Before you answer this question, let me ask you some leading questions.
Why did you get in to the Laundromat business? (To make money)
How much money did you invest? (A lot of money in present day dollars)
What was your expected rate of return (ROI) on your initial Laundromat investment?(A decent return, 30-60%)
Are you still making the same "rate of return" on your Laundromat investment?
Should you expect the same "rate of return" on your investment?
What has changed from when you originally acquired your Laundromat to today?
Whether to raise your vend prices or not should be considered like any other business decision. To raise your Laundromat's vend prices needs careful consideration and some analytical methodology. In following articles, I will explain how I determine to raise my prices (or not). Business 101 says that the profitability of any business is the gross income minus your expenses equals your profit (or loss). Let's look at the income and expense side of operating a Laundromat or coin laundry business. Gross income is the amount of money that ends up in your money boxes. Currently with high un-employment rates, a portion of our immigrant population has a choice of being un-employed in the US or un-employed in their home country. Many illegals have decided to go home which has reduced our pool of Laundromat customers and consequently reduced our store income. This income loss may be slightly tempered by the increase in customers who own their own washers & dryers and have decided not to repair or replace their broken home appliances. Undeniably, Laundromat income has dropped during this recession, so the question is how do I keep the same financial returns?
Laundromat expenses are increasing all the time. The four largest expenses in operating a Laundromat are; Labor, Lease, Note and Utilities. Labor expenses have been pretty stable and probable equal to or have fallen behind when compared to inflation. Lease expenses are composed of base rent, property taxes and the common area charges. Lease expenses are compounded expenses where the increases are on top of last years increases. Lease expenses (especially if they include property taxes) Never go down. Note payments, on the other hand, are the cost of laundry equipment loans (or acquiring the business) and are usually the same month to month.
The last major expense is the Utility expenses. Utility expenses have 4 components being the cost of electricity, gas, water and sewer. The cost of Electricity is pretty stable and does not vary that much in the market place. The cost of electricity is somewhat regulated by the local public service commission. Electricity rates are stable but they are also tied to the cost of energy. More and more electricity power plants are using natural gas to generate electricity. With electricity being generated from natural gas, there is an increased the demand for natural gas. More demand equals higher prices.
Natural Gas is typically the largest component of a Laundromat's utility bill. Natural Gas is widely de-regulated and a large number of Laundromat owners have been burned by locking in at a high rate with energy companies. Some of us have been purchasing de-regulated gas as a price above an industry standard (such as Henry Hub or City Gate pricing). Right now we have some historic lower cost for Natural Gas. Gas prices spiked in price during 2005 and 2006, but have been historically high since 2001. We all know that once the economy turns around, the cost of all energies will go up, especially Natural Gas. Again, it is simple supply & demand.
Water & Sewer rates have increased dramatically over recent years and show no signs of leveling off. It is more and more common for a gallon of water to be more expensive to get rid of then to actually purchase. Sewer plants and increasing demands for improved water quality have been raising sewer costs to un-presentenced rates. All Laundromat expenses (including utilities) are increasing every year, year after year.
With this as background, I wanted to know if Laundromat vend prices were keeping up with the cost of inflation. If you built you store 10 years ago (in 2000), the cost of doing business is now 25% higher than it was 10 years ago. If you built your store 20 years ago (1990) the cost of doing business is 65% higher and if you built your store 30 years ago (in 1980), it now costs 160% higher than when you originally opened your Laundromat. Let's look at the increased costs associated with inflation. A $150,000 store in 1980 would now cost over $240,000 in present dollars.
If you review the above chart titled "Historical Laundromat Vend Price" you can see the plot of the national average washer vend price from 1997 to the present. The data before 1997 was in a different format and could not be used in this chart. When looking at the chart we see a consistent increase in price for all the different sized commercial washers from year to year. There are dips and "burps" in the data, but there is a consistent trend for higher vend prices over time. I have also super-imposed the (national average) cost of inflation as an orange colored line and benchmarked the inflation line to the 1997 average vend price figure. As you can observe the orange colored inflation line is falling below the average vend price line which means that the average Laundromat vend price is beating and is higher than inflation. This is a good thing and certainly an eye opener to me. I always guessed that our Laundromat vend prices were failing to keep up with inflation, but I was pleasantly surprised to be wrong.
So if Laundromat pricing is higher than inflation, how are we doing with regard to utility costs? I could not find any historical data for water or sewer costs on a National basis. What I did find is the wholesale cost of Natural Gas. Natural Gas is an American made energy source that is produced in the Gulf of Mexico. Henry Hub is the main distribution point for Natural Gas to the continental United States and is located in Louisiana. Henry Hub prices are used in the spot and futures pricing for Natural Gas. I have used the average Henry Hub pricing and compared this to the annual increases of Laundromat vend prices.
Reviewing the Chart of Inflation and Gas Costs vs. the Average Vend Price we find that the average vend price has fallen way below the cost of Natural Gas. If you observe the dotted pink line, this shows the linear average of Natural Gas prices benched marked to year 1997. The linear average for Natural Gas has shoot way above the cost of inflation and way above the Average Laundromat Vend Price. In year 2000 and again from 2002 through 2009 the Laundromat Vend Price has not been kept up with the operating costs of running a Laundromat. This was nine years where the Laundromat owners were subsidizing the customers to use their Laundromat. Well they may be extreme, but my point is unless we use Utility Costs as a benchmark for setting our vend prices we will certainly become less and less profitable to the point where Laundromats are not longer making any money. All utilities should be the benchmark for setting all of our vend prices in the Laundromat industry.
In the purest economic analysis, we are selling Utilities. Customers are coming into our Laundromat and they are renting our laundry equipment but we are selling the utilities to operate the machines. Our "cost of goods sold" (sorry, an accounting term) is electricity, gas, water and sewer. The other expenses (lease, note, insurance, labor, alarm, marketing, cleaning & supplies) are all overhead costs. These costs will remain the same if the store has only 4 customers a week or 4,000 customers a week. The utility costs are the only variable cost in operating a Laundromat and really should be the determining factor used to increase the vend price for processing a load of laundry. Overhead is required to set the base cost for vending the washers & dryers but any vending increases (or decreases) above the base cost are really a function of the cost of the utilities. So, we need to base our washer & dryer vend price on our cost of utilities.
How do we raise our vend prices and how much should we raise the prices? Should be raise the prices across every sized washer and or dryer? How much of an increase? An across the board quarter or fifty cents increase? Should be figure out the cost per pound to do laundry and make our increases from there? Can we make this price increase decision in a vacuum of do we need to survey the other Laundromats in our market place? In my next article I will go into the preparation required before you raise your vend prices.