Demographics and Leasing (More to it than meets the eye) Case Study: Existing Laundry Owner

From our sister site, laundryanalytics.com, comes a brief story about an existing laundry owner in the Phoenix area and his history in the business.  Here is a short primer on the story.  The Arizona retail market has been severely struggling since the recession began, which has really impacted laundry owners.  Laundromats depend on dense residential areas for business, and in the Arizona market, many people have fled as construction jobs and other low wage retail jobs have disappeared.  Of course, in any down market, lease prices fall and landlords become amenable to making deals, so thought becomes, ‘maybe it is time to lease a space and build a laundry.’  Here is the post reposted from laundryanalytics.com for the full story:

Arizona

An old client in the Phoenix area called last week and sounded excited.

“Bob,’ he said with an enthusiasm in his voice that I have not heard since 2005.  “I’m thinking about building another laundry. Rents are low now, lease terms are favorable, and construction costs are down about 30%. It just feels right to add a location now. What do you think?”

I quickly did a mental review of his existing store and the one I helped remodel and sell in 2006.  He was eager to get out of that store as his lease was about to renew and the landlord wanted a 15% bump in the base rent. His existing store was under pricing pressure then as two other stores had opened in 2005 within a ¼ mile of his location, and density of the Phoenix market was not high enough with respect to customers per square mile.

“So,” and I paused. “How is your current store doing?”

He tells me that this is his best winter since 2004. I point out that it is also one of the coldest winters in the southwest in the last thirty years, which means heavier clothes and greater customer per pound weight.  I also point out that lease rates are quite low because there is lot of property available, much of it bank owned in this market.  The demand element of the vend price equation is weak.

“I take it you have seen some storefronts that you like?” and he tells me yes and goes on to describe them. They sound good but; “Where are the customers?” I ask, and he describes the apartment buildings, as well as the immigrant population in the area.  He also believes that these are underserved areas in total machines and that the existing operators are not into customer service.

It’s true that unemployment claims are down, lease rates have fallen (in some locations quite dramatically) and the stock market is up. There is feeling that we are pulling out of a deep recession and while that may be, launching a new store requires more due diligence then just how one feels about a location.

The biggest issue that I see as I talk with owners and visit sites is this: where are the customers and what are they spending on?  Demographic reports are good sources of information about a given market, but in many immigrant areas, they are not accurate enough to be relied upon exclusively.  Construction and trade work is still in a depression, which employs the heads of household for these customers and many have returned to their home country or relocated within the USA.  A great way to learn about your market is the apartment vacancy figure. You can often get this data from your local apartment association or look at the move in rate.  If you see banners hanging from multi-tenant facilities that read, “Free Rent, or Move in Specials,” you know that there is a high vacancy rate.

Customer spending per visit and visits per month are two pieces of data that Starbucks tracks, but few laundry owners track unless they are using a card system and are properly tracking data.  Predicting this data is possible but a subject for a future post.  The goal: find a breakeven point (BEP) including debt service, and subsequently determine how many customers are necessary to earn a gross margin of 30% or greater. We usually use a turns-per-day to examine gross income, a figure that relies on the vend rate of each machine, and one that is subject to customer price sensitivity.

I relay these thoughts to my client and I can hear sighs on the other end of the line. “I’m not trying to dampen your enthusiasm. However, you don’t know if you are at the bottom of the lease rate market yet, and you don’t have sufficient customer data.  Before you make a 20 year lease commitment put your feelings aside and make a 4 month commitment to learning as much as you can about your potential customers as well as your competitors.”

“What about an existing store. At least I will have the store’s historical data to analyze,” he says his tone a bit deflated.

“Actually,” I tell him, “you will have the store’s history, not the store’s future.”

“Yeah,” he says. “Your right. I guess I better do a lot more homework.”

“Let’s start with the customer,” I tell him, and I’ll share come customer analysis tips with him and you in the next post.

We assist with Laundry and Laundromat research and analysis.  Call us (323) 213-9193 or email cs@justelementary.com