Dry Cleaning and Laundry Services

Dry Cleaning

Industry

The industry selected is laundry and dry-cleaning services. This industry has a NAICS code of 812320 "Cleaners, dry-cleaning and laundry." Separate categories 812332 and 812331, exist for industrial laundry and linen supply respectively (U.S. Census.gov, 2012). Companies in 812320 "provide dry-cleaning services," "provide laundering services" or "provide dropoff and pickup sites for laundries/drycleaners." Specialty cleaners are also in this category.

Industry Size and Composition

Industry statistics tend to focus on all laundry businesses without differentiation, presumably in recognition of some overlap. IBIS World estimates the total size of the industry to be around $11 billion in the U.S. annually on the institutional side, $4 billion for laundromats and $9 billion for drycleaners. There are no major players in the dry-cleaning business nor in the laundromat business other than coin-operated. Coin-Mach and Mac-Gray are two major players in coin laundry. On the industrial side, Cinta, Aramark, G&K and UniFirst are among the larger competitors.

The industrial side has much greater concentration in part because there is a need for economies of scale. The customers on that side of the business are very large, and the result is that they need suppliers with substantial economies of scale, leading to much larger firms. Both drycleaners and laundromats operate in industries that are heavily fragmented. There may be small chains, but most of these would be local in scope. In general, the fragmented and diffused customer base on the benefit of having location close to the customer has created an emphasis on small players on this side of the industry.

The industry is characterized by low barriers to entry and low barriers to exit. Businesses can be transient. Most laundries are relatively small operations, ranging from 1500 to 6000 square feet and operate on long-term leases. It is unusual to find a laundry that has a value over $1 million. The financials of the business are unique in that laundries have almost no inventory, no accounts receivable (all cash) and high turnover. Thus, equity can build quickly if the business has limited competition and therefore has the ability to set prices. Firms in the industry have been compelled to adopt a service orientation in order to continue to attract business, as fewer new homes (or apartments) are built without laundry facilities. Extended hours and various tactics to improve ancillary revenues are the norm in the industry, and may require additional investment in staff and fixtures (No author, 2013).

The coin laundry industry is similar with business values topping out around the $1 million mark. Store sizes are comparable with 1500 to 5000 square feet the norm. Many coin laundries share premises with full service laundries, so there is significant overlap between the two industries. Heavily fragmented, there are over 35,000 coin laundries in the U.S. with mean sales around $140,000 per year. Industry growth is spurred by population growth, but demand is related to the local market conditions. The most successful stores operate in areas heavy on rental apartments, especially older stock that was not built with laundry facilities. Nevertheless, demand emerges even in new residential areas. The more intense the population growth, the more opportunity the industry has. Furthermore, consumer segments of the laundry industry have stable demand, unaffected by prevailing economic conditions (CLA, 2013).

IBIS World notes that the industrial laundry and linen business is in decline, having shed 1.7% of its revenues over the course of 2008-13. There are over 3000 businesses, but the share of the largest companies is relatively large and there are markets where they will dominate. There is good distribution around the nation but more firms exist in the Southeast, the West, the Great Lakes and the mid-Atlantic. Over one-quarter of all laundries are in the Southeast, a function of growing population in that region, along with growing tourism that attracts more hospitality development. The hospitality business is the main buyer, along with institutions like hospitals and care homes, for industrial laundry and linen service.

At the local level, the industrial business does not change much. Individual states and cities might have their own local competitors. Some companies might also be vertically integrated and handle their own laundry needs. On the consumer side of things, the fragmentation of the industry is also evident at the local level. There are, however, a variety of local and regional chains both franchised and not that might capture significant local-level market share. None of these has been able to build out a national presence yet. Coin operators are the exception to this rule. The growth of a concentrated coin operator industry relates in part to the economies of scale involved in the refitting and servicing of machines, which is best done by a larger company.

The local conditions to this area mirror those of most areas. Ease of entry has encouraged competition in the industry. There does not appear to be significant overcapacity or under capacity. There is little profit potential in the industry in this area, even though most competitors are mom and pop operations that have limited capital and ability to compete. At the industrial level, competition is intense. There are many large customers in this area, so the business is hypercompetitive and supports at least four large companies. This creates a challenging situation for a new player because without a reputation it looks like price competition is the only way to win new business. Price competition without having economies of scale is a challenging proposition unless other means of executing a low cost strategy can be achieved.

Porter's Five Forces

Michael Porter describes his five forces as the forces that determine where profitability in an industry comes from. The five forces are the bargaining power over buyers, the bargaining power over suppliers, the threat of new entrants, the threat of substitutes and the intensity of rivalry. The bargaining power of buyers is low in this industry for consumers and moderate for institutions. Consumers are price takers, since they need the service, have low information and aside from competition few substitutes. However, the more intense the competition in an area, the higher the bargaining power of buyers. The bargaining power of suppliers is pretty high.. Most firms are mom and pop stores, much smaller than their suppliers and inconsequential to the supplier's business. This gives them little bargaining leverage Consequently for most companies in this industry margins are tight. For industrial players, margins are a little better because costs are passed on to end users by the customers, and because there is less competition

The threat of substitution is ever-present. For consumer laundry services, consumers have the option of installing washing machines in their homes, and avoiding the purchase of dry-clean only clothes. Such tactics would be employed if the cost of laundry services is too high. For industrial players, vertical integration is usually a legitimate option. There are exception -- hotels in downtown locations that simply lack the real estate for serious in-house laundry operations have low threat of substitution. There is a high threat of new entrants, especially at the consumer level where the start-up costs are low. At the institutional level, there are scale issues and the need for a company to have large clients in order to make entry into the business worthwhile. Furthermore, most parts of the laundry business are in decline, which decreases the threat of new entrants.