A UNITED STATES DEPARTMENT OF COMMERCE PUBLICATION SIPJE Ui $2 ^ ^ % f oc, UMm' INDUSTRIAL LAUNDERERS AND LINEN SUPPLY ^1 U.S. DEPARTMENT OF COMMERCE Economic Development Administration Office of Minority Business Enterprise *■'-.■■''■.■•." ski $m For sale by Superintendent of Documents, U.S. Government Printing Office Washington, D.C., 20402 - Price 30 cents URBAN BUSINESS PROFILE INDUSTRIAL LAUNDERERS AND LINEN SUPPLY SIC 7218 and 7213 April 1972 EDA-72-59590 Prepared for ECONOMIC DEVELOPMENT ADMINISTRATION in cooperation with OFFICE OF MINORITY BUSINESS ENTERPRISE U. S. DEPARTMENT OF COMMERCE Washington, D.C. 20230 Peter G. Peterson, Secretary J 7 Robert A. Podesta, Assistant Secretary for Economic Development .3 John L. Jenkins, Director g 1 Office of Minority Business Enterprise 3 This report was prepared by Boise Cascade Center for Community Development, Washington, D.C., under contract with the Office of Economic Research, Economic Development Administration. The statements, findings, conclusions, recommendations, and other data in this report are solely those of the contractor and do not necessar- ily reflect the views of the Economic Development Administration. FOREWORD As part of a continuing program to provide encouragement and assistance to small business ventures, the U.S. Department of Com- merce is issuing a series of Urban Business Profiles. It is hoped that these reports will serve as a meaningful vehicle to introduce the prospective small urban entrepreneur to selected urban-oriented businesses. More specifically, a judicious use of these profiles could: provide a potential businessman with a better understanding of the opportunities, requirements, and problems associated with particular businesses; provide guidelines on types of information required for location-specific feasibility studies; assist urban development groups in their business creation activities. ^J&U*** < .^7V**-«-t7^ Robert A. Podesta Assistant Secretary for Economic Development Table of Contents Page I. Recommendation 1 II. Description of the Industries 2 A. Definition 2 B. Dimensions of the Industries 2 General — Size Distribution — Location C. The Market 4 General — The Supply Chain — Economic Thresh- old for Entry into Market — Ease of Entry- Market Potential D. Competition 8 General — Form of Organization of Competition E. Technology 10 F. Cost Structure 11 G. Productivity 11 H. Pricing Policy 13 I. Profitability 13 III. Analysis of Business Feasibility 14 A. Major Factors Determining Industry Success 14 Marketing and Sales — Cost Control — The Criti- cal Growth Gap — Size of Client — Product Mix B. Problems of Minority Enterprise 15 C. Projection of Returns — Two Hypothetical Situations . . 15 IV. Guidance for Establishing the Business 17 A. Approaching the Market 17 B. Obtaining Financing 18 APPENDIX— TRADE ASSOCIATIONS OFFICE OF MINORITY BUSINESS ENTERPRISE (OMBE) AFFILIATES URBAN BUSINESS PROFILES URBAN BUSINESS PROFILE Industrial Launderers and Linen Supply (SIC 7218 and 7213) I. RECOMMENDATION The industrial launderers and linen supply industries are both grow- ing sectors of the U.S. service industry. Since the technology and mar- kets are basically similar, these industries are often combined in one business. A new business can be started at any level of capitalization between about $20,000 and $200,000. The technology is simple, and the skills needed are primarily related to managerial capacity. The ability to "sell" is an important one. The industries are highly competitive, and selling is vital. The enterpreneur must have the confidence to respond to closed bid competition, the main method by which clients select a laundry or linen supply firm. This confi- dence will come from experience, good management, and cost control. The industries have had a fairly high failure rate, due largely to poor cost accounting which results in the submission of bids on which the firm can only make a loss (for a contract period as long as 2 to 3 years). Since the labor productivity has traditionally been low in the indus- tries, and labor costs often represent 50 to 75 percent of total costs, the ability to manage labor is also important. Indeed, every effort must be made to accumulate capital quickly so that the expensive labor saving machinery available can be used. There is a critical size in the growth of firms in these industries of about $500,000 to $1 million annual revenue, at which labor produc- tivity is often too low to compete with larger firms, while overheads are so much higher than those of small firms that underbidding is frequent. The small entrepreneur should be able to outbid all but the cheapest of the larger companies — but only if he is capable of con- trolling his overhead costs carefully, while being constantly aware of the need to increase labor productivity at a rate faster than the growth of his total revenues. This is a critical management problem, and it requires considerable managerial aptitude. With this aptitude the entrepreneur can suc- ceed; without it he will probably fail very quickly as his firm begins to grow beyond a small-size operation. II. DESCRIPTION OF THE INDUSTRIES A. Definition This report treats two industries in parallel. They are: SIC 7218 Industrial launderers providing cleaning and recondi- tioning service for uniforms, towels, safety equipment, work clothes, dust control items. Items are owned either by company or customer, and establishments may or may not operate their own laundries. SIC 7213 Linen supply (or services) supplying uniforms, gowns, bed and table linens (on a rental basis) to commercial and service establishments may or may not operate their own laundry. B. Dimensions of the Industries 1. General Both of these industries are part of the Nation's $600 billion ''serv- ices" sector, and because of this orientation, are growing fast. There are, of course, many features contributing to the growth and to the differences in the growth rates of the two industries. 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 TABLE 1 Growth of Output and Establishments Linen supply Industrial launderers $ $ Number of Mil- Output Number of Mil- Output establishments lions Percent of growth establishments lions Percent of growth 1,469 1,435 433 463 6.9 491 6.0 498 1.4 540 8.4 571 5.9 611 7.0 664 8.6 734 10.6 804 9.5 885 10.1 768 918 272 408 10% average annual growth The Standard Industrial Classification (SIC) definitions suggest more of a distinction between the two industries than actually exists; the industries are in most respects very similar. Almost all industrial laundries (IL) do some "flat work" (sheets, tablecloths) and many linen supply establishments (LS) supply industrial-type goods such as mats and dust mops. Both industries devote much of their output to garment supply, but it is within this latter activity that they are somewhat distinct. Both industries are fairly small. Linen supply has an output now of about $970 million per year, and industrial laundries about $700 million, while in terms of numbers of establishments, 1,435 were classified as linen supply and 918 as industrial launderers in 1967. 2. Size Distribution Size distribution is important since it indicates the degree to which small businesses share in the market. Both industries have many small companies with low revenues and few employees serving a small segment of the market. At the other extreme there are a few large companies with fairly large revenues occupying an increasingly large part of the market as they grow by amalgamation and through the purchase of smaller companies. Data presented in Table 2 reveal the preponderance of small reporting units in the industries in both 1965 and 1970, with possible indication of increasing size in the latter year. Nevertheless, the heavy concentration of facilities in the lower employment group categories (46 percent of total employment in 1970 was in reporting units employing less than 20 employees) indi- cates continuing opportunities for small businessmen. TABLE 2 Distribution of Reporting Units With Employees, by Employment Size (1965, 1970) Employment Number 1 Number 1 Linen supply 2 Industrial size 1965 1970 launderers 3 1-7 693 530 374 156 8-19 371 445 322 123 20-49 442 475 324 151 50-99 339 348 213 135 100-249 220 262 188 74 250-499 36 44 31 13 500 and more 3 4 4 — Total 2,104 2,108 1,456 652 1 Reporting units — linen supply and industrial launderers combined 2 Reporting units — linen supply, 1970 3 Reporting units — industrial launderers, 1970 Bureau of the Census, County Business Patterns, 1965 and 1970. 3. Location Firm location is a function of population and population density, and all major metropolitan areas have industrial launderers and linen service representatives. National chains try to place at least one estab- lishment in each metropolitan area. Exceptions to this occur where there is a component of demand greater than the population would seem to indicate. Hospital centers, State capitals, university towns, and cities near large military establishments are particularly attractive locations to the industry. C. The Market 1. General An idea of the general orientation of the market is available in Table 3, estimated from the 1963 market structure. In an industrial laundry, over 60 percent of the business comes from renting garments owned by the industrial laundry itself. Only 5 percent of business is done with articles owned by the client. Other categories of the market are wiping cloth rental (12 percent) and dust control rentals (8 percent). In the linen supply industry 80 percent of total revenues are derived from renting to businesses, but most of this is in "flat- work" (sheets, towels, tablecloths) rental which is the linen service's main business. However, 28 percent is now garment rental to busi- nesses — a growing proportion, up from perhaps 20 percent in 1963, and bringing the two industries closer in the types of business they do and the markets they serve. This major distinction (in degree to which the two industries are specializing in garment rental) is per- haps the single most important factor in their growth differences. Garment rental is not only the fastest growing market sector, but also the most profitable. Originating in a "uniform" rental business, garment rental has now expanded to "career apparel" including clothes for all types of service workers — in hospitals, banks, restau- rants, retail shops, garages, academic institutions, car rental agencies, transportation companies, public utilities, and so on. TABLE 3 Market Structure A. Industrial launderers Percent Garment rental 63.2 Wiping cloth rental 11.6 Dust control 7.6 Garments and wiping cloths owned by customer 5.3 Linen supply rental 4.1 Other sources 8.2 Total 100.0 B. Linen supply Percent To homes (linen supply) 1.0 Garment rental (to business) 28.0 Flatwork (to business) 52.0 Drycleaning work 1.3 Family work 1.7 Commercial work 3.5 Industrial laundry work 11.8 Other 0.7 Total 100.0 Details of the linen service market are available in Table 4, show- ing that restuarants, motels, and hotels are the major customers. Receipts from these customers are growing primarily as a function of the garment rental rather than "flatwork" rental; the latter is also less profitable except in very large quantities for major clients. TABLE 4 Sales, linen supply, industry — 1968 Percent of Customer category annual volume * 1. Restaurants (includes country clubs) 25.9 2. Food stores (grocery stores, supermarkets) 8.0 3. Industrial (other than food processors: includes gasoline service stations and new/used car dealers) 7.6 4. Hotels and motels 11.6 5. Medical (doctors, dentists, clinics, nursing homes, hospitals) 10.9 6. Other 36.0 * Results of a 1968 membership study conducted by the Linen Supply Association of America. In both industries, growth is taking place by: a. Expansion of rental service into homes — particularly for towels, and b. Expansion of services to existing clients by introducing the idea of prestige, image-producing "career apparel," mainly in the customer contact industries. 2. The Supply Chain The service provided by industrial laundries/linen service com- panies varies in at least two ways. First, the articles can be owned by the client, or the industrial laundries/linen service, or (increasingly) by the manufacturer of the articles in a licensing or franchising agree- ment with the industrial laundries/linen service. Second, the service can be initiated by the client, as a request; from the industrial laundries/linen service, in a sales bid; or from the clothing manufac- turers, some of whom are realizing that the rental clothing market is a very fast growing one indeed. 3. Economic Threshold for Entry into Market Several factors have a bearing on the scale of operations which must be obtained before market entry is feasible. Both industries are highly labor intensive. This characteristic is changing due to more activity by unions and expanded research into more capital intensive methods designed to cut labor costs and increase labor productivity. The large firms (with access to capital) are in the forefront in this trend, and are able to hold down prices as a result, while smaller operations are being forced to close if lack of capital prevents them from investing in the ''new" machinery. "Minimum threshold size" is, therefore, growing. Another major component of cost (over 25 percent in most cases) is attributable to the distribution of clean articles and collection of soiled items. These costs are increasing due to road taxes, trucking industry wages, fuel bills, and the costs of vehicle servicing. This means that there is an advantage in securing large clients who have large orders, and a disadvantage (even a loss) in serving a small client. Interviews in the industries suggest that the current cost of making one service call may be about $5 to $7. The advantage of a large client is obvious: 100 customers, 10 pieces each = 100 calls per week = $500-$700 10 customers, 100 pieces each = 10 calls per week = $50-$70 4. Ease of Entry The "minimum threshold," therefore, tends to be a function of both contract size and total business, and this makes it difficult for the small firm, since entry with small capacity prevents access to the most profitable large order market. Initially, at the "mom and pop" size, the firm might be quite com- petitive in bidding for contracts as labor and overhead costs would be low. Despite low labor productivity due to low capitalization, survival would be feasible even serving small clients with small orders where distribution costs are high per item. Capital invest- ment totaling $10,000 would be sufficient for this type of operation, with the following items of equipment probably required: Employment: 4-5 persons Plant size: 2-4,000 sq. ft. 1 100 lb. washer $2,000 1 press 2,000 1 tumble dryer 2,000 2 delivery vehicles 3,000 stock (setup costs) 1,000 $10,000 However, expansion beyond this stage is difficult. As soon as the firm is able to secure larger contracts (inherently more profitable), then a change of scale is needed, entailing new machinery, a larger, and possibly unionized, work force, a sales effort to keep the new machines fully occupied, and administration costs, all of which tend to raise the operating costs despite higher labor productivity. Prices in bidding will then be higher than both "mom and pop" size stores with low overhead and large companies with high productivity. In effect, the cost per item processed is higher in the size range $50,000 to $100,000 than it is for companies of smaller and larger size. 5. Market Potential Future growth of linen supply and industrial launderers will no doubt be considerable, but there are many complicated factors to be taken into account. The two industries have grown because of the great convenience which their services offers — it relieves the client of an unpleasant, costly, time-consuming, job, and the market for rental garments and other items will grow because of this. An even more convenient method, however, is now available to solve this problem and is on the market — the use of disposable items in flatwork (wiping cloth, sheets, towels, napkins, tablecloths) and in the garment areas (cover- alls, surgical aprons, patient coveralls, and so on). The economics of disposables are making them more attractive as the price of labor (and therefore of linen supply and industrial launderers services) grows. The Linen Supply Association of America (LSAA) is aware of this trend and is encouraging its members to expand into the disposable market by adding disposables to their services to be used where most economical. Given this possibility, the industrial laundries/linen service might grow even faster. The linen supply industry expects the market for career apparel to grow to $70 billion by 1980. This optimistic LSAA estimate of the market for "career apparel" based on the penetration of the "career clothing" idea to some very large markets, such as banks, utilities, and university communities, where uniforms are not as yet fully accepted. Recently, for example, Minnegasco (Minneapolis Gas Co.) outfitted all its employees from president to janitor with several alternate types of clothing, including various lines of dresses (evening wear included) and pant suits for women employees, all imaginatively styled and updated on a fashion conscious basis. This "image" building activity may well provide a very important market for linen supply/industrial launderers. 7 D. Competition 1. General Competition within the industries is severe in most metropolitan areas, and survival depends largely on two factors: a. The success of the firm's marketing effort. b. The degree to which the firm can reduce labor costs. Most large companies, institutions, hospitals, restaurant chains, and the like take care of their laundry needs by asking for bids from the industry. The ability to assess one's own costs in relation to the types of items needed, the frequency of service, and the quality required is a critical feature. Bidding tends to be highly competitive, and in some areas a price-cutting "war" develops in which firms "steal" contracts from each other by bidding below cost. Great variation in local labor rates, due to the differing bargaining power of local unions, causes significant differences in the competi- tive stance of firms. Currently, wage rates in Oakland, California, are 60 cents per hour higher than those in Los Angeles, allowing Los Angeles companies to compete successfully for Bay Area business despite the 400-mile distance. As a result, all but two of the existing Oakland firms are now for sale. Recent expansions by the national chains have also increased com- petition, since the large companies have greater resources in market- ing and bidding. By mid-1970, 50 percent of the industrial laundries market was controlled by the top eight companies and 60 percent of the linen service market by only five companies. The swing toward higher capitalization in response to rising labor costs favors the large companies. 2. Form of Organization of Competition Tables 5a and 5b feature the industry structures from the point of view of organizational form. It is clear that the dominant organiza- tions are corporations (70 percent of all ownership), which control 90 percent of the market. Small businesses, individually owned and in partnerships, represent over 20 percent of the firms, sharing 3 to 5 percent of the market. Despite this, however, in 1963 the industries were still composed primarily of single establishment firms, with only 20 percent of industrial laundries having more than 11 branches (21 percent of market). Today the leading chains control perhaps 50 percent of the market. This growth in chains has steadily lessened the available opportunities for small businessmen during the last decade, particularly in the linen supply industry. 8 C CD h% o rn 1 °. u a. t l< CO OO 1 O o r* Q. "53 u CD C£ i/i oo r- ^r p~> is© <»■- C o Lfl CN co o CN t-^ in c CD CN r- v- o u Lfi oo O o I— -T {"■ ch o CD T— CL 2 Cl oj u CD CZ i IT) c '£> 0^ r— t£ "I o r\ \6 n! x — LO o o K CN (A r ~ r i m v> tn Cl Q. 3 c CD C 1 c CD U »— CD ID O LO I O cn d r^ I O CN VO O >- a Q. 3 u-i 1/1 ■w c C CD CD C E _J -C t/1 -O CO c CD u I— cu 0. CD -Q £ 3 in N CO m N n o d o CN O O r- rr In. r- C~i CO CTi o o rn cr> m r- £ en r- O in 3 t- r- Z E £ CD X o vO N. en E r- CTi r- CN CD T— 3 z r- T - C o ** « CO # N in 'c LU re _J 60 CD < L. h- vt- E u O u. ^_ ra ec u c CD co m Cfi cu m co i^ « CO o o m CD U CD cz: , £ Tf q C7> n "*. — c «* 5 .2 CN T^ O CN CN r- m v£> m r- r- CO CO in 3 1/1 u 0) C Cl CD ra o c i— ra 0- O U 4-J o 3 o cn E CD jQ E hv ^d- r- CN k£5 N r- in m o _0J _ ooo j. 2 C r- i tn cn ^r2 E. Technology Recent attempts to increase productivity in response to rising labor costs have resulted in many new processes and machines being introduced. Yet the technology used by both industries remains basically simple. Standard equipment includes the following *: Washers 25-400 lb. capacity $20,000 Washer/extractors 17,000 Tumble dryer, up to 400 lbs. 3,000 Flatwork ironers 55,000 Steam presses (hand) 5,000 Steam presses (machine operated) 10,000 Tunnel steamer 10,000 Solvent drycleaning, up to 400 lbs. 30,000 * Prices are averages for one item of the largest capacity. Additional necessary equipment includes conveyor (overhead and ground), loading and unloading equipment, parcelling machines, a hot water system of large capacity, and perhaps dye vats. Trucks for delivery are also needed. All of this equipment is simple and can be maintained "in-house"; it is also fairly reliable and downtime is normally not excessive. Major technological changes include the recent introduction of the "hot box" by LSAA — a heating and steaming box operating at high temperatures (300° to 400° F) for cleaning garments. This major innovation performs some of the functions of washers, driers and presses, and labor saving possibilities are large. Some hot boxes are now in use, permitting increases in productivity of 80 to 200 percent and cutting down on the labor force proportionately. Another major technological change without which the hot box cannot be used is the development of increasingly long-lasting, man- made fiber mixes and manmade/natural fiber mixes. In uniforms the 65-percent dacron 35-percent cotton garments can last up to 2 years (four times their cotton equivalents) at an extra initial cost of only 30 to 80 percent. They are essential if a firm is to take advantage of such methods as the hot box. Item replacement is an important component of cost in the industry. Finally, new continuous process machinery developed in Europe is now being brought into the U. S. market, permitting even lower labor handling costs. The LSAA is increasing productivity at the dis- tributor end of the business by providing advice to the salesmen's problem of least-cost delivery with optimum service to customers. 10 All of these improvements require high volumes to justify them- selves economically. Capitalization in the industry is growing rapidly, raising the economic threshold for entry into the market. F. Cost Structure The extent of labor productivity has been the major factor in the structuring of costs in the industry. During the past decade there has been a gradual substitution of capital for labor as labor costs have risen. Nevertheless, the recent technological breakthroughs have been associated with increasing union pressure for better wages and work- ing conditions. Annual replacement ratios for items in the linen supply industry vary considerably. Industry statistics show the ratio for continuous towels to be 1.623 per 100 whereas that for pants is 5.316 per 100. The use of "new" fiber in garments is expected to close this gap, and ratios may change considerably as the need for hot processing methods (to raise labor productivity) forces companies to use the long-lasting product mixes. G. Productivity Productivity is a different concept to deal with in a service industry. Clearly it is important to raise output per man-hour but such efforts could conceivably lower the quality of service to the customer, which is ultimately the only measure of success that is relevant. The very low labor productivity figures which have until recently been common in the industry (Table 6) are more an indicator of the degree to which the industry has been dependent on labor (instead of capital) than in indicator of "inefficiency" per se. During the period 1963 to 1967, output per man-hour grew at a rate of 4 1 /2 percent per year in industrial launderers and 6 percent per year in linen supply. However, in both cases, output per dollar of labor cost declined. TABLE 6 Productivity of Labor (Estimates only) Output per $1 of labor cost Total receipts per man-hour Industrial launderers Linen supply 1963 1967 1963 1967 $2.65 $2.63 $2.68 $2.60 $5.55 $5.95 $4.01 $4.90 11 This low productivity feature is related to low capital investment figures, which even after the relatively heavy investment of the 1965- 1970 period range only between $1,500 and $6,000 per employee, with an average of about $3,000, depending on the size of the company. Data on productivity in relation to revenue and to weight of goods processed are in Table 7, which distinguishes between firm sizes. The table shows that productivity per pound increases as firms increase annual volume to $1 million of revenue while revenue per employee increases up to companies doing $2 million worth of business. Beyond these points average productivity begins to decline. TABLE 7 Productivity Measures Linen Supply Industry — 1968 Productivity Company size Revenue per lb. (cents) Revenue per employee Under $200,000 — — $200,000 to $500,000 20.1 $ 8,178 $500,001 to $1,000,000 21.5 $10,934 $1,000,001 to $2,000,000 20.0 $12,017 Over $2,000,000 18.8 $11,426 Source: LSAA survey 1968 These data indicate that the smaller firms with low productivity of labor receive a fair revenue per pound of work processed. Above $1 million in sales, revenues per pound start to fall due to increasing overheads (such as sales, administration, and equipment amortization costs) despite increasing labor productivity. Economies of scale do not emerge in these figures, but they cer- tainly are available in many forms. The advantages of having large clients and large volume in lowering distribution costs have already been discussed. Almost all capital expenditures in these industries cut down labor costs and produce economies since the larger and faster machines use so much less labor per pound of output. One problem associated with capital intensity, however, is the need to generate quantum increases in business in order to run new ma- chinery at full capacity, involving much greater expenditures on sales and the marketing function. Lowering production-labor costs, there- fore, involves an increase in administration and sales-labor costs. There is no evidence that these types of overhead eventually make further expansion less profitable. The available economies of scale do not seem to have a cutoff point as long as advances in technology take place. 12 H. Pricing Policy Pricing is one of the critical skills affecting success in industrial launderers, linen supply industries. Most sales made to large- and medium-sized organizations take place by the bid method in which 20 or more firms are requested to submit bids from which the client makes his selection. Bid prices are based on the cost of processing individual types of items and vary considerably from such simple items as towels to the complex "career apparel" items. Competition is severe, and accurate knowledge of costs is, therefore, a requisite for survival in the industries. TABLE 8 Average Price Received for Selected Clean Items Delivered Percent of total sales Price per item Price per lb. Office towels 5.4 90 550 Pants 5.8 45 34 Shirts 4.7 39 20 Wiping cloths 1.2 3 15 Sheets 9.1 13 17 Tablecloths 3.7 13 18 Dresses 5.4 35 33 Source: LSAA Handbook 1970 These data show great variation in the price per pound received. These prices must cover labor costs, the machine-hour rate (MHR) and replacement costs for the items due to wear and tear and loss. Obviously, bidding on a contract which might include many different items is a difficult process and requires great skill and good cost ac- counting. It is common for many firms to bid at "below-cost" prices, not only because of their desire to get the contract, but because of ignorance over certain aspects of the costs of one or two items in the total contract. The price per pound to process shirts and pants (which need to be pressed) is obviously greater than that of towels. Sheets and tablecloths require a special item of equipment — a flatwork ironer — which represents a $50,000 investment, and large volumes of business are needed to fill the capacity of even the smallest flatwork ironer. Margins are slim and small slips cost money. I. Profitability Profitability per item is difficult to generalize about because of all the variables involved, but industry sources stress the profit potential of garment rental (given adequate new machinery) and the difficulty of making money in flatwork. Indeed, firms will often offer flatwork as a "loss-leader" in order to gain associated garment contracts. 13 The LSAA Survey of 1968 (44 firms) indicated the following average operating ratios: Gross profit (margin) 42.2% Operating expenses 34.4 Operating profit 7.8 Income taxes 2.8 Net profit 5.0% The average after-tax return on investment was about 19.5 percent. These margins are fairly wide by service industry standards, exceeding much of the retailing industry in operating and net profit. Return on investment is handsome. Variation in profitability varies considerably by size of company. TABLE 9 Linen Supply Industry — 1968 Operating Ratio Percentages by Annual Receipts Categories Under $500,000 to $1 million to $500,000 $1 million $2 million $2 million + $30 millior Gross margin 42.9% 39.1% 41.8% 40.5% 31.7% Expenses 35.2 34.2 32.3 30.7 21.1 Operating profit 7.7 4.9 9.5 9.8 10.6 Taxes 2.2 1.1 3.7 4.4 5.2 Net profit 5.5% 3.8% 5.8% 5.4% 5.4% Expenses decline systematically with size — a function of the econ- omies of scale discussed earlier. This means that operating profit tends to increase with size, apart from the "dip" in the medium-size com- pany which experiences low-profit levels. III. ANALYSIS OF BUSINESS FEASIBILITY A. Major Factors Determining Industry Success 1. Marketing and Sales The industry is selling a service, and growth takes place by extend- ing the range of those services. This takes a great deal of skill and persuasiveness by the firm. Bidding is at the heart of the company- client relationship and competition is severe. A good sales staff, ade- quately paid, is an essential. Subscription to lists of "contacts" is in- valuable. 2. Cost Control The pressure placed on margins by the increasing cost of labor in this industry means that efficiency in all other areas is essential. This 14 applies particularly in distribution where good management can re- duce costs effectively. 3. The Critical Growth Gap Entry can be achieved with a very small amount of capital, but growth beyond the $500,000 per annum level is difficult as overhead becomes larger. At this point, access to larger amounts of capital is essential in order to reduce labor requirements and raise productivity. Failure to do this reduces net profit to critically small margins, and it becomes difficult to win any contract at "above cost" prices. 4. Size of Client Of all the critical features this is the most difficult to deal with. It is clear that very small clients cannot be served profitably once the firm grows beyond the "mom and pop" stage, and many firms have a min- imum contract value ($5 to $10 per week) below which they will not service a client. This feature is a difficult one from the point of view of a new small business. 5. Product Mix Garments are the most profitable end of the business but require larger sums of investment both on behalf of the firm (in processing machinery) and the client (in his stock of garments). Unless entry is made at a fairly large size, this valuable market may not be open to the new firm with little experience. B. Problems of Minority Enterprise A new minority enterprise in these industries must face all of the problems discussed above and probably several others. But, there may be opportunities not open to nonminority competitors. In Detroit, Cleveland, and Oakland, California, and some other large cities, the minority community clientele may be sufficient to support a fair-sized industrial laundry, given guarantees of support from minority company trade associations. Most of these companies are relatively new, however, and are unlikely to be very receptive to at- tempts at selling "career clothing" or other industrial launderers/linen supply services. C. Projection of Returns — Two Hypothetical Situations Two situations likely to characterize minority enterprise are dis- cussed next. The difference between them is mainly one of scale, a function of the capital investment made by the entrepreneur at the outset. In both cases, emphasis has been placed on the high profit side of the industry (garments) and less on the flatwork side. 15 TABLE 10 Financial Projections for Representative Businesses of Two Sizes Case 1 Case 2 Small proprietorship Medium-sized proprietorship ($50,000 annual gross) ($200,000 annual gross) Capacity — lbs. per yr. 250,000 lbs. 1,000,000 lbs. lbs. per day 1,000 lbs. 4,000 lbs. Equipment Costs: Washer extractor 1 (200 lb.) $ 4,000 1 (400 lb.) $ 20,000 Spare 1 (50 lb.) 1,000 1 (100 lb.) 3,000 Dryer 1 (100 lb.) 2,000 1 (400 lb.) 4,000 Press 2 (manual) 1,000 1 (automatic) 5,000 Drycleaning machine 1 (small) 5,000 1 (large) 30,000 Heating plant 1 2,000 1 12,000 Installation 1,500 8,000 Other 500 2,000 Vehicles 1 2,000 3 6,000 Total $19,000 $ 90,000 Gross receipts Annual operating statement $50,000 Net profit before taxes and owner's compensation $200,000 Operating expenses Labor: Production (3) $16,500 (6) $42,000 Distribution (1) 7,500 (3) 26,750 Sales and administration (2) 17,500 Nonwage benefits (nonunion) 3,500 (union) 22,000 Total labor costs $27,500 $108,250 Supplies 1,000 4,000 Equipment maintenance 1,000 5,000 Materials replacement 5,000 35,000 Total operating expense $34,500 $152,250 Overhead expenses: (3,000 (10,000 — Rent and Utilities sq. ft.) 4,000 sq. ft.) 12,000 Equipment depreciation (10 yr.) 1,900 (10 yr.) 9,000 Total overhead 5,900 21,000 Total expenses $40,400 $173,250 $ 9,600 $ 26,750 Certain Assumptions are Made 1. All buildings and real estate are rented, not purchased. 2. Input capacity is determined by the capacity of the washer/ extractor machine. All other equipment capacity is geared to this. This is not unreasonable, but in practice other measures of capacity would be necessary also. 16 3. An assumed revenue of 20 cents per pound of goods processed is used as base (the average of the linen supply industry). 4. Labor needs are calculated as follows: a. production — from manufacturers' literature b. distribution — it is assumed that the average client has a con- tract worth $30 and is serviced once a week. From projected net receipts, it can be estimated that Case 1 firm has weekly revenues of about $1,000 and Case 2, of $4,000. The number of contracts this revenue represents is: Case 1— $1 / 000/$30 = 33 Case 2— $4,000/$30 = 133 Each vehicle can make 10 calls per day, or 50 to 60 per week; Case 1 needs one vehicle and driver, and Case 2 needs three. IV. GUIDANCE FOR ESTABLISHING THE BUSINESS A. Approaching the Market The most opportune situation for both Case 1 and Case 2 might be to purchase an existing business with an established clientele. This may not be possible, however. Marketing is a very important part of the industrial launderers/linen supply industry and can be thought of as two activities: 1. Direct selling to potential customers. 2. Being placed on bidders' lists (for institutional and other larger customers). Both these activities can be started by subscribing to "contact leads" published by specialist organizations covering the industrial laundries/linen service market locally. A blanket mailing coverage of all establishments in the "customer types" list (LSAA) derived from the local yellow pages of the phone book is another basic approach. The "customer types" list as shown in Table 4 is large and can yield much valuable business. Minority businessmen will, of course, attempt to contact local minority-owned businesses in the customer-types listing. Direct per- son-to-person contact with the potential client is more effective than any other means of selling. Initially, it may be that only small clients, who are difficult to service without making a loss, are recruited; how- ever, in the beginning "all business is good business" and small con- tracts will help. The aim should be to bid effectively on the larger contracts let periodically by larger companies, chains, restaurants, and so on. Public institutions and military agencies welcome potential bidders; other larger organizations must be "sold" more heavily. 17 Specialization in a particular market that is also a particular product group is an additional possibility. Specialization in servicing gas sta- tions, for instance, might yield high profits as experience grows and knowledge of the "gas station" industry is accumulated. Another profitable area of specialization might be dentists' and doctors' of- fices, particularly where the latter are grouped together in "medical centers" and have minority representation. Indeed, this latter factor can be a criterion used to search out markets, since minority busi- nesses are most frequently found among gas stations, automotive repairs, food franchise outlets, some areas of retail trade, beauty shops, and bars. Attempts at getting "guarantees" of business from minority opera- tions have sometimes been successful in other industries and can be applied here, too. Certainly this would be an effective method in larger cities which have a large minority community. B. Obtaining Financing Established firms in industrial launderers/linen supply industries make use of bulk credit and of equipment-secured debt to finance operations and expansion. For the newcomer to the industries, financ- ing can be difficult to obtain, and for minority newcomers, even more so. There are, however, opportunities for minimizing startup capital needs. The use of used machinery and vehicles is an obvious one, as is the purchase of stock and other materials from other companies which are going out of business, or being amalgamated, or spinning off some operations. The trade journals "personals" are an effective market source for this. Leasing premises rather than buying or con- structing them is an obvious capital-saver, but less obvious is the pos- sibility of lease/lending machinery from some of the major manufac- turers. In times of slow business and poor credit, manufacturers tend to be more open to the possibilities of lease/lend in order to move their stocks of machinery. The new business will, of course, need some new capital to start and to continue operations. In order to obtain this as cheaply as pos- sible, a sound "financial plan" is essential. Elements of this include knowledge of the Federal, State, and local loans and guarantees programs available for small business. Another listing of non- profit "help" agencies for minority business, some of which have financial resources, is the publication Private Programs Assisting Mi- nority Business, issued in 1970 by the Office of Minority Business Enterprise, U.S. Department of Commerce, Washington, D.C. 20230. 18 APPENDIX Data on labor requirements, capital needs, and plant size have all been discussed in Section II of this report. Further information spe- cific to the industry in these areas can be obtained from the industries' trade associations and their local branches. 1. Linen Supply Association of America 925 Arthur Godfrey Road Miami Beach, Florida 33140 Phone: 305/532-6371 Publication: Linen Supply News (monthly) 2. Institute of Industrial Launderers 1726 M Street, N.W. Washington, D.C. 20036 19 OFFICE OF MINORITY BUSINESS ENTERPRISE (OMBE) AFFILIATE ORGANIZATIONS Albuquerque National Economic Development Association (NEDA) 1801 Lomas, N. W. Albuquerque, N. M. 87104 508/843-2386 Victor M. Casaus, Regional Vice President Atlanta Atlanta Business League (NBL) 329 Walker Street, S. W. Atlanta, Georgia 30314 404/524-5449 Franklin F. O'Neal, Executive Director Wendell White (OMBE Representative) 404/526-6304 Baltimore Morgan State College Minority Business Enterprise Project 2108 North Charles Street Baltimore, Maryland 21218 301/685-0610 Ralph J. Ross, Executive Director Boston The Roxbury Small Business Development Center 126 Warren Street Roxbury, Massachusetts 02119 Bernard Wiley — Acting Executive Director 617/427-6333 Frank Bispham (OMBE Representative) 617/223-2381 Chicago Chicago Economic Development Corporation (CEDC) 162 North State Street, Suite 600 Chicago, Illinois 60601 231/368-0011 Garland Guice, Executive Director Bennett Johnson, Jr. (OMBE Representative) 312/353-4460 NEDA 537 Dearborn South Chicago, Illinois 60605 312/939-2607 Gilbert M. Vega, Regional Vice President Cincinnati Determined Young Men 3880 Reading Road Cincinnati, Ohio 45229 513/221-0180 Merven Stenson, Executive Director Cleveland Greater Cleveland Growth Corporation 690 Union Commerce Building Cleveland, Ohio 44115 216/241-4313 Melvin Roebuck, Executive Director Minority Economic Developers Council (MEDCO) 10518 Superior Avenue Cleveland, Ohio 44106 Armond L. Robinson, Administrator Dallas Dallas Alliance for Minority Enterprise (DAME) 7200 North Stemmons Freeway Suite 1006, UCC Tower Dallas, Texas 75222 214/637-5170 Walter Durham, Executive Director Denver Colorado Economic Development Association (CEDA) 1721 Lawrence Street Denver, Colorado 80202 303/255-0421 Edward Lucero, Executive Director 20 Detroit Inner City Business Improvement Forum (ICBIF) 6072 - 14th Street Detroit, Michigan 48208 313/361-5150 Walter McMurtry, President El Paso NEDA First National Building Suite 10B 109 North Oregon Street El Paso, Texas 79901 915/533-7423 Jose Manuel Villalobos, Regional Vice President Indianapolis Indianapolis Urban League 445 North Pennsylvania Street Indianapolis, Indiana 46204 317/639-5391 or 253-5418 Sam Jones, Executive Director Kansas City Black Economic Union (BEU) 2502 Prospect Kansas City, Missouri 64127 816/924-6181 Curtis McClinton, President NEDA 703 North 8th Street Kansas City, Kansas 66100 913/342-6663 Richardo Villalobos, Regional Vice President Los Angeles South Central Improvement Action Committee (IMPAC) 8557 South Broadway Los Angeles, California 90003 213/751-1155 Louis Wilson, Director The East Los Angeles Community Union (TELACU) 1330 South Atlantic Boulevard Los Angeles, California 90022 213/268-6745 Claude Martinez, Director of Development NEDA 5218 East Beverly Boulevard Los Angeles, California 90022 213/724-6484 Silvestre Gonzales, Regional Vice President Jack Wilburn, Coordinator 213/824-7691 Powell McDaniel (OMBE Representative) 213/824-7715 Joseph Luna (OMBE Representative) 213/824-7715 Memphis Memphis Business League (NBL) 384 E. H. Crump Boulevard Memphis, Tennessee 39126 901/574-3213 Leonard J. Small, Sr., Project Director Harold Jones (OMBE Representative) 901/534-3216 Miami NEDA 8551 Coral Way Suite 307 Miami, Florida 33155 305/221-5531 Dr. Antonio Machado, Regional Vice President Newark MEDIC Enterprises, Inc. 287 Washington Street Newark, New Jersey 07102 201/642-8054 New Haven Greater New Haven Business and Professional Men's Association 226 Dixwell Avenue New Haven, Connecticut 06511 Gerald S. Clark, Executive Director 203/562-3819 New York Puerto Rican Forum, Inc. 156 Fifth Avenue New York, New York 10010 212/691-4150 Hector I. Vasquez, Executive Director 21 New York (continued) Richmond Capita! Formation, Inc. 215 W. 125th Street, Room 313 New York, New York 10027 Hirom C. Cintron, Director, Harlem Office 212/222-9650 Brooklyn Local Economic Development Corporation (BLEDCO) 1519 Fulton Street Brooklyn, New York 11216 212/493-1663 Preston Lambert, Executive Director NEDA 19 West 44th Street Room 407 New York, New York 10036 212/687-1128 David J. Burgos, Regional Vice President Philadelphia Entrepreneurial Development Training Center 1501 North Broad Street Philadelphia, Pennsylvania 215/763-3300 Alphonso Jackson, Director Phoenix NEDA Amerco Towers 2721 North Central Suite 727 South Phoenix, Arizona 85004 602/263-8070 Joseph Sotelo, Regional Vice President Pittsburgh Business & Job Development Corporation (BJDC) 7800 Susquehanna Street Pittsburgh, Pennsylvania 15208 412/243-5600 Forrest L. Parr, President Marian Diggs (OMBE Representative) 412/644-5529 National Business League 700 North Second Street Richmond, Virginia 23219 703/649-7473 Allen Roots, Acting Project Director San Antonio NEDA 1222 North Main Street Kallison Tower, Room 422 San Antonio, Texas 78233 512/224-1618 Cipriano F. Guerra, Jr. Regional Vice President Jesse Rios (OMBE Representative) 512/225-5511 San Francisco Plan of Action for Challenging Times (PACT) 635 Divisadero Street San Francisco, California 94117 415/922-7150 Everett Brandon, President Seattle United Inner City Development Foundation 1106 East Spring St. - Xavier Hall Seattle, Washington 98122 206/626-5440 Wilson Gulley, Executive Director Washington, D. C. Mayor's Economic Development Committee (MEDCO) 1717 Massachusetts Ave., N. W., Room 704 Washington, D. C. 20036 202/667-6480 Michael D. Wallach, Director, Business Assistance Center Curley King (OMBE Representative) 202/967-5051 Howard University's Small Business Guidance & Development Center Post Office Box 553 Washington, D. C. 20001 202/636-7447 Dr. Wilford White, Director 22 Profiles of urban businesses are for sale at listed prices by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402. Beauty Shops (25 cents) Bowling Alleys (30 cents) Building Service Contracting (30 cents) Children's and Infants' Wear (25 cents) Contract Construction (30 cents) Contract Dress Manufacturing (25 cents) Convenience Stores (25 cents) Custom Plastics (30 cents) Dry Cleaning (25 cents) Furniture Stores (25 cents) Industrial Launderers & Linen Supply (30 cents) Machine Shop Job Work (30 cents) Mobile Catering (25 cents) Pet Shops (30 cents) Photographic Studios (25 cents) Real Estate Brokerage (25 cents) Savings & Loan Associations (30 cents) Supermarkets (30 cents) Preparing a Business Profile (20 cents) «U.S. GOVERNMENT PRINTING OFFICE: 1972-721-936/710