Is Now the Time to Increase your Vend Prices? Part 2.
In the previous HK Newsletter article we discussed that there are 4 major expenses in operating a laundromat and they are Labor, Lease, Equipment Note and Utilities expenses. These are the big dollar expenses. Utilities being the only variable expense are directly tied to the profitability of the store. If utility costs go up then you need to raise your vend prices. Utility costs are composed of the cost of Electricity, Natural (or LP) Gas, Water and Sewer costs. Of all of these expenses the Water & Sewer costs are the costs that are increasing faster than any other expenses.
How are laundromats doing with the utility costs over time? Are we losing ground? Is the Laundromat vend pricing keeping up with the increased cost of Natural Gas? 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 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 vend 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 machines 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.
(Article to be continued Next Week)
Chart Showing Historic Vend $ vs. Inflation
(Avg Vend Prices as reported by the CLA)
Inflation & Natural Gas Prices vs. Avg. Laundromat Vend Prices
(Avg Vend Prices as reported by the CLA)
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