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Shrink Business to Grow Profitability

Diana Vollmer |

For certain operations in today’s economy, shrinking may be the first and best step toward growing stronger and more profitable. The strategy is contrary to the basic principles of entrepreneurial capitalism and its basic philosophy: “Grow or die.”
In general, the strategy flies in the face of standard operating procedure, but today’s environment offers less-than-standard operating conditions. Today, many people face unique circumstances that may also relate to drycleaning operations.
For instance, everyone knows that the real estate market has taken a tumble recently. Although it hasn’t hit every area of the country equally, there are places with large numbers of foreclosures. In these areas, drycleaners have seen sales decline 20% or more. No amount of discounting or price-cutting will bring these customers back in the short term — other strategies will be necessary.
In other markets, slow growth may have followed accelerated expansion in retail drycleaning. As a result, new stores or routes anticipated to do great volumes fell behind original projections.
Finally, significant cost pressures are having an effect on markets throughout the United States. The most obvious increase is the cost of vehicle fuel. Hangers, of course, have had issues, but these are only top-of-mind items. Most items have quietly or not-so-quietly increased prices at rates beyond historic levels.
Boiler fuel has gone up. Employee wages and benefits are going up. Rents have matched — at a minimum — consumer prices indexes. These circumstances will need different strategies for a midterm correction and return to profitability for some operators, since no single adjustment can attack all of these issues as quickly as necessary.A COMPLETE EVALUATION, NOW
It’s time to evaluate every aspect of your operation from a position of current profitability. This differs from a perspective relating to future profitability. A look forward takes into account that new stores and new routes take time to mature and maximize their contributions. Untrained employees take time to get up to speed and contribute fully.
If profitability is already lagging significantly, you may not be able to wait for a store to mature while working capital shrinks, and you start to hold vendor payments to avoid overdrafts. Immediate profitability is the perspective to take. A thorough evaluation will look at each area of the operation with the objective of maximizing its value quickly or eliminating it.
It’s surgery: First, you evaluate the body to verify that each organ is healthy. If one part of the body or business has a disease, it must be repaired or removed immediately. Waiting is not an option.
Take a look at each store as a stand-alone entity; don’t consider that even a small dry store might cover some overhead. Are sales at least $250,000 per store, per year? Are the rents including CAM charges below 15%? Has all unnecessary labor been eliminated, including the 30 minutes’ overlap between shifts? Every little bit adds up.
If a dry store doesn’t meet these minimum requirements, what are your options? You probably have a long-term lease, otherwise you would already have done something about it. You still might be able to renegotiate with the landlord. After all, if you need to declare bankruptcy, he’ll lose you entirely — and the center already may not be full as it should be.
You have other choices. You might be able to sell the store to another drycleaner that sees the store as more advantageous. Although this is out-of-the-box thinking, a shrinking strategy that helps you survive in the short term needs to be considered.
It may be best to close the store, save on labor and move as much volume as possible elsewhere while you keep paying the rent. Your monthly losses might be less, depending on how slow the store is.
A better option may be to sublet the location to a business that’s more compatible with the current status of the neighborhood. In one case, subletting to a check-cashing business actually created more profit for the drycleaner than running his own store.
Many individuals have tried to open routes in their areas, after successful operators started route-building strategies more than 10 years ago. These laggards found that they were at a significant disadvantage, and the routes often did not yield the volume and profitability anticipated.
Now there are low sales, high labor costs, and increasing truck and fuel expenses. It’s time to determine the real, stand-alone profitability of each route. It might make sense to consolidate two small routes into a single profitable one. Although profitability is difficult to grow, it will increase with lower labor and operating costs. The extra vans can be sold at reasonable prices or mothballed.
Operating costs in the plant are the next place to look. Again, any area of operations can be stripped if it needs to be. Some operations have stripped down on packaging. Others have eliminated same-day service to reduce the number of shuttle runs.
Productivity is a big area to shrink your operation. Recalculate your projected volume based on store and route closures, and then rebuild your labor requirements based on the new volume. If there’s any way to finance labor-saving technology, this will be the way to go for larger operations. For smaller operations, consolidating plants offers an immediate savings in utilities.
In the worst circumstances, you might ask employees to take pay cuts. They can see sales falling, and understand the situation better than you imagine — any job is sometimes considered a good job. This is also the time to let the least-effective employees go. Remaining staffers will respect this move, and appreciate the extra hours.LEAN AND HUNGRY
Each of these strategies will actually help lay a foundation for strong future growth. Although they may seem distasteful to operators who have always solved problems through growth, it isn’t always possible today. With a few successful changes, you’ll be able to pick your time and opportunity as profits improve and the economy rebounds.
Make a careful profit analysis of existing divisions and take the appropriate steps to cut unprofitable operations, and you will position your company to take advantage of opportunities created by the economic downturn. When business is the most challenging, it’s the right time to increase market share by giving customers what they want, when, where and how they want it.
Many of your competitors are cutting in areas that are important to customers, leaving you with an opportunity to win over disappointed consumers. Competitors may be cutting customer-service representatives, resulting in poor service. They may have cut labor or supplies, resulting in a substandard product. They may be cutting corners that show a lack of attention to detail — and the best customers are fanatics about details.
Finally, many of your competitors are discouraged, burned out and negative about the industry and its future; they may be ready to sell at a price that’s advantageous to an opportunistic buyer. Keep your operation lean, mean and profitable to put yourself in the perfect position to expand market share selectively through the intelligent acquisition of compatible stores and routes. Shrinking can be a very profitable strategy for growth.
 

About the author

Diana Vollmer

Methods for Management (MFM) Inc.

Managing Director

Diana Vollmer is managing director of Methods for Management (MFM) Inc., a consultancy specializing in drycleaning businesses. You may contact her at dvollmer@mfmi.com, 415-577-6544.

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