The Author Points Out the Flaws with a Common Method for Determining a Store’s Marketplace
Don’t get me wrong – I like pizza as much as the next person. Pepperoni and cheese is personal favorite, and that new bacon-wrapped version I’ve seen advertised looks pretty tasty, too.
Of course, Chicagoans love their deep-dish pizza, which requires a knife and a fork to eat; New Yorkers swear by their town’s hand-tossed, thin-crust pies; and I’m told Californians can order their pizza with tofu and broccoli.
It all sounds delicious to me. However, there is one particular type of pizza I simply don’t like – and that’s “Pizza Economics.”
What is Pizza Economics, and what does it have to do with the self-service laundry business? Is it a method of removing pizza stains from clothing? Is it a new way to deliver wash-dry-fold orders in 30 minutes or less? Or is it a new type of promotion, where you pay for one washer and get the next washer for half price? No, it’s none of these clever ideas.
Pizza Economics is a term I made up to describe a long-held convention within the laundry industry that – like the shape of a pizza – the demographics of a one- to three-mile radius around a laundromat should be used to determine the market size of that location. Think of the demographic radius around your store as the “pizza” and the size of the market within that demographic radius as the “economics.”
The convention of Pizza Economics implies that the potential laundry market within the demographic radius is determined by looking at factors such as population size, number of households, household income, family size, average age, number of renters… you get the idea. This philosophy also suggests inserting all of these variables into a formula, and the end result is the potential market size of that particular laundry.
After determining the size of the “pizza” and examining the competition serving that laundry market, you then can determine whether or not you can cut the “pizza” into more – and smaller – “slices.” Furthermore, if you buy and rehab an existing “slice” or cut a new “slice” (by building a new store), you theoretically will have a competitive advantage with new equipment, which will plateau after 18 to 24 months.
Unfortunately, there are flaws with this way of thinking – the most obvious of which is risk. First, the demographic information, which is only updated every 10 years, is static and estimated. For example, what happens to the size of the “pizza” if the population changes due to macroeconomic factors, such as the outsourcing of manufacturing jobs or the gentrification of a neighborhood located close to a densely populated downtown area? Likewise, what happens if apartments in your “pizza” are bought and flipped with new route washers and dryers?
Second, what happens when another laundry competitor uses the same Pizza Economics model and decides to do the same thing you did two years earlier – rehabbing an existing laundry within the “pizza” or building yet another new laundry and adding more – smaller – slices to the pie? Yes, there is a possibility that a lesser competitor may close, but more times than not, the existing competition always finds a way to hang on and remain open. Even if you knock out your existing competitor, the proposition is risky, because it is a zero-sum game where you have to have a winner and a loser.
Third, Pizza Economics is defeatist. It’s as if you’re walking into a battle with a white surrender flag in your pocket. Before you ever start, you’re assuming your “pizza” is only so large, based on the demographics in the radius you select. You are cutting that “pizza” into smaller “slices” and assuming that any growth you have – most likely at the cost of your competition – will plateau after just 18 to 24 months, even though chances are your financing or payback period is much longer. And, if you believe you have a great business model and that “the world is your pizza,” with a finite number of slices, history suggests otherwise – and the competition can become so great that laundry owners have resorted to tactics such as “free dry” and other measures of dilution to remain competitive.
Hopefully, it’s easy to see why I like to leave pizza in the kitchen or the restaurant – and out of the laundry industry. The good news is that, if you are a laundry owner like me, there are other business models besides Pizza Economics to grow your laundry business.
Despite this entrenched method of viewing a store’s marketplace, I can honestly say that, after six years, my two laundries have enjoyed double-digit growth every year they’ve been in operation. In fact, total sales are now in excess of $1 million and are up 20 percent so far this year. Meanwhile, during those six years, we have seen several competitors open up within a two-mile radius of our locations.
Over the course of the next few months, I will use this space to show how to increase sales if you already own a laundry, as well as share business models other than Pizza Economics for investors looking to get into the laundry business.
In the meantime, leave the pizza to Domino’s, Papa John’s and Pizza Hut – and start focusing on ways to really grow your laundry business.
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