| From
Forbes Magazine, March 1997 issue: HAVE YOU HEARD THE ONE about the Laundromat owner? Had three stores, but couldn't open a fourth—ran out of relatives. Patrick Clifton cackles at the story. The 38-year-old is chief executive of SpinCycle Inc., a privately held Eden Prairie, Minn.-based Laundromat chain. Why the laugh? Because if his year-old company grows according to plan, Clifton would need about 900 brothers, sisters and cousins by 2001. In coin-operated laundries, Clifton thinks he's found an ill-served niche. His dream is to do to the coin-op business what Blockbuster did to home video—consolidate a fragmented business |
| and operate
it more efficiently. SpinCycle has already opened 16 stores in five states. Ten are in
Chicago. By year-end another 98 will open around the U.S. What's so great about a chain of Laundromats? Ask anyone who owns one—including multibillionaire John Kluge, who owns some 130 Laundromats (Forbes, Feb. 26, 1996). The business isn't really seasonal, nor is it impacted by recessions. All sales are in cash, so there's no chasing after receivables. And the customers do most of the work. Cash-flow margins? About 30%. The business is highly fragmented. Some 30,000 laundries in the U.S. generate more than $3 billion in annual revenue. No one owner has more than 200 stores. "Coin-op laundry is unglamorous," says Clifton. "People are looking for the next big coffee chain. What we're doing is under the radar." Chicago's blue-collar far North Side is the kind of neighborhood where Clifton plans to prosper. There, a 5,100-square-foot SpinCycle sits by itself on a one-acre parking lot. Sunlight pours in through floor-to-ceiling windows. Gleaming new stainless steel washers and dryers line the wide aisles and walls. Laundry carts on rubber wheels glide quietly over the spotless white tile floor. This is a huge difference from the dingy Washout Inn down the street. At SpinCycle every folding table has a color TV. A carpeted Kids Korner with blocks and toys keeps toddlers happy. Clifton's employees—he now has 150—are trained to go out of their way to help customers and will even unload laundry from their cars. When the first SpinCycle store opened in Chicago a year ago, a woman mistook a helpful SpinCycle attendant for a thief and shouted, "Hey—you're stealing my clothes!" A typical SpinCycle probably grosses about $500,000 a year. Cash flow (net income, that is, before interest, taxes, depreciation and amortization) is estimated at $150,000 a year and can easily be increased. As John Kluge has observed, who would object if a 75-cent wash goes to $1? Clifton says he can buy Laundromats at about four times cash flow. What about employees dipping their hands into all those quarters? Computers are a big help. To keep store managers honest (and satisfy the Internal Revenue Service), each machine in each store is linked to a central computer network. Every quarter that comes in is recorded at headquarters and reconciled with the next morning's cash receipts. Every machine is programmable. This means Clifton can maximize revenue by offering, say, 50-cents-a-load specials on Wednesday, when utilization falls to just 10% of capacity. On Sundays, when the machines operate at full capacity, a load costs $1.50. This would-be Kluge grew up making money in Tucson, Ariz. At 17, Clifton and some high school chums cut and sold mesquite wood. Clifton made a deal with local landowners: In exchange for every ten cords they allowed Clifton and his friends to harvest from their property, they would get a free cord of firewood. In 1978 the Tucson real estate market was hot. Two units shy of a high school diploma, Clifton dropped out and got a real estate broker's license. His friend Peter Ax went on to the University of Arizona, where he became friends with Scott Beck, who would go on to help build Blockbuster Entertainment and later cofound Boston Chicken Inc. Today Beck is Boston Chicken's chief executive. While Ax got his M.B.A. at Wharton and went to work on Wall Street, Clifton and his brother Michael built a successful chain of video stores in Phoenix. In 1991 Beck called Clifton. Blockbuster was having trouble expanding in Minneapolis. Would Clifton move north to help? He did, and in 18 months opened 32 Blockbusters around the Twin Cities area. Two years later Beck asked Clifton to open Boston Chicken units around the upper Midwest. In less than a year Clifton opened 50. By mid-1995 Clifton wanted to launch his own concept. By this time Peter Ax was running Lehman Brothers' Private Equity Group, but he, too, was itching to move out on his own. Searching for an industry to consolidate, they focused on three possibilities: coin-op laundries, self-serve car washes and dry cleaners. Laundromats won. Clifton and Ax threw together a business plan and raised $10 million—90% from big investors, the rest from friends—in exchange for two-thirds of their new company's equity. Most of the money was quickly spent on leases and setting up stores. But it took Clifton and Ax nearly a year to convince Raytheon's commercial washer-dryer division to extend SpinCycle a line of credit. In June 1996 Raytheon approved $20 million, enough to equip about 70 SpinCycle stores with top-of-the-line Speed Queen washers and dryers. In choosing Laundromats, Clifton consciously picked a business where other erstwhile consolidators had failed. In the 1980s the then-Ames, Iowa-based Duds n' Suds opened 80 franchised coin-op laundries that included beer bars and jukeboxes. Duds n' Suds went broke in 1989. Clifton says Duds n' Suds made two mistakes: creating a bar atmosphere at a place frequented mainly by female customers; and situating its stores in college towns, as opposed to inner cities where the heaviest coin-op laundry customers live. Clifton and Ax have a big vote of confidence from a proven winner that they are on the right track. Scott Beck has invested more than $2 million of Boston Chicken's money for a 15% stake in his old friends' SpinCycle idea. |
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