In the course of his research on the industry, Gold had come across a diaper service in California that also carried toys, baby shampoos, infant formulas -- about 300 products in all. Gold liked the concept and decided to try it. But he figured he'd be better off with a dozen good products he could turn over 20 times instead of 300 he could turn over once.
Gold figured the diaper service itself, with projected gross margins of 70%, would cover his costs. He needed only 200 customers, he calculated, to break even. (Neither he nor Goldman would draw salaries at the start.) The add-on products -- natural baby foods, lotions, lullaby tapes, diaper covers, pacifiers -- would sport markups from wholesale averaging 42%. That would be pure gravy, and Gold reckoned they could contribute at least a third of the company's revenues and possibly a lot more.
Moreover, by diversifying his product mix, he hoped to cushion the impact on the company if, as predicted, the baby boom leveled off between 1993 and 1995. "We can add other products that grow with the child," Gold says. "There could be developmental toys, products for the second child or even for the mother." So he'd have a fallback position.
Not only did he think he could sell the add-ons, he was already contemplating branching out into such extras as baby photographs and perhaps even his own catalog. He figured people would be more likely to buy products when they saw the same person every week. "I thought of it like the old-time milkman who began to sell his customers butter and eggs," he says. "So I wanted my customers to develop a relationship with my drivers, to be on a first-name basis and more like friends."
Then Gold took the idea one step further. Even before he had his first account, he planned to franchise Diaper Dan's. The National Association of Diaper Services, in Philadelphia, was being deluged with information requests from hundreds of would-be entrepreneurs; they had spotted the same opportunity that Gold had. Given that level of interest, Gold believed he had a franchise market ripe for tapping. The obstacles would be the cost and the management hassles. A franchisee would need a large facility equipped with commercial laundry machines and a staff to run them. But it was here that Gold perceived a huge advantage. Neither he -- nor his potential franchisees -- would do the washing of clothes.
For Gold this was partly a matter of financing. He had spoken to several venture capitalists about investing in the company, but no one took him seriously. "You're a lawyer, Dan," one said, shrugging. "What do you know about the diaper business?" Convinced that start-ups spend too much time and money trying to raise financing, Gold simply obtained a $50,000 bank loan on his personal guarantee and added $25,000 of his own cash.
With a total capitalization of $75,000, he was hardly able to invest the kind of money required for high-volume laundry equipment. That could run well into six figures, with a payback period as long as seven years. And after all, he had 40,000 diapers to buy, at a cost of about $30,000. He had a van to purchase, and Yellow Pages ads to buy. Those were the basics. Besides, he had little interest in the laundry end of the business. "If I had to be worried about running machinery and each month buying a new washer and dryer and also manage an entire staff of cleaning people, you're talking nightmare," he says.
Instead, he decided to do something unusual in the industry -- farm out the dirty diapers to an outside party. After exploring his options, he settled on Virginia Linen Service, part of a company that has 13 operations in six eastern states and the District of Columbia. Virginia Linen Service, rigged with a state-of-the-art, continuous-batch "tunnel" washing-and-drying system, was a 10-minute drive from Diaper Dan's own location, in Washington's Maryland suburbs. In addition, Virginia Linen had some experience laundering diapers, having done it for years before the advent of disposables.
Last March Gold locked up a three-year contract with the company to handle his and only his diapers within a 50-mile radius of the Washington Monument. There's only one catch. "It's an exclusive provided he builds the volume that makes it worth our while," says Virginia Linen's owner and chief executive, Donald Struminger. "If he doesn't build that volume, then he will not have an exclusive contract. He has not yet reached the point where we'd be satisfied to continue, but he is moving along on the projection curve that we set when we made the agreement."
The exclusive deal is critical to Gold, mainly because it thwarts copycat start-ups from using that same launderer. And his research showed that launderers willing to take on this kind of work were few and far between. Most other large linen companies launder only their own garments and rent them to hotels and hospitals. An option to renew the contract also is key. Although they have not negotiated it yet, Gold hopes to secure similar terms in other states where Struminger has operations -- Ohio, West Virginia, North Carolina, Pennsylvania -- if and when he sells franchises there.
Thus, under Gold's plan, potential franchisees would be freed of the cost of laundering and the need for a large facility. They could operate a business with a van and a telephone -- a husband-and-wife team could run it out of their house.
Finally, Gold planned to introduce a name-brand Diaper Dan's diaper for retail sale. Most cloth diapers sold in the United States are manufactured domestically by Dundee Mills and Gerber Childrenswear. India, Pakistan, Peru, and Venezuela produce cotton diapers. But Gold was convinced that the best, the most absorbent, and the cheapest diapers came from China. Chinese cotton products exported to the United States are restricted by U.S. textile quotas, but Gold already had contacted a U.S. agent about securing for him a reliable supply of Chinese diapers.
