Upstarts: Dry Cleaning
An Opportunity to Clean Up
OK, let's get it out of the way: dry cleaning is a dirty business.
For decades the dry-cleaning industry has been derided as a sullied, unprofessional backwater of some 35,000 loosely organized establishments and some staid suppliers. But now hundreds of millions of dollars are riding on the idea that dry cleaning can clean up its act. Some of America's top company builders -- spotless reputations on the line -- are trying to apply the entrepreneurial Midas touch to the problems that beset this cobwebbed corner of the economy.
Ken Langone is one active investor in the dry-cleaning arena. This heavy hitter is famous for cofounding the Home Depot. Tapping his well-placed connections, Langone has helped raise $50 million for Micell Technologies Inc., a dry-cleaning franchisor based in Raleigh, N.C. The company is now rolling out a chain called Hangers Cleaners. "Micell is one of the darlings of Ken's stable," says CEO Kirk Kinsell, adding that the company also has backing from billionaire George Soros's private-equity fund.
Meanwhile, three-year-old Zoots, a rival based in Newton, Mass., has also amassed $50 million in private equity, including $11 million from Staples Inc. founder -- and Zoots cofounder -- Tom Stemberg. And in Pleasanton, Calif., Payam Zamani, CEO of PurpleTie Inc., has raised $8 million from investors that include Apple Computer's former chief financial officer, Debi Coleman.
Such an influx of marquee talent is unprecedented in the dry-cleaning industry. But don't think of the players as just a bunch of rich people casting about for grandiose vanity projects. New companies are popping up in various regions, with executives that have varying degrees of experience and sophistication. And that swoosh of cash comes even as the venture-capital and credit markets are cooling down nationwide. A gold-rush mentality has beset the dry-cleaning community, not unlike the recent rush for dot-com riches.
Ironing out the wrinkles
The dry-cleaning business has traditionally been wildly fragmented, and for good reason. The hours are long, the margins are slim, the cleaning process is fraught with difficulty -- and then there are all those damn missing buttons. "All the new start-ups promise top quality and great prices, but they have to deliver on that," says Jay Calleja, vice-president of communications for the International Fabricare Institute (IFI), the industry's leading trade group. "And dry cleaning is tough, hot work with stores open from 7 a.m. to 7 p.m."
Of the new crop of dry-cleaning start-ups, Micell Technologies, the company that franchises the Hangers chain, is the most aggressive in wanting to change the way garments are cleaned. In 1995 a professor at the University of North Carolina at Chapel Hill and two of his former graduate students started Micell to bring to market a cleaning method using liquid carbon dioxide. The company struggled for several years to define the right growth strategy, eventually choosing to build a franchise of dry-cleaning stores around the new technology. The first Hangers opened in February 1999; at press time there were 40 Hangers stores in five states.
Industry insiders are skeptical that the chain will continue to grow, however. "These carbon dioxide machines cost $150,000, while a typical dry-cleaning machine costs only $40,000 to $50,000," notes the IFI's Calleja. "When you add in the Hangers franchise fee, the total package is $175,000, and at that point you have to consider what the typical dry cleaner makes."
Kinsell admits that his system is expensive but says the long-term rewards for dry cleaners that switch to liquid carbon dioxide will outstrip the short-term expense. He claims that a Wisconsin chain that just picked up the Hangers franchise has seen its weekly sales jump 40% since making the switch. He attributes the surge to consumers' embracing the chain's eco-friendly cleaning process, which, he claims, is easier on both the environment and delicate fabrics. "This industry has seen very little transition around technology in terms of the process piece of how clothing is cleaned and also how the customer is served," says Kinsell.
Collars and cuffs, hubs and spokes
Other start-ups are focusing less on the process of cleaning clothes and more on logistics and technology to improve overall efficiency. A broad movement wants to centralize cleaning facilities rather than have dry-cleaning equipment in every storefront.
Increasingly, dry cleaners are using fleets of trucks and vans to go door-to-door to collect soiled garments from time-strapped customers. One company that's taking the concept to the next level is PurpleTie, which is gambling on handling its customers' transactions online. CEO Zamani believes that the Bay Area's burgeoning professional class will prefer to use the Web (or the telephone) to order home pickup of dirty clothes by PurpleTie's fleet of trucks. After receiving the order, the company transports the soiled garments to a centralized facility, cleans them, and then returns them to the customer.
Zamani argues that the central-hub approach -- though a huge operational challenge -- creates immense savings just by cutting real estate costs. To help him build the sophisticated on-the-street logistics systems he'll need, Zamani has recruited former UPS executives, who are pros at using technology to streamline truck routes. Zamani himself already has a track record at applying the Web to a hard-core retail business: in 1994 he and his brother cofounded the car-buying site Autoweb.com. (One caveat: Autoweb's stock is now worth pocket change.)
Zamani's business plan calls for having PurpleTie trucks rumbling through the congested boulevards of 25 of America's major markets by 2003. He projects that 2001 revenues will hit $10 million and that the San Francisco operation will be cash-flow positive early this year. All of which depends on market acceptance. "It will be interesting to see if consumers really want to do their laundry online," says Calleja.
Projecting $10 million in sales so early in the game may sound ambitious to some. But compared with the projections of Zoots -- a third key start-up in the industry -- PurpleTie's numbers are practically humdrum. Zoots hit $30 million in sales last year and expects to balloon to $60 million in 2001, only its third year of operation. And like PurpleTie, Zoots also offers home delivery and lets its customers order service on the Web.
But in addition to its online operation, Zoots has 41 stores in six states, which feed clothing to the company's large production facilities. And it's in the retail arena where Zoots's differentiation is most obvious, says CEO Todd Krasnow, who was formerly a top deputy to Stemberg at Staples. "We're in business to take care of customers, not to piss them off," Krasnow says.
On a wet evening last October, Krasnow pointed out all of his snazzy customer-service innovations at the Zoots store in West Roxbury, Mass. The weather helped him illustrate his point. To avoid the rain, most customers used the store's drive-through window. But Krasnow also took pleasure in showing off the way Zoots can serve its customers even after hours. After the store closes for the evening, customers can enter its vestibule, which is accessible by credit-card swipe, and retrieve clean garments from lockers by using a PIN.
Of course, even guys like Krasnow -- who know retail as few others do -- still find dry-cleaning customers to be a particularly difficult breed. Irate patrons have tracked down the CEO's unlisted phone number to complain about missing sweaters, for example. "There are still too many customers unhappy at the end of the process," he admits. But for now, Krasnow and his competitors aren't panicking about heavy customer demands, believing instead that automated systems and sophisticated management will eventually result in happier customers.
Mike Hofman is a staff writer at Inc.
The Next Big Perc
Perchloroethylene -- or perc, as it is more commonly known -- is the solvent that the vast majority of dry cleaners in the United States have used for the past 50 years. 95% of all U.S. dry cleaners still use perc. But now both private and government reports have labeled perc a possible carcinogen. Perc has also been a cancer in a business sense, quietly but steadfastly eating away at companies' profits throughout the dry-cleaning industry.
"The solvent has definitely hurt the cleaning industry as far as moving forward," says Jim Barry, former CEO of Pride Cleaners, a chain based in Kansas City, Mo., that ranked #494 on the 1987 Inc. 500. According to Barry, big-league investors have been unwilling to put venture money into dry cleaning for fear of an Erin Brockovich-like class-action suit over contamination from improperly handled chemicals.
Lawsuits aside, perc is a burden for small businesses in other ways. If there's a mishap, cleanup costs are high. Some states also levy a tax on perc users. And naturally, the potential liability drives up insurance premiums, increasing the overhead of small dry cleaners. "If you run a chain, we're talking hundreds of thousands of dollars a year," Barry says.
And then there's the labor issue. Job seekers aren't exactly jazzed by the prospect of handling an allegedly dangerous chemical while earning relatively low wages. High employee turnover and recruiting difficulties have further retarded the growth of dry cleaners. As a result of those factors, Barry points out, no dry-cleaning entrepreneur has ever parlayed local success into a national branded rollout.
But it now appears that several rival solvents could revolutionize the industry. During the past year, the efficacy of various perc alternatives has gone from being a back-burner issue to becoming the hot topic in the dry-cleaning world. None of the major retail start-ups in the industry use perc, and Micell Technologies, in particular, has said its mission is to market cleaner solvents using liquid carbon dioxide. Petroleum-based solvents are also growing in popularity, as is another method called "wet cleaning," which relies on water and detergent to cleanse delicate garments. If such alternatives ever take off, the costs of operating a dry-cleaning establishment would decrease considerably.
Not to be outdone, former Pride Cleaners CEO Barry is also hunting for a new people- and planet-friendly way to clean America's clothes. He is now chairman of GreenEarth Solutions LLC, a joint venture with a General Electric business unit that aims to create a new silicon-based solvent. "I really believe that this is something that's going to change the course of an industry," Barry says.
One Mom-and-Pop Responds
Most of the buzz in dry cleaning today centers on big fish from other industries' ponds. But dry-cleaning veterans like Siamak Ghazvini also want to transform the business. Ghazvini, 42, has run a popular dry cleaner in the heart of Silicon Valley for seven years. "The #1 thing is that we're not new to this industry," he boasts.
Three years ago Ghazvini was running a traditional seven-store dry-cleaning chain based in Redwood City, Calif. He eventually added pickup and delivery services for his high- flying, high-maintenance clientele. In 1999, Ghazvini and his brother, Payman Rafii, started SiliconValleyCleaners.com to offer customers the ability to request dry-cleaning services on the Web. "It's a convenient way of keeping in touch with sophisticated customers," he says.
Now Ghazvini has completed a new business plan to take his Bay Area concept national. He calls the company AmeriCleaners.com and hopes to create a 1-800-Flowers-like network of independent dry cleaners by providing them a national brand and technology infrastructure. Ghazvini claims to have lined up 20 partner operations to form a network from Los Angeles to San Francisco and has even signed on a few partners in other cities, like Atlanta and New York.
Customers will submit dry-cleaning orders on the Web, and AmeriCleaners will forward the lead to the closest cleaner in its network. That shop will then pick up, launder, and return the garments within 36 hours. "We believe that dry cleaning is a very local business and should be operated locally," Ghazvini explains. "All we'll do is maintain the portal and provide expertise to dry cleaners on how their customers behave online."
Ghazvini says he'll promote the AmeriCleaners brand name heavily, although at this point his funding includes no outside investors.
But Ghazvini remains confident. A bunch of dilettantes invading his turf, he says, are no match for his years of toil in a brutal industry in one of the most demanding consumer markets in the country. "You know what happens to those big-hype companies," he scoffs. "They deflate like a balloon."
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