High profits or fast growth?
That's the choice cleaning companies make
|Why would a company choose to be a residential or a commercial cleaner? To these franchisors, each market has its benefits, and its drawbacks.|
Franchise Times spoke to three cleaning franchisors and found widely differing perceptions of where the sweet spot of profitability resides.
Sign up to clean the Sears Tower and your margins will be razor-thin. Residential cleaning, on the other hand, is more profitable on a per-job basis but you have to acquire more customers and your workers tend not to stick around for very long. Residential or commercial, hmmm..., what to do? Here's how three franchisors came out after wrestling with these questions.
Molly Maid Inc. has been in residential cleaning from the outset. The company was started by a nurse who was having trouble finding a good maid. While growing to 280 franchises in 38 states, Canada, and four other countries, the company has continued to limit franchisee work hours to weekdays in order to give franchise owners a more flexible lifestyle and more time with their families. Commercial cleaning, on the other hand, is mostly done on evenings and weekends.
Some Molly Maid franchisees derive as much as 10 percent of their business from commercial establishments, but came by such opportunities through satisfied residential customers who wanted some light cleaning done at the office. However, moving into commercial in an organized fashion has never been considered at the corporate level because the company "can grow quite aggressively in the current market that we're servicing," says Kristi Mailloux, Molly Maid's president. Moreover, such a move would compromise the company's core value of keeping operations confined to weekdays.
Molly Maid's revenue per customer runs about $2,500 to $2,800 a year. While this is smaller than commercial accounts, commercial is more competitive and entails more capital and risk, Mailloux says. Molly Maid has some franchisees who wandered into commercial only to take a beating when they lost an account they had allowed to become too big a part of their business. On the residential side, "if you lose a client, it's relatively easy to pick up another client and you're not at risk for losing a major portion of your overall revenue coming from one
customer," Mailloux says.
The owners of Molly Maid created a holding company, Service Brands International, in 2000. The company's other brands (Mr. Handyman, 1-800-DryClean) have some commercial accounts, but are 80 to 90 percent focused on residential. Retaining the residential focus was deliberate in order to leverage expertise and maximize cross-selling, as the ideal customer (busy dual-income household with children) is much the same for all three brands. Molly Maid franchisees have the keys to 80 percent of their customers' homes, so the marketing message has to be personal given the trust factor involved, Mailloux says.
Coverall Cleaning Concepts has looked at the residential market numerous times but has always ended up sticking to small to medium-sized commercial properties, a $30 billion to $60 billion space by various estimates. "There's a lot of fish to fry still in that market," president and CEO Ted Elliott says. "It's still extremely fragmented. The top 10 cleaning companies probably control less than 20 percent of the market."
Coverall avoids the commoditization trap with its "clean for health" strategy. It chooses submarkets that require specialized training or expertise, such as healthcare where special disinfectants are needed and OSHA mandates must be met. Healthcare is Coverall's largest segment (26 percent), followed by other high traffic areas such as churches, schools and daycares, which must be sanitized with anti-microbial materials. The company has just over 9,000 franchises and is part of a holding company with a second brand, Coverall Hospitality Services Inc., which serves hotels and restaurants.
The question of residential versus commercial did not enter into Coverall's original decision-making process. Commercial accounts are much bigger, so "it's certainly a faster build of the business" for the franchisor, Elliott says. He believes commercial is significantly more profitable. "We can go to one site for one night and have a $1,000 transaction take place, whereas I would have to travel to many, many homes with numerous headcount to accomplish that," he says.
But there continue to be good prospects for growth on the residential side, so Coverall would consider moving into that space if the right acquisition of an established brand came along. That would make more sense than trying to enter the residential market from scratch, Elliott says.
MTOclean straddles both worlds. It has about 30 franchisees which typically derive 70 percent of their revenue from residential and 30 percent from commercial. The company was founded in 1988 as Maids to Order, serving the residential market until it was acquired by franchise investment firm Merrymeeting Inc. (MMI) in 2004. After evaluating market structure and competitive forces, MMI concluded there were unmet needs in both markets and repositioned the brand to address the commercial market in addition to residential, says Kylene Golubski, vice president of business development in MMI's high growth division. The name was changed to MTOclean to facilitate the move into commercial.
"'Maids to Order' really pigeon-holed us into the residential sector," Golubski says. "It wasn't vision-consistent anymore." KFC's name change (from Kentucky Fried Chicken) was influential in the re-branding process because it showed America's fondness for acronyms.
"There's a large segment of commercial that doesn't require huge operational changes to pursue," Golubski says. Small-to-medium size commercial properties, like households, require similar chemical knowledge, a customer-service orientation, and staff-management skills. The franchisee's infrastructure, already built for residential, can be leveraged to support expansion into commercial. MMI couldn't find a good reason not to put it all under one brand, so it gave franchise owners the flexibility to go after both revenue streams, whatever makes sense in their local market. "Why would we only go after one piece of the pie?" Golubski asks.
Cash flow presents a challenge to franchisees, though. There are no receivables on the residential side of the business, but commercial accounts typically entail 30-day terms. Because there are immediate outlays on the commercial side for labor and other costs, more working capital is needed to support commercial accounts. MTOclean advises franchisees to build up the residential side of the business first, and then use the cash to expand into commercial. This has the added benefit of letting the franchisees perfect their business systems before adding another layer of complexity.
Sales ability is another challenge. Whereas the residential space is mostly about response rates to targeted marketing campaigns, it can take months to cultivate a commercial prospect that has a pre-existing cleaning contract up for renewal. Franchise owners have to make sales presentations and know how to close a sale.
Franchisees also had to get used to the idea that it doesn't pay to go outside the scope of work specified in commercial jobs. This was a big adjustment because delivering a premium service level "is how we've earned such a strong reputation in residential," Golubski says. But going above and beyond cuts into the slimmer profit margins in the commercial segment and may lead to re-pricing requests that commercial customers don't want to hear, she says.
Where's the sweet spot? Residential is higher margin but more seasonal and has greater potential for customer and employee turnover. Commercial is more predictable and higher volume. Having both revenue streams evens things out. "You combine those two and they offset each other quite nicely," Golubski says in arguing that a portfolio approach to the choice-of-market question is best.