Reaching a vital stage in development

The heavy-duty laundry market in Russia has a high growth potential. Its future prospects, and some of the problems that investors currently face, were brought sharply into focus at the first international conference for the Russian laundry and drycleaning market held at the Jensen-Senking factory in Harsum, Germany, last October.

This event was jointly organised by the Jensen Group, the heavy-duty laundry equipment manufacturer, with JSC Business Monolith, Jensen group’s distributor in Russia, and Business Management Group, a Moscow-based events organiser.

There were more than 40 attendees at the conference, representing manufacturers of laundry equipment, chemicals and textile suppliers, Russian government officials, directors of the largest industrial laundries in Russia and trade press.

Jesper Jensen, the chief executive of the Jensen Group, opened the conference. Attendees also had an opportunity during their five-day visit to see the Jensen production plant and an operational laundry.

The Russian market

Moderate turnovers are a consequence of drycleaners and laundries’ customer base, which consists predominantly of individuals rather than corporations. The costs in this business are also quite high and according to some companies in this segment, the simplest equipment designed to treat clothing at a small drycleaners costs at least $60,000.

Setting up a factory may require at least $100,000. It takes quite a long time – as long as 5 years – for drycleaners and laundries to see a return on this investment. It is therefore hard to attract investors, and companies have to rely on their own resources.

Marketing research carried out by the Diana drycleaning and laundry company in Moscow suggests that the Moscow region makes up around 49% of the total Russian market for laundry and drycleaning, with a value of US$70m in 2005, from US$63.6m in 2004, and US$55.7m in 2003. The Diana company forecasts the market will increase in value to US$100m in the next few years.

According to Nadezha Kuznetsova, deputy director of the department of consumer market forecasting at the Russian Federation’s ministry of economic development and trade, the consumer market is one of the main drivers of economic growth in Russia. At the same time, the price for services of modern laundries is still high, so inhibiting the development of these companies.

She pointed out that the purchase of quality equipment from abroad and noticeable improvements in the manufacture of domestic equipment are contributing to the service providers in the laundry industry being able to operate under the new economic conditions, offer new services, and use modern chemicals and cleaning materials. Nevertheless, within the service industries sector, laundries account for less than one per cent of the total volume, and this proportion is constantly declining.

“Development of this sector is directly related to the level of economic development in a given region, and the levels of earnings of the population. With earnings being very low in some regions, the population is unable to use these services,” she said.

It is a point borne out by the market survey by Diana, which revealed that around one-third of the population in the Moscow region did not use a drycleaning or laundry service.

Another factor is the decreasing number of laundries. There were 1,051 laundries in January 2006 compared with 2,197 companies operating as laundries in October 1996, a fall of 47.8%.

Despite this, the operational capacity of laundries (in kg of dry linen) per 10,000 population decreased less significantly, and is at 55.2% of its 1996 level, which means the average operational capacity of each remaining laundry has gone up.

Konstantin Kasatkin, deputy general director of conference organisers JSC Business Monolith, said its own market survey had revealed that 94% of all laundries and drycleaners in the Moscow region are in need of reconstruction and replacement of their equipment. This does not mean a replacement of one or two machines – most of the businesses looked at needed to replace entire premises, change worn-out communications, boiler houses and almost all the equipment. Revenue is seen as too small for serious investment in new equipment. “It is also impossible to shut down an operation, as a six months break will lead almost inevitably to loss of customers. This is why most managers, while understanding the problem, are putting off its solution. Instead they carry out minor repair work on the equipment, purchase some equipment. But these are temporary measures that do not substitute for a major reconstruction, which is inevitable.”

The Moscow property market is experiencing high growth at present and many companies were reporting that the total cost of their assets together with their revenues is significantly lower than what their building and land are worth. It can be predicted that many companies will move outside of Moscow in the near future.

“Businesses being pushed out of the city may even become a solution rather than a problem,” said Konstantin Kasatkin. “Sometimes it is much easier to build everything from scratch rather than reconstruct a decaying premises.”

Textile rental

The textile rental market remains in its infancy in Russia.

The market in the Moscow region consists mainly of OPLs and industrial laundries. The Diana company launched its Clean Standard project in 2003, consisting of three industrial laundries which process linen on a large scale for hotels, hospitals, boarding schools, restaurants, prisons and entertainment centres.

Peter Bierholm, MD of Beirholms Vaeverier AS told delegates that Russian laundries need to be convinced to invest more in textiles.

He told delegates that the European textile rental market currently stands at Euro8.870 million, of which flat linen accounts for Euro1.993 million.

Tourist arrivals are rising, not only in Europe and the Americas, but globally. As tourist numbers increase, so too does purchasing power. “The battle in the future will be the battle for the travelling consumer” said Peter Bierholm.

The company sets out to provide laundries with the right textile rental solution, said Bierholm. Giving an example of an investment in linen, he suggested a laundry that was handling 10tons of flat linen, approximately 3,500 beds and 1,000 tables each day. Total investment in flat linen was around Euro750,000 – but how should this sort of money be invested?

Bierholm suggested that by investing in higher-quality textiles, laundries can see a significant improvement in costs. He quoted a study of 300 laundries around the world, commissioned by Beirholms Vaeverier, which showed that the cost of purchasing textiles accounted on average for around 14.6% of the textile rental laundry’s turnover, compared with salary costs of 26.2%. By investing a little more in the quality of their textiles, laundries would see a substantial drop in labour costs; by increasing textile investments by 2.6% of turnover, the best six laundries in the survey reported a drop in salary costs by 8% of their turnover.

Megatrends in laundry

In his opening address to the conference, Jesper Jensen, the chief executive of the Jensen Group drew attention to what he described as the megatrends in the laundry industry. These were higher spending on healthcare services, more travelling and more tourism, all at a time when there is even greater demand for further automation in the laundry.

Speaking exclusively to LCN International, Jensen said: “If you go back to the 1950s and 1960s, people weren’t travelling much, travel was seen as too expensive. The trend that is developing in not only in our part of the world, but in other parts of the world also is for much greater travel.

“It is clear that tourism and business travel is growing rapidly. That is a trend that has been growing since the 1970s, since air travel became less expensive. It results in more linen to be processed so it is a good trend for our industry.

“You have reduced workforces, more expensive labour – that is increasing the move towards greater automation in the laundry. Another trend is the consolidation amongst our customers. This will only increase.” Jensen considers the current stage of development in the Russian market as a vital one.

He explained: “There are so many decisions to be made, both at a government level and at a private investment level in Russia today. Russia has a strong historical trend towards very, very big laundries and that has somehow disappeared with the ending of the Soviet Union.

“We heard how many big laundries there were in the past so the interesting thing about Russia is that they have the expertise, the knowledge to run them.

“Whatever decisions are taken over the next two to three years will be vital for the development of textile rental in Russia.

He said: “There is no doubt that the money is there in Russia. There is a whole new entrepreneurial spirit amongst young people particularly, who are coming up and starting new businesses.

“We do have companies that have 4 or 5 laundries, big ones: they are still operating as commercial laundries but have a tendency to want to go for textile rental. So I think the process has started. The more people we get motivated to start textile rental, I think the better it will be for the future of the Russian market.

“Textile rental is a fact of life in Europe, Australia, Japan and the USA. The question is when will textile rental become dominant in the so-called “emerging” markets? Textile rental is successful here and it should be successful in other countries as well,” said Jensen.

He sees room for the refurbishment of existing laundries, alongside the creation of new ones.

“The aim of the conference was to be as objective as possible, to present an opportunity for Russian delegates to see what a European laundry looks like, where the trends are going, and what sort of regulations are in place.

“We can say that there is a big market potential in Russia – we just need to see which of the entrepreneurs are going to seize it.

“For the future, there has to be some combination between government and private enterprise. I think that it will be private enterprise that will be running the laundries, not the government, although there will be government supervision with respect to standards and levels of quality.

“It was Business Monolith’s initiative to develop this conference and we will be discussing feedback with them. The feedback to date has been very positive – it is always interesting to get a different perspective. They have been impressed by what they have seen on the visit.

“In Russia, labour is still relatively inexpensive, so a simple conveyor system, tunnel finisher would perhaps be more suitable for a laundry in Moscow.”

Currently Jensen has around five tunnels washers running in Russia (one in Ukraine), sold in the last two years. The equipment supplied is taken from Jensen’s standard line.

Factory visits

Jensen arranged visit to Steritex Textile Medizinprodukte at nearby Göttingen. Here Jensen’s Peter Gunther told delegates that the family owners have run a laundry in Göttingen for more than 100 years. The present Steritex plant, situated on the site of the town’s former dairy, is one of the largest medical textile laundries of its type, with around 200 workers handling up to 45 tons an hour over a 10-hour shift. Delegates were able to view, although not enter, the clean room facility and examine at first hand a Jensen system in operation, that included dryers, Metrifeed feeders and Multiscan conveyors.

The final day featured a visit to the Jensen factory at Harsum, where managing director Bo Rasmussen welcomed delegates.

He explained that the company focuses on four core areas – washroom technology; finishing technology; material handlings technology; and software and process technology. The company is presently making between 80 to 100 CBWs and as many as 300 driers a year. No two CBWs are exactly alike – all are customised, said Rasmussen.