While it is the C-Suite of CEO's, COO's, and CFO's that make all the headline-grabbing decisions, it is the front line employees that really make or break a company. In the case of U.S.'s largest uniform rental company Cintas (NASDAQ:CTAS) and its peers UniFirst (NYSE:UNF) and G&K Services (NASDAQ:GK), truck drivers play a big part in their successes (and failures).
Maximizing driver productivity
Truck drivers pick up clients' uniforms for cleaning regularly, but they don't get paid more for making additional stops along a delivery route. Because of this, a uniform rental company can maximize its profits by driving productivity with a higher ratio of customers to drivers.
As companies typically don't disclose the number of drivers in their workforce, I use the total staff strength as a proxy for the number of drivers to calculate the customers-to-drivers ratio. The results validate Cintas' current market leadership. Each Cintas employee serves approximately 30 customers, while the customers-to-drivers ratio is about 22 for both UniFirst and G&K Services.
An alternative measure of employee productivity is the amount of revenues per employee. The results are almost identical. According to data from Reuters, Cintas generated approximately $137,000 in revenues per employee for the trailing twelve months, while each staff member at both UniFirst and G&K Services only contributed $117,000. The economics of delivery networks suggest that as the largest uniform rental company, Cintas will continue to do well as long as it can drive more business on existing routes.
The only potential hiccup in this comes when a uniform rentals company expands aggressively and needs to bring on new delivery routes. During Cintas' first quarter 2014 conference call, management acknowledged that margins have been weak for the past year because of new routes that were added in the second quarter of 2013 that are currently still low on utilization, and consequently less profitable. That should change as Cintas starts generating more revenues from the new routes, however. In the meantime, its competitors are trying to seize market share from Cintas by improving their customer service.
Driving sales with better customer service
Drivers behave more like salespeople in the uniform rental industry. In fact, UniFirst calls its truck drivers "route sales representatives." According to its job advertisements, UniFirst's route sales representatives are tasked with maintaining client relationships and are empowered to apply discretion in making necessary decisions.
UniFirst's strong sales culture was further validated by its top 10 ranking on Selling Power magazine's 2013 list of "50 Best Companies to Sell For." Selling Power awards companies based on factors such as salary, benefits, and training programs. A strong showing suggests that UniFirst's drivers are motivated to deliver superior customer service.
G&K Services acknowledged that its underperformance was partly attributable to a lack of customer focus in the past. Looking ahead, it has set a target of achieving operating margins and ROIC in excess of 12% for the next two to four years. The company's drivers will play a key role in that by delivering on the G&K Customer Promise. Drivers have to ensure on-time deliveries and excellent customer service as part of the G&K Customer Promise. G&K Services hopes that satisfied customers will lead to increased sales and improved profitability.
Despite efforts to improve customer service, both UniFirst and G&K Services, still lag behind Cintas in terms of profitability. Cintas has consistently delivered gross margins in excess of 40% for the past decade, while its peers have to be content with gross margins in the mid-to-high 30s.
Driver productivity still has a bigger impact on profitability than customer service. With revenues less than one third of Cintas, UniFirst and G&K Services will find it hard to generate higher margins based on economies of scale. My bet is on Cintas to retain its market leadership in the uniform rental business.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.