Strategy and Finance — Consumer Preferences Prompt Business Model Retooling
According to marketing and analytic service, Co Store Group, the retail environment was scorched by the downturn with many areas showing a 70 percent decline in leasing activity and 30 percent to 40 percent drop in rents while new retail construction fell to its lowest level in over 30 years.
The car wash industry also had impacts with significant declines in equipment and chemical spending and new construction.
Today, there is a general sense across all retail sectors that consumers have adopted a new mantra: live better by consuming less and saving more. In response, retailers have re-tooled business models.
Walgreens, Dollar General, Wal-Mart and others are succeeding in launching new smaller-format stores located
closer to neighborhoods. Some companies are co-branding stores (i.e., combination Taco Bell/Long John Silver’s drive-through) while others like J.C. Penny are monetizing existing space in stores using the store-in-store concept.
Perhaps the most important trend noted by experts is retail has hit bottom and is in recovery mode. For example, Standard & Poor’s predicts a 3 percent increase in U.S. consumer spending in 2011 while Customer Growth Partners, a think-tank, pegs retail growth at 5 percent.
Some evidence of a recovery is seen as property values appear to be bottoming. For example, in Pinellas County, FL, there were only a handful of sales transactions during 2009 involving automotive-related property. During the fourth quarter of 2010, there were over 20 transactions in one city alone, with prices as low as $300,000.
Convenience retailers offering bargain menus are translating into cap rates of 7 percent while prime automotive businesses like Jiffy Lube and Pep Boys are commanding rates of 7 percent to 8 percent.
To benefit from trends, investors should examine opportunities available to them by first separating out the trash. Least desirable would be areas on the fringes where car wash developers got ahead of growth by following building permits instead of rooftops, like the suburbs in Atlanta. More desirable would include areas, like Pinellas, that have infill and redevelopment opportunities. Locations with business models, equipment, and technology in vogue 20 years ago would be the most likely targets.
Today, there are a variety of strategies investors can follow to do well now instead of buying low and then just waiting for things to get better.
Equipment suppliers have “out-of-the-box” conversion kits (mini-tunnel) for slower moving in-bay automatics. Others have kits to transform slower in-bays into high-speed units. Auto-cashier, tunnel upgrades, central vacuum, re-training employees, and other enhancements can transform a full-service wash into one that is much faster and far less expensive to operate.
Other conversions that are creating some buzz include the “gated” POP (pay-one-price) self-service car wash format and combining a mini-tunnel with discounted gasoline. In some cases, bargain property prices would have the potential to improve the old “tear down” equation for car wash conversions by 33 percent or more.
Pursuing any of these strategies would involve due diligence and funding. Although loans have been virtually off the table for most mom and pop ventures, there are options available.
According to Curt Newsom, president of Summit Funding Group (summitfundinggroup.com), a specialized lender to the car wash industry, the lending environment has improved recently.
Newsom, explains, “We continue to see favorable changes in credit parameters from our underwriters. This is making it easier and more convenient for car wash operators to obtain financing.”
“On equipment replacement for existing operations, generally we can now approve 100 percent financing for up to $150,000, fixed rate, terms up to seven years, with just a completed credit application.”
For refinancing existing debt and new location financing, the rules are different. Newsom, explains, “Depending on customer, terms are available up to 25 years, fixed- and adjustable-rate financing. Down-payment or equity requirements are now down to between 10 percent and 25 percent.”
Because situations are so different, Summit has developed a streamlined process to quickly assess a customer’s position and provide them with a preliminary proposal with terms and conditions.
Newsom concludes, “Over the past six months, we have seen a steady increase of people seeking out alternative financing because their local bank has little or no interest in car wash projects.”
Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.
