Auto Laundry News invited executives from various segments of the car wash business to share their insights on where the following 12 months might take the industry. The participants are:
• Aaron Green, CEO of Focused Car Wash Solutions
• George Otten, partner with Ardent Advisory Group
• Kyle Poyer, CFO of Magnolia Car Wash Holdings
• John Roush, CEO of Express Wash Concepts
We asked the panelists to consider four issues of general interest to car care business operators:
1. The economy – the outlook for 2022 and its impact on the car care industry.
2. Is there still room in the industry for the mom-and-pop operator?
3. How does the ongoing supplier-side consolidation affect operators?
4. What are the biggest challenges operators will face going forward?
The economic outlook for 2022 is concerning for several reasons:
Inflation is going to hit the economy very hard and wages will struggle to keep up with the cost of living increases we are experiencing. This has the potential to hurt the retail side of our industry. In 2008, we experienced a bad weather year, along with the economic downturn. In Colorado, we estimated that 15 percent to 20 percent of our total volume drop was related to economy, while the rest was due to weather. Today, the cost to build and the debt load is much higher. Also, competition is far greater now than in 2008; therefore, a 10 percent to 15 percent drop in total volume could really hurt many people.
Financing: one way to control inflation is through higher interest rates. If that happens, money will get tighter and financing these properties will become more challenging, slowing down the pace of construction and renovations.
Supply chain: simply put, if we have nothing to sell, we don’t have a business.
The outlook for 2022 is at best uncertain. The pandemic, inflation, a tight labor market, high fuel costs, tax reform, and the potential for a massive government growth program provide mixed messages as to what can be expected. And against this backdrop we continue to set records in the equity markets. The good news is that our industry is in large part insulated from many of those factors. At our core we are a car-loving nation that broadly ignores public transportation. We need to maintain our cars, put fuel in our cars, and we all feel better in a clean car. In short, the demand for the services will be there. Will we knock the cover off the ball? That I don’t know, but I am confident the industry will perform and likely grow as there are more options available to the consumer, and frankly better options. Car washing specifically is undergoing a period of expansion where wash quality is superior, services such as free vacuums are expanding, and more washes are being built making it more convenient for customers to keep their car clean. At some point saturation may become an issue, but not in the near term. For now, it looks like we are making the pie bigger.
With each passing day we as a society get better at attacking the impact of COVID-19. As such, economic growth is likely to revert to historical, trend-like expansion in 2022. However, with proposed tax changes on the table, the industry will most likely see continued consolidation as smaller operators look to be proactive with proposed tax law changes and larger players continue to develop their pipelines.
Additionally, vehicles on the road today have average ages that are at all-time highs. With supply-chain shortages continuing to hamper new car manufacturing, vehicle owners are more and more inclined to take better care of their current vehicles. This kind of demand should make all players in the industry bullish.
I believe we will continue to experience unprecedented growth in 2022, and with that the one critical area we’ll need to place continued emphasis on will be proper staffing. We have to attract, retain and nurture engaged, happy, and high-quality team members. We’re all racing to do a better job than the guy next door, and it’s our team members that are onsite day in and night sweating the details that make or break the wash. We have to provide excellent customer service, a high-quality wash, and provide our customers more value than the wash down the street. All of that is done by highly trained, engaged team members. If we can’t execute that, we will be done!
MOM-AND POP OPERATORS
I absolutely believe there is still room in the industry for mom-and-pop operators. It is estimated that there are 16,000 conveyor car washes in the United States; the top five largest companies only represent 6 percent of that number and the top 10 only 8 percent. So yes, there is opportunity.
McDonald’s is the largest hamburger store in the United States, yet people are still opening hamburger restaurants in the country. Although it’s getting harder to open a car wash from a cost perspective, the opportunity still exists. With the market moving further away from home washing every year, the professional car wash market continues to grow.
There is absolutely room for some mom-and-pop operators, but there is a tremendous amount of consolidation that is a direct threat to those small businesses over time, and not all of them will survive. So much depends on location, ability to discourage competition, potential size of the served market, or the quality of the mom-and-pop wash. Being a sole proprietor surrounded by three large operators is likely a losing proposition. Being a one- or two-shop operator in a small town with strict zoning laws could be a long-term winner. All things being equal, however, the big players have significant advantages. Economies of scale, access to capital, ability to weather downturns, sophisticated analytical tools are just a few. Over time, these advantages will tend to squeeze out the smaller competitors, but there will always be circumstances under which some of those small players can continue to thrive. We can look to other industries to predict the future of the car wash industry. When Home Depot came along, we lost quite a few mom-and-pop hardware stores, but some still flourish because of their locations or service offerings. I believe car washing will follow a similar model, but will be more kind to the small operator as the price advantage of a large wash chain is not as dramatic.
Of course there is still room in the industry for the mom-and-pop operator. The industry is still extremely fragmented and underserved. Even with the level of consolidation occurring heading into 2022, there is still room for single-site operators to develop quality locations in markets that are underserved and be extremely successful.
There is absolutely room in the industry for the mom-and-pop operator, and I would argue that now more than ever, with growing eyes on our industry, there are even greater opportunities for the mom-and-pops to shine. While it may seem the big consolidators are picking off the mom-and-pops one at a time, there are hundreds of underserved markets that a well-run mom and pop could dominate. It’s not just about new builds coming into town to take over — there are plenty of opportunities for mom-and-pop operators to buy a bad wash, fix it, and grow a healthy customer base particularly in these underserved markets.
With supplier consolidation comes less competition and fewer options. This can affect several areas:
Supply time: with less competition, the need to produce products and deliver in a timely manner can slow down. I don’t think we have seen much of this yet, other than in the supply chain, but it is possible.
Innovation: we need competition and independent companies to invest in research and development. How do we wash a car better? How do we keep up with the ever-changing modern car? How do we connect with customers better (POS system)? All of these questions get answered by the operator and supplier working together. As they say, the wheels of change move slowly. That is true in big companies; the relationship between operator and supplier can get lost and custom-made solutions can be harder to find.
Pricing: less competition can also cause the cost of products to creep up. Healthy competition in the market forces suppliers to ensure they are producing a quality product as efficiently as possible, while keeping the costs as low as they can. I spoke to an operator the other day who said they used to invest 70 percent to 80 percent of their money in what actually washed a car; now they seem to invest 70 percent to 80 percent on items that support washing the car (e.g., vacuums, POS systems, etc.). While technology and supporting equipment are extremely important, it is interesting to look at the shift in spending and the difference in what it now costs to build a complete car wash.
Fewer suppliers is a mixed bag of good news and bad for operators in pretty much any industry. The good news is that the larger players can enjoy economies of scale that allow them to innovate, produce equipment more efficiently (and less expensively), and offer a broader range of products and services. The bad news is that larger companies could potentially consolidate their product lines leaving fewer choices. These choices could become more expensive as the larger firms flex their pricing power. Looking forward, I could easily imagine how larger, consolidated operators could benefit as the consolidated suppliers seek to do business across their portfolio and drive price and service concessions as a result. This focus of larger suppliers offering premium service to larger operators could have the effect of marginalizing smaller players as they pursue their more modest growth goals. That said, a smaller operator could benefit from a one-stop shop approach enabled by a larger supplier.
A supplier could offer services beyond simply selling equipment that make it easier for a small operator to grow and succeed. Those enhanced services could serve to level the development playing field, but will almost certainly come at a cost.
Less competition is never good, but with the pace of expansion in this industry it is inevitable. Suppliers will still need to continue to fight for market share, which leaves opportunities for operators to find the best vendor partners to fit their needs, but it does give suppliers opportunities to take margin on areas of the industry in which switching costs are high.
This is a growth play — not a buy-it-and-cut-cost play. I have witnessed supplier-side consolidation have a more positive effect on operators than negative. There are suppliers that have an incredible product but a lackluster process, and consolidation has helped with that. I believe R&D has been positively impacted through consolidation as well, which benefits us operators tremendously. I have also seen smaller companies get better post-consolidation, from both a quality, overall value, and marketing perspective. Like most things in business, it’s about offering a high-quality product or service backed by exceptional customer service.
Competition: washes are being built so quickly right next to established facilities. Local operators will need to remain focused on their business in order to weather the storm in the short run. It will be crucial to hone-in on processing, consistency, and value, not on who is building or doing what.
Consolidation: the brands you have grown to love and trust might be changing. It’s a great opportunity to get out of your comfort zone and explore other opportunities you might have never considered.
Supply: currently, many things are becoming harder to get. Operators need to have a better plan for storing chemistry on site, carrying more parts, ordering signage earlier, and buying cloth sooner. Consumables might be out of stock or may take longer to get; it’s important to think ahead and be prepared. Yelling at distributors and manufacturers over something they have zero control over might feel good in the short run, but it can really damage a relationship. In 2022 and into the future, relationships might be what save you.
I believe inflation and employee availability will pose significant issues to operators as we move forward. Inflation yields higher interest rates and operators have gotten accustomed to cheap debt to fund their growth aspirations. As these rates increase, the cushion between interest payments and cash flow thins. Inflation will also hit equipment, utilities, chemicals, property taxes, lease rates, and most of the other costs associated with operating a car wash. The question is whether or not prices can be raised sufficiently to offset these cost increases. Perhaps the most significant cost increase will be on the labor front. Even before inflation kicked in, there were a number of factors at work making it more difficult to attract qualified candidates, and more expensive as well. This may decrease as a number of government-sponsored support programs expire, but will most certainly be exacerbated by inflation. A diminishing labor pool in the face of inflationary impulses is potentially a double whammy for cost. The best news is that as the express model eclipses that of flex or full serve, the impact of increasing labor costs can be more easily managed as the pure number of employees trends down.
The attractiveness of the industry will continue to garner attention from large investors and technology will become increasingly efficient. As such, underserved markets will quickly be developed, and customers will be drawn towards the most efficient operators with the newest technology. The biggest challenges will be accelerating the concept-to-cash cycle on new developments and keeping up with the technological changes to better serve customers.
We are hopefully getting back to normal in regard to the pandemic, but I believe the biggest challenges operators will continue to face revolve around the supply chain and proper staffing. The demand for growth is ours for the taking — but if we can’t successfully address it and come up with creative solutions to keep up with the demand we are losing out on an incredible opportunity. I still drive around and see more dirty cars than clean ones. It’s humbling just how much we have positively redefined the car wash stigma in these last few years, and how we are using our car washes to create opportunities, particularly for our team members, to advance in their careers, buy cars and houses, and provide for their families.