The advent of the express-exterior wash format has caused some drastic adjustments in the industry over the past 10 years or so. More recently, expanding consolidation activity has brought further upheaval.
Self-service coin-op washes have been adversely affected, as their historical $3.25-per-wash customer is being converted to the $3 express-exterior wash concept. Full-service washes are also being impacted since they are hard pressed to compete on several levels, for example: payroll of 43 percent versus 19 percent, wash time of 20 minutes compared to 4 minutes.
The express-exterior model came into its own following the financial meltdown of 2008 and targets customers who want speed, affordability, quality, and safety. And it thrives on high car counts, state-of-the-art equipment, low payroll, and simplicity. It is, in simple terms, a high-speed vending machine.
The success of the express model soon drew the attention of investors and consolidators. Their strategy is to purchase clusters of existing washes. Mom and pop operations consisting of two to five or more washes are target buys. These clusters are being courted with the objective of monopolizing geographic markets. Larger consolidators are intent on building and managing multi-state operations, hiring territory managers to oversee specific geographic areas. They target high population density locations and rely on economies of scale, customer discretionary income, and the steady revenue generated by monthly, unlimited wash club memberships. Whatever mom and pop washes then remain are surrounded by low, basic-wash price points and are squeezed to the point where they capitulate and either close shop or sell out to the competitors at a low-ball price, or, against all odds, try to tough it out.
Consolidators need to pay particular attention to the operational side of their ventures. Absentee owners frequently assign lower priority to such issues as maintenance and customer service when volume increases. Long term, this ultimately drains customer loyalty, earnings, and value.
With so many investors and consolidators vying for the same businesses, competition is to be expected. Survival is determined by keeping the following 3Cs in sync:
Competition for Locations
The “low-hanging fruit” — buying quality existing full-service washes and converting them to express exteriors in major U.S. cities — has already been picked over and harvested. The alternatives are 1., the “face lift approach: buying antiquated full-service washes, performing some cosmetic nips and tucks, and adding a cheap equipment remodel and 2., building “ground up,” which today, depending on the land prices, averages $3.3 million to $4 million or more per location, all in. The latter involves taking a chance on competitors not developing a new express exterior within a three-mile radius, thus splitting the wash-customer pie. The process to build an express-exterior wash is complicated, time-consuming, costly, and at the mercy of city planning and zoning authorities that need to approve a special use permit. The permit is often denied due to neighborhood opposition stemming from perceived increased noise and traffic potential. This permitting process can take up to a year or longer.
Competition for Repeat Customers
The express-exterior format depends on a low-price, high-volume model. An essential part of the high-volume aspect is the monthly, unlimited wash program. Essentially an enforced loyalty program, members are discouraged from going to a competitor as their credit card is captured upon originally signing up and automatically charged every month until the customer cancels. The customer benefits by being able to wash as often as he wants at one low price, while the wash operator benefits from the automatic monthly recurring income, rain or shine.
Competition from Other Expresses
Saturation is inevitable. It’s becoming a dirty little business: the villains’ trick in this story is to build a solo wash in the middle of the established territory of an express operator, wash free upon opening and advertise ultra low points thereafter, forcing the established operator to buy them out. Another tactic is to show potential investors an existing, successful express operation and encourage the newbies to build close to that existing wash. Obviously the wash-customer pie gets sliced into ever-smaller pieces, diluting the original successful wash’s car count, and diminishing the potential of the new-build. The result could be not enough cars in the immediate market area for both to survive. Express consolidators and investors are inching their way into each other’s sand box. This rampant building on top of each other — or converting existing washes to expresses literally next to an existing express — has evolved into a phenomenon I call car wash consolidator cannibalism. The last time I experienced a situation like this was in the early 2000s when attempts were being made at a full-service wash rollup.
Hundreds of washes were bought, resulting, in due course, in a great auction, not to mention a lot of bruised egos.
MAKE A DEAL
Express consolidators’ aim is to gather as many locations in the shortest possible time and build a “branded” chain of washes, similar to the fast-food-chain model. They often request a “carry back” from sellers to help in the buying process, enticed with buyer’s stock options or incentives to stay on and manage the washes and participate in their future performance. Caveat Venditor! (seller beware!)
Consolidators’ ultimate goal is to do a “roll up” of hundreds of express washes for an IPO play on the stock market. The one to two years it takes to see an express wash from planning to open for business does not suit their time-is-of-the-essence approach. As a result there is a lot of buying of existing washes going on. This, in turn, leads to high EBIDTA multipliers being paid for existing express washes, exceeding market value just to beat other consolidators to the punch.
Either one of two formulas is used for the current express buying model, including the real estate: multiple of 4.7 times gross sales or 8.6 times EBIDTA (Earnings, Before, Interest, Depreciation, Taxes, and Amortization). Any seasoned car wash broker or CPA should be able to recast the sellers P&Ls, cognizant of membership discounts, car counts, and basic wash vs. upsells, which, when verified, can forensically decipher a true EBIDTA. In addition, there are material factors such as existing competition, new competition, condition of equipment, capital improvements, neighborhood composition, and immediate or proposed road construction that affect value. That is just a partial list of factors to be considered.
It is imperative for both buyers and sellers to have an attorney, CPA, and an experienced car wash broker to advise on any transaction, especially if new to the car wash business. The good news of this buying frenzy is that existing car wash owners are being heavily courted by consolidators. This is an active “cat fight,” and a savvy seller can have a field day making a bundle. The race is on. Which consolidator will pay the most, buy the most, arrive at Wall Street first, and what will the EBIDTA value of their bundle of washes be when they get there?
There are some 24,000 existing self-service wash sites in the United States, of which 20 percent qualifies to be converted to a mini express wash on existing 23,000 square foot lots for an all-in cost of under $2 million. (For further information on this subject, refer to my article in the June 2017 issue of Auto Laundry News.) This mini express concept is going to give the express consolidators a headache if located within a two-mile radius of their high-volume washes. California is an example of high land costs and low-density lots, which is a recipe for mini express conversions. Additionally, the Southwest is aggressively converting existing self-service washes or building on half acre lots instead of the traditional one-acre express sites to keep all-in traditional express building costs down. For less than $2 million, a mini express can be built to wash 10,000 or more cars per month.
I’ve been in the wash brokering business since 1985, licensed in seven Pacific Southwest states. I have never seen such a frenzy of express wash buying, building, and flipping. There are only so many cars that can be washed in a geographical market. Granted, there are a lot of budget-minded customers, but auto dealers are offering free washes, and at a $3 to $5 price point for a basic express wash, most washes need to do 10,000 cars per month just to make the monthly debt service! I’m a mini express fan. The model is gaining momentum; at half the cost of a traditional express footprint, it can easily do 10,000-plus cars per month. The era of one acre washes with 140’ tunnels is just old school.
There are seasoned express groups that have been in the business for a while that are conservative operators. Bravo to you few who will survive and ultimately buy the failing expresses at auction. Consolidator newbies and flippers entering into this express market may want to face the facts: inevitably, a wash congestion storm is coming. I call ‘em the way I see ‘em and will write the follow up to this next year. We’ll then take a count of who’s still standing.
Roger A. Pencek is president of Scottsdale, AZ-based Car Wash Brokers Inc. He holds an MBA from the University of Phoenix and has been a real estate broker and consultant in the car wash business since 1985. You can visit the company on the web at www.carwashbrokers.com.