In the December 2020 issue of Auto Laundry News, our panel of executives considered two of the four issues presented to them. Those issues were:
• The economy – the outlook for 2021 and its impact on the car care industry
• The effect the Coronavirus pandemic will have on the industry in 2021, and possibly beyond
In this issue, the panelists offer their views on:
• How the influx of private equity funds will change the car wash business
• Other issues operators should expect to have to deal with in the New Year
Sharing their insights on what the following 12 months might hold for the industry are:
• Michael Ford, managing director of Coast Commercial Credit™
• Jeff Pavone, co-founder of Amplify Car Wash Advisors
• Jeff Reichard, president of Proto-Vest Inc.
• Trent Walter, owner/CEO of National Pride Equipment
The private equity investment is primarily, but not exclusively, in the express exterior sector. The reason for this is the format is more scalable than full-service and it eliminates the challenges of having to manage large numbers of employees.
Private equity investment in the car wash market is a double-edged sword. It gives some operators an exit strategy that may not have been previously available.
The desire to purchase existing sites by private equity investors has and will continue to allow entrepreneurs a way to maximize resale value.
On the other side, private equity investment creates more competition for existing operators. While competition isn’t bad, it may be more difficult for a single operator to compete with an entity that owns a large number of facilities in that same market.
In addition, we have seen an influx of hybrid private equity investors enter the space. These are groups managed by individuals that are leveraging smaller pools of investors. Whether large or small, investment groups are becoming more common and should continue to flourish because the car wash market remains an attractive investment for all.
For decades, the industry has been dominated by “mom and pop” operators, but that’s changing fast. The emergence of financials buyers, including private equity firms and family offices, has institutionalized the way in which car washes operate. With so much pent-up demand in private markets, there’s a tremendous amount of capital sitting on the sidelines. The lack of quality opportunities, which has intensified in the post-COVID environment, has had a slowing effect on deal flow. As a result, financial buyers have found themselves with a lot of dry powder and the need to put money to work.
The car wash industry has evolved in recent years, with recurring revenue models via memberships offering greater stability in cash flows, making for an even more attractive investment opportunity, so we expect interest from private equity to continue. A growing pool of financial buyers and attractive industry characteristics will continue to be a significant driver of growth for the industry as a whole, which will subsequently put pressure on individual owners/operators that will find it difficult to compete with well-capitalized private equity firms.
If private equity groups’ (PEG) interest in the car wash industry were played on a football field, we would only be in the first quarter! The second, third, and fourth quarters will be much faster.
Our industry will continue to be very hot solely because it is ripe for continued consolidation. PEGs will continue to acquire for quick sales, eliminate redundant multiple ownerships, and migrate to one system for all. PEGs need quick hits to achieve rapid EBITDA and liquidate in three to five years. Once they acquire 300-1,000 car washes, they will sell to each other to form organizations of 3K to 5K car wash companies and the cost take out process starts all over again! Their mantra is simple: buy right, add value, exit.
We just saw two good, strong, and significant manufacturers for car washes make major announcements with two different companies/private equity organizations. Many more will follow in all segments of the car wash industry.
Right now, and in 2021, there are only three courses of action, one of which you must take right now:
1. Remain independent as an autonomous company.
2. Remain independent but join/form an alliance with other car washes, i.e., enhancement and buying groups.
3. Quickly prepare to sell at the maximum value of EBITDA.
In my article, “Private Equity,” in the April 2020 issue of Auto Laundry News, I put forward detailed action plans for each of the above three options so that you might be adaptable in our rapidly changing marketplace.
Private equity (PE) will be a dominate force in our industry for the foreseeable future. The cash cow express wash market will continue to fuel PE’s thirst for growth in our industry. Their deep pockets will drive new construction in many large to mid-sized markets on prime real-estate. Even with the new construction, PE will grow even faster through acquisitions of existing private operators. Their ability to acquire and re-brand existing sites will drive significant consolidation across the market. With more than 30,000 private conveyorized washes across the United States there is plenty of room for consolidation. PE groups will work to build their brands not only in local and state markets but across the country. If you are a private operator your choice will be one of two: maximize profitability and sell to the highest bidder or batten down the hatches and get ready for an ultra-competitive market because PE is coming to town!
When the pandemic hit, one area of business lending that virtually stopped was the conventional commercial mortgage market. Unlike Small Business Administration (SBA) backed loans that received federal CARES Act support, conventional commercial mortgages do not have a federal government guaranty and did not receive the paid payment program. Assistance in the conventional loan market came in the form of deferral or forbearance, which allowed for a temporary suspension of payments. Commercial real estate investors were having a difficult time making payments because the tenants in strip malls, apartment complexes, and beyond were not paying rent. Therefore, having large numbers of loans on deferral made it difficult for lenders to justify extending conventional loans and growing loan portfolios that have underlying issues.
As we head into 2021, there is expected to be a significant volume of commercial defaults. Banks and financial institutions can only defer payment for so long before taking action. This pending conventional commercial mortgage crisis should put conventional lenders in a much more conservative mode. We anticipate commercial lending to be more difficult in 2021 even as rates remain at all-time lows. As a result of the constriction in conventional lending, we feel there will be a continued surge in long-term, low-rate SBA lending.
The race is on to grow! Valuation multiples are currently trading at double digits (on EBITDA), and as a result, chains are now aggressively developing new sites. The logic here is simple, if you have to pay a multiple of 10x to buy an established site but can build a new site at a multiple of 5x, the economics are far more favorable to build versus buy. For multi-site operators looking to fuel growth via development opportunities, limited funding sources given the current economic state could be a hurdle in the year ahead, although we do expect this headwind to subside. In addition, the trend to grow and establish a regional brand continues to shape the car wash industry. Multi-site operators are quickly recognizing the importance of a strong regional brand, not just for the purposes of achieving scale in operations, but for the positive impact it has on customers when delivering the same experience at any location. With so many untapped markets in an industry that is still very much fragmented, there are ample opportunities to develop major market brands and quickly become a top player in the region. For smaller operators, the biggest potential issue ahead is the threat of new entrants with a growing regional brand.
Two Key Suggestions:
The first, location, location, location. Do you know who McDonald’s thinks is their biggest competitor? It’s CVS! Why? Because they both apply the same demographics in picking a location to open a new store.
Every industry competes on four value propositions: quality, availability, price, and service. In express washes there are very little face-to-face service experiences. Use the credit card, drive through, and leave. The higher the perceived value provided relates to the higher the price a customer is willing to pay. When you have multiple options for the same service within one to two miles of one another, there is an oversaturation for a specific demand. Everyone has quality and availability, so unfortunately the only true differentiation is price. All it takes is one new competitor willing to wash for $5 and your price of $7 is now 30 percent uncompetitive overnight. Of course, they will not take all your business but will take enough to hurt your business. In growth markets, pick your new locations wisely. Obvious, right? Then why are so many new washes one to two miles apart?
The second, rapid cost reduction. With the market being down, the biggest opportunity for wash operators is to quickly reduce cost to maintain their profit margins. Key word is quickly. Energy conservation is a very quick hit that requires minimal investment for a quick return on investment. Joining a buying and enhancement group is another quick avenue for savings with next to zero investment.
Coronavirus seems to be the hot-button topic. Employees and employment matters will be a challenge not only next year but for years to come. Government PPP funds, unemployment payouts, and stimulus packages have created an underlying monster. When things do get back to “normal,” getting employees back to work in a productive manner will be a challenge. In the age of technology, Coronavirus, and government stimulus packages, we have built a culture that is going to struggle with social interaction and overall work ethic. As we speak, we are conditioning our younger generation to avoid contact, stay at home, and keep the blinds shut, and that direct communication should be through Facebook, texting, or Twitter. At some point, getting back to “normal” means getting employees back to work, communicating, and being productive. As of now, most operators are running the washes with little to no customer interaction, customer service is being sacrificed in the short term. Operators should be planning on how to re-train employees when things completely open back up.