Sustainable Profitability - Vehicle Miles Traveled Is One Factor
By Robert Roman
Recently, I came across a blog published by a pit-cleaning company that provided a “how-to” on cashflow projections for a car wash start-up.
The objective was to show how cashflow can be used to determine if a location is a profitable investment. Calculating cashflow was described as a function of average annual traffic count, capture rate, days of the year in operation, average revenue, and margin per vehicle.
While this function may be appropriate to determine profitability on an average day, it’s not well suited for calculating profitability for future years, future locations, or sustainability of profits versus projections.
For instance, average annual traffic is a rate not a trend. Annual average daily traffic (AADT) is the total volume of vehicle traffic of a highway or road for a year divided by 365 days.
According to the Department of Transportation, AADT is used primarily in transportation planning, transportation engineering, and retail location selection.
VEHICLE MILES TRAVELED
Arguably, a better measure of future profits and sustainability of profits would be vehicle miles traveled (VMT).
Total VMT is the sum of the number of miles traveled for all vehicles over the period of one year as shown in the chart on page 18.
Since 2008, total VMT in the United States has declined slowly. In 2012, it reached its lowest level since 1996. This decline was attributed to new land use policies, economic factors, and strategies to reduce car-dependence.
In reference to the FRED (Federal Reserve Economic Data) chart, the trend in total VMT (moving 12-months) turned on spiking and sustained higher prices for fuel, it declined during the Great Recession, rebounded during economic recovery, and then tanked during the pandemic.
Anecdotally, it’s not surprising the trend in industry wash revenues has mirrored the pattern of total VMT.
Of course, it should. After all, one of the long-held premises in the industry is that sales volumes are directly related to the amount of highway traffic that passes by a site.
According to the Office of Energy Efficiency and Renewable Energy, from 2017 to 2019, the amount of VMT on a monthly basis was consistent. However, in 2020, VMT declined due to the pandemic. April 2020 marked the lowest point which was 40 percent lower than April 2019.
According to the Federal Highway Administration Office of Highway Policy Information, the negative trend in traffic volume for all roads continued from May 2020 through February 2021.
Moreover, the trend was not evenly felt throughout the country. For example, in February 2021, the VMT trend in the Northeast was -18.5 percent whereas in the South Atlantic it was -9.9 percent.
Maryland -20.6% South Dakota -1.1%
New Jersey -21.7% Florida - 7.7%
Wash. D.C. -24.7% Georgia - 8.5%
Table 1 – VMT Trend Urban Arterials (02/21)
Although the trend in VMT is rebounding, experts believe challenges may lie ahead for businesses that rely on highway vehicles.
According to a 2020 white paper by KPGM International, enduring changes in driving habits in reaction to the pandemic could lead to a permanent drop in VMT of between 9 percent and 10 percent.
Principals at KPGM believe such a drop would have significant impact on the auto industry and beyond as can be seen in the chart on page 22.
KPGM points to a reduction in commuting to work and offline shopping which in turn leads to less demand for cars. Less demand means fewer car sales, fewer car repairs, fewer cars to wash, etc.
Consumer behavior may also lead to decline in VMT. For example, folks involved with the Smart State Transportation Initiative (SSTI) believe these estimates paint a promising picture and aims to ensure we witness this change and that it stays long term.
SSTI is a joint project of the University of Wisconsin and Smart Growth America to promote transportation practices that advance environmental sustainability and equitable economic development.
Smart Growth America is a non-profit organization that aims to improve racial and social equity by influencing policy makers when it comes to choices about land use, housing, development, and infrastructure.
Demand for Cars
Another factor we should consider when evaluating profitability of future years and sustainability is the demand for cars. Here, experts say the demand for a car is really a demand for transportation.
Factors affecting demand for transportation are the cost of transportation, availability of substitutes, land use policies, and demographic factors such as personal income.
For example, in 2008, we learned that consumers responded to higher gasoline prices by driving less and buying more fuel-efficient vehicles. Today, areas that are more walkable, compact, and have strong public transportation systems are increasingly associated with lower VMT per capita.
According to AARP, active baby boomers are likely to buy one new car down the line whereas less active boomers may already be on their last car.
Moreover, baby boomers are driving less. According to the research, at the height of their driving years, boomers averaged 51 miles per day. Now the average is roughly 22 miles per day.
What would KPGM’s estimate of 14 million fewer cars mean to the car wash industry? According to our estimate, potentially about $2 billion in industry wash revenues.
Seasonality is another factor that affects profitability for future years and sustainability. For example, in many parts of Florida, car wash operators depend on semi-permanent residents (snowbirds) and tourism.
Each year, like clockwork, there is a boost in business around Thanksgiving and Christmas and then business grows steadily from beginning of January through Spring Break and Easter. After which volumes trend downward to the beginning of the rainy season. In the midst of this are pollen season and two love bug seasons.
Economic freedom is another factor that should be considered when evaluating future profits and sustainability. For example, California, New York, New Jersey, and Michigan imposed tough restrictions to try to control the spread of COVID-19, but Florida did not. These states struggled with huge case numbers and hospitalizations while Florida did much better.
According to Sean Snaith, director of University of Central Florida’s Institute of Economic Forecasting, Florida’s economy remains on track to a faster recovery outpacing much of the nation in job and income growth.
There is also a new generation of “green” activists to contend with. These folks maintain that automobile dependence contributes to racial injustice, gender inequality, health disparities, and exclusion of people of diverse abilities from public space.
This has given rise to notions such as mobility justice, an umbrella term to acknowledge the fear that marginalized people and immigrants may feel with regard to transportation. Justice is achieved by prioritizing bus service, expanding rail service, bike lanes, and de-emphasizing automobile use.
The final consideration is customer loyalty. Today, it’s not uncommon for an exterior car wash to have anywhere from 500 to 2,500 or more monthly subscription members. Here, each member visits considerably more often and spends more money than the typical customer. However, in examining the model we described earlier, there is no factor to account for such a large portion of the overall profit picture.
Here and Now
Aside from these potentials, the car wash industry is now coping with a resurgence of the pandemic, soaring consumer and producer prices, and a precipitous drop in consumer sentiment.
According to the preliminary August reading, the University of Michigan’s consumer sentiment index tumbled to 70.2, the lowest reading since 2011. Arguably, the resiliency of the car wash industry will be further tested into 2022.
We’ve shown it takes more than cashflow projections to determine if a location is a profitable investment. Rule of thumb equations and sanity tests have their place but they are no substitute for rigorous due diligence. Such due diligence should evaluate not only the likelihood of achieving a certain level of profitability but also sustaining it.