Market Analysis - The Express Market Will Continue to Grow
By Roger A. Pencek
The car wash market has made some very drastic adjustments over the last five to 10 years. Self-service coin washes have been affected since their historical $3.25 wash customer is being converted to the $3 express-exterior wash concept. Full-service washes, too, are being diluted since their historical payroll of 43 percent and time for a basic wash (20 minutes), cannot compete with the express’s 19 percent payroll and four-minute, in-and-out wash.
Hence, the express concept is the clear leader of the pack in pursuing the majority share of the business among the 21,000 estimated conveyor car washes in the United States. The express exterior operates on the basis of high car counts, state-of-the-art equipment, low payroll, and simplicity. Wash customers are easily converted to the wash’s speed, economy, quality of wash, and free-vacuum concept.
A relatively recent development, the proliferation of express washes is exploding. With this success, there are a few trends that are obvious. There are several mom-and-pop clusters of two to five express washes that are very successful owner-run operations, which meet the sweet spot of $800,000-plus gross sales per year, resulting in a 40-percent-plus EBIDTA (earnings before interest, depreciation, taxes, and amortization). Larger express groups, whose objective it is to monopolize target markets, are courting these smaller clusters of washes.
These aggressive express buyers are known as consolidators. They are acquiring multiple wash locations (from five to 20 and more locations in a market), which makes it more efficient to operate multi-state operations with territory managers overseeing each geographical location. The goal is to have multiple express-branded locations in a concentrated geographic area, targeting high population density, focusing on customers in the 20 to 55 age group, and implementing monthly unlimited-wash-program memberships.
The current express buying model, including the real estate, rests on one of two equations: a multiple of 4 times gross sales or 8.6 times EBIDTA. An expert car wash broker or CPA should be able to recast the sellers P&Ls, cognizant of membership discounts, car counts, basic washes, and upsells, which — when verified — can forensically decipher a true EBIDTA. That’s a lot of big words, but the “unleaded version” is simply making sure the last 24 months of rolling P&Ls, IRS returns, tunnel computer summaries, and actual gross sales bank statements, all match. In addition, there are material factors such as competition, condition of equipment, capital improvements, and commercial land costs — to list a very few — that will adjust the value of the wash.
There are currently five major U.S. express consolidators, all vying for the same goal, which gives raise to the 3Cs facing consolidators:
Competition for Locations
While this is great for sellers, it makes life more complicated for express consolidators. The “low-hanging fruit” — buying existing full-service washes and converting them to express washes in major cities — has already been picked over. The alternative is to build from the ground up, which today, depending on the land prices, averages $3.3 million to $4 million-plus per location. The gamble is that a new-built express will not have any other express competition within a three-mile radius, as time goes forward. Additionally, local planning and zoning (P&Z) city officials often turn down wash permits due to anticipated noise and high-traffic patterns that are perceived to arise from wash operations. The process of acquiring a special use permit is very time consuming and costly.
Competition for Repeat Customers
This is obvious. The low cost monthly unlimited-wash program is the way to create customer loyalty and discourages a current customer from “jumping ship” to an express-wash competitor. The success of the express-exterior concept is contingent upon the ability to capture and keep the car wash customer 2.5 times per month. Therefore the monthly unlimited-wash-program memberships are paramount to express success.
Competition from Other Expresses
Congestion is inevitable. As this express frenzy evolves, there is a trend among some car wash equipment sellers to lead interested neophyte car wash buyers to existing successful express operations, wittingly or not, influencing them to build express washes too close to existing express operations. As a result, the wash-customer pie is divided into ever-diminishing slices, making it difficult — if not impossible — for all washes to survive. This is a concern, as consolidators continue to inch their way toward achieving omnipresence.
The goal of all these exterior consolidators is to gather as many locations in the shortest possible time and build a chain of washes similar to a fast-food-chain concept. Often the consolidators will request a “carry back” from sellers to help in the buying process with buyer stock options or other incentives to sell. Caveat venditor! Seller beware! Whether you’re exiting or entering the car wash business it’s advisable for both buyer and seller to get an attorney, CPA, and a good experienced car wash broker to have your back.
Existing full-service car wash owners are being heavily courted to sell their solo washes in an attempt to assemble them with other solo washes in the same geographic areas. There are also self-service B sites that can be easily converted to mini express washes. (For further information on this subject, refer to my article in the June 2017 issue of Auto Laundry News.) With high land costs to contend with, California developers, as an example, are currently converting existing self-service washes or building on half-acre lots instead of the traditional one-acre express sites to keep all-in costs down.
The express wash concept came to be as a result of the financial meltdown of 2008. Most washes were historically full service, on large parcels of land, often with fuel service, c-stores, and lube shops. The express concept delivers to a wash customer speed, affordability, and safety by staying in the car during the wash process. Only a few niche markets will afford full service in the future.
The car wash industry has been fragmented with no major automated car wash leader, since its inception. Car washes are ripe for consolidators to “roll up” multiple locations into a REIT or IPO play for the stock market. There are still a few flippers who buy run down washes, apply a little lipstick, add a new equipment package, and resell for a profit to new buyers who successfully build the car count and survive.
Most recent consolidators, however, are more interested in buying established EBIDTA washes. Where consolidators need to tread with caution is on the operational side: as absentee owners they often take their eyes off the “boots-on-the-ground” daily operations. Issues like equipment maintenance suffer, which ultimately drain profitability and lower the value long term.
EXPRESS IN EUROPE
I visited the Car Wash Show Europe in Amsterdam in September last year and found some interesting European wash trends. The massive attendance made it crystal clear this express frenzy is a popular investment internationally. Express washes in Europe tend to have smaller land sites, reducing their all-in cost to operate. The express is dominating here, too, often along with fuel service. Recently, European wash consolidators have entered the U.S. express market by acquiring multiple existing car wash chains. I am convinced this will bring very aggressive European car wash competitors to our shores. It’s worth noting that they are very seasoned operators.
OH, FOR THE GOOD OLD DAYS…
Over the last 30 years, I have talked more car wash buyers out of buying than I care to remember — and much the same regarding sellers, advising them on when and how to sell. I have presented countless seminars, been a guest speaker at car wash conventions on the subject of valuing car washes, only to see the car wash industry morphing into something different.
The honorable handshake to sell your car wash has become ironclad real estate exclusive listing agreements and covenants not to compete. It’s taking the fun out of doing a deal. Our once personalized car wash business has become a science rather than an art. The “good old days” of a seller’s honor and reputation building their wash’s goodwill, has sadly been transformed by consolidator Wall Street buyers with little regard to on-site presence or to preserve the wash’s personality.
The traditional full-service “good old boy” car wash concept built on the owners’ personality and pride in their wash, coupled with customer satisfaction is slowly disintegrating. The express wash is changing the industry into an impersonal sales-generating box. It kind of reminds me of a vending machine business.
The express market will continue to grow, competing for the $3 or $5 basic-wash customer. The express’s $3-$5 basic entry price point is 50 percent of its customers — a loss leader. Currently, $5.15 is the U.S. average express wash ticket, the wash relying on a consistent monthly high volume of cars for its success or failure.
The current car wash consumer seems to be addicted to receiving speed, lower pricing, free vacuums, and omnipresence of locations. To secure a win-win synergistic customer/express wash relationship, express operators will need to take care not to overbuild on top of each other and keep this impersonal car wash customer relationship in harmony. Solo mom-and-pop express wash survivors will be rare.
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.