Finishing Line - August 2009

Detail Dilemma —
Are Retail Trends the Answer?
By Robert Roman

Although they command the highest average ticket in the industry, independent detail shop operators have always struggled for recognition. By independent, I am referring to the typical freestanding detail shop with three or four service bays and several employees. By any measure, things have always been tough for this sector and now it may even get tougher.

Industry benchmarks indicate that most shops process about 1,800 vehicles annually with average revenue of $121. After deducting expenses of $169,900, this would leave $47,900 to cover overhead and owner’s draw. Even if you are a person of modest needs, this may no longer provide a decent living.

Detail shops are difficult to value since they are highly dependent on the personal relationships between management and its customers. However, most guidelines suggest that a detail shop can be valued as a multiple of four times monthly gross revenue. Using this approach, the benchmark would have a market value of $72,600. Arguably, this doesn’t seem like a lot of money compared to the effort and time it takes to establish a successful business. Detail shop operators also have other concerns.

Common experience has shown that many operators rely on wholesale work for as much as 50 percent of their volume. However, vehicle sales in the U.S. have tanked for three consecutive years. According to Ward’s AutoinfoBank, new car, light truck, and SUV sales fell by 2.5 percent in 2006 and 2007 and by 18 percent in 2008. New car dealerships have been dropping like flies and analysts predicted that 18 percent of new car dealerships could close in 2009.

Operating expenses continue to erode detailers’ profits. Over the last decade, average revenue trended upward by compound annual growth rate of 8.9 percent while the cost to operate a detail shop has risen by 11.7 percent. This suggests that profit has been declining by an average rate of 2.8 percent.

With a shrinking wholesale base and rising costs, operators will need to look towards the retail sector for more business. However, detail shops are facing more competition from car wash operators who serve this segment. For example, over 90 percent of full-service owners report having express detailing and/or a detail shop on site. Furthermore, the growth and popularity of express exterior and flex-serve conveyor car wash facilities poses a significant threat to detail shops.

For $10, an express exterior conveyor can provide motorists with a high-quality car-care service including undercarriage, polish/wax, full-body protection, and tire shine in about 3 to 4 minutes. Plus, you can vacuum to your heart’s content, for free. This doesn’t compare to the quality of a $121 four-hour detail service, but 10 washes for $100 is a significant value for the average motorists who is hard pressed to pay for essentials like groceries and gasoline.

Pundits are quick to point out that people are keeping their vehicles longer and that detail shops should benefit from this. However, this is no guarantee of increased business activity. In all likelihood, dwindling car sales, closed dealerships, and narrower wallets are going to translate into less demand. After all, there are only so many car buffs with deep pockets to go around and, as many car wash operators have learned, the recession has left motorists with less money for nonessentials such as car-care.

Detail shop operators may benefit by better leveraging their assets — employees, customers, and business system. Since most operators will have leveraged employees and customers, the business system may be the most likely target. By system, I am referring to store dimension, which involves location, store size, layout, image, and services.

Retailers have always understood that location is paramount. However, location is something that detail industry leaders don’t seem to discuss as often as they preach the need and virtues of becoming better business managers and technicians. However, the retail sector in the U.S. is going through a restructuring phase, which is justifying new trends.

Consumer spending behavior has changed, consumers are more demanding and they are staying closer to home and making fewer shopping trips. This has forced many retailers to invest in stores of smaller dimension. This means smaller buildings, more efficient layouts, and smaller selection of products. Retailers locate these smaller stores closer to neighborhoods and compete by focusing on the quality of goods and services they do offer. Perhaps detail shop operators may find salvation by mimicking this strategy.

Bob Roman is president of RJR Enterprises — Consulting Services (www.carwashplan.com) and vice president of Bubble Wash Buildings LLC. You can reach Bob via e-mail at bob@carwashplan.com.

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