Features

Investment and Technology - Re-examining Business Models and Strategy

By Robert Roman

05/01/14

Prior to shutting down in 2011, Modern Car Care magazine published a short series of state of the industry reports. In those reports, leaders provided insight about the U.S. car wash industry and described strategies that might improve a firm’s standing within the industry.

Eric Wulf, International Carwash Association CEO, said (I paraphrase) until we see a recovery, there is a need to focus on business decisions to survive or strive. Wulf said the worst strategy is no strategy and waiting for things to improve is a losing proposition.

Ken Brott, vice president of sales and marketing at DRB, noted that consumers are increasingly pressed for time and car washes are now not only competing against themselves but also against dining out, a movie, or Starbucks.

Murray Kennedy, CEO of Mark VII Equipment Co., said operators have delayed capital spending to squeeze more life out of aging equipment. Kennedy believed forward-thinking operators would seize the opportunity to upgrade to achieve competitive advantage.

These points should be well taken because they speak about the need for operators to re-examine and adapt their business models.

In business modeling, it is suggested a firm attempts to develop a sustainable competitive advantage by means of cost, or to differentiate so consumers are willing to pay a premium, or to prospect a niche.

Let’s examine advantage from a cost strategy.

Low cost strategy is when a company offers a relatively low price as a pricing strategy, seeking to stimulate demand and gain market share. The best use of this strategy is product volume, achieving economies of scale.

One way to reduce the cost of production inside a company is to employ technology. Let’s look at some of the benchmark evidence for this strategy.

As shown in Figure 1, the trends in some of the technologies in use that reduce costs suggest more conveyor operators have heeded Kennedy’s recommendation to upgrade.

To put this into perspective, I developed an index that represents the change in technology use based on benchmarks and information from my internal files. This included pay station, VFD, wash material, tire shiner, wash process, controls, methods, plus technologies referenced in Figure 1.

As shown in Figure 2, I found technology use by survey respondents and other conveyor operators is three times greater today as compared to 1994 with 2005 being a point of more rapid adoption of technology.

Increasing levels of technology requires increasing levels of investment. To put this into perspective, I divided car wash automation into three categories and developed cost factors for each based on bay length for newer and older washes.

Basic included standard in-bay, friction tunnels, and washes at gas stations and car dealerships. Advanced automation spanned premium in-bay, in-bay express, and mini-tunnel. Express, flex-serve, and high-performance mini-tunnel rounded out high-tech.

The results were basic at $1,000 per lineal foot, advanced at $1,600, and high-tech at $2,400 per lineal foot.

Not only has development cost of car wash automation increased (excluding real estate); stepping up to high-tech takes some additional lifting (Figure 3). Of course, the big question is: Is the investment worth it?

One benefit of technology may be washing more cars. Unlike self-service and in-bays at gas sites that have seen shrinking markets, less demand, and little innovation, the trend in conveyor sales volumes is positive (Figure 4).

 

As shown in Figure 5, another benefit of technology may be the reduction in the number of full-time equivalents (FTE) needed to operate a wash. FTE represents 37.5 hours a week of labor.

In order to be practical, cost must translate into benefits. I found this more evident in exterior washing where cars per man-hour trended upward (Figure 6). Full-service gains are slight but important because margins are greater.

Finally, I estimated productivity for each category of automation. Productivity is a function of throughput and investment. Throughput is defined as the rate at which the system generates money through sales. Investment is all the money the system invests in purchasing things the system intends to sell.

So, is it worth it?

I found increasing levels of technology leads to increasing levels of productivity and returns. When compared to basic car wash automation, productivity measures for advanced and high-tech was 2.1 and 2.9 times greater, respectively (Figure 7).

Although certainly not scientific or definitive, my findings do echo the assertions of those mentioned earlier in this article that car wash operators stand to benefit from re-examining their business models and strategy.

We showed how this could be achieved with a cost strategy using investment in technology to upgrade the plant.

Considering the puny returns on safe investments today and the volatility of others, car wash operators may find that investing in their business and technology may be the smarter bet.

 

Bob Roman is president of RJR Enterprises – Consulting Services (www.carwashplan.com). You can reach Bob via e-mail at bob@carwashplan.com.



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