Location Strategy - Consider the Community’s Social Desirability
By Robert Roman
In the November 2020 issue of Auto Laundry News, Harry Caruso discussed the importance of analyzing the data surrounding a pre-existing membership program when evaluating the purchase of a car wash.
To paraphrase: a program that is ill-conceived or half-hearted will usually result in a small take rate and a program that consists entirely of the least-desirable members, namely the heaviest users.
Heaviest user means customers who consistently wash most often, pay the least, and have the lowest degree of incremental revenue.
Likewise, it’s important to analyze the data surrounding a geographic area when evaluating the purchase of a car wash, the development of a new car wash, or when developing a marketing plan for an existing business.
For example, one variable analysts use to help calculate multiples in valuing a wash is social desirability of the community. Here, attractive environments have shown to have a positive influence on multiples whereas an environment that is rough or lacks prestige does not.
Consider Brite Wash Auto Wash located in Leesburg, VA, which is also featured in the same November issue of Auto Laundry News. In terms of location, you couldn’t ask for better demographics.
According to our estimate, the total available market for the city has doubled to more than $4 million. This occurred as farm country was transformed into a tony satellite community with upscale housing developments, shopping, and business centers.
The author did not mention reasons for this growth but examination suggests folks moved to Leesburg to escape skyrocketing housing costs, pricey child care, crowds, and relentless traffic that exist in the communities that surround Washington, D.C.
Such conditions also cause businesses to flee in other areas. According to Jay Cheng, director of public policy, San Francisco Chamber of Commerce, the area’s high business closing rate is due in part to the high cost of operating a business in the city. Long permitting processes, high construction costs, and expensive retrofits have made it almost impossible to open and maintain a retail business in the city.
Los Angles was also suffering — even before the pandemic. According to State of California, Labor Market Information Division, in 2019, Los Angeles County non-farm employment decreased by 443,900 or 9.8 percent.
A recent Gallup poll found that while 80 percent of Americans live in urban areas because of their jobs only 12 percent said they want to live there. Asked where they would live if they had their choice, the top response was a rural area.
According to the U.S. Census Bureau, the South is now the largest region in the country and is growing whereas the Northeast has become the smallest region and the population is in decline.
This change is due to net domestic migration which is the movement of people from one area to another within the country. Top states with net domestic migration loss are California (-203,414), New York (-180,649), Illinois (-104,986), New Jersey (-48,946), Massachusetts (-30,274), and Louisiana (-26,045).
Based on our estimate of per capita spending on car washing, this migration alone represents a relocation of potentially $43 million in industry wash revenues.
There is also the hole the pandemic has created. According to the AP, about 60,000 of the 80,000 or more businesses that have permanently closed since the pandemic began were local businesses, which are defined as those with fewer than five locations. The five top cities for permanent closures were New York, Los Angeles, San Francisco, Chicago, and Dallas.
Unfortunately, car wash facilities can’t flee a location in decline like people can. For example, after 64 years in business, Seattle’s iconic Elephant Super Car Wash announced its closing. The owners cited reasons as increasing crime, drug activity, homelessness, increasing costs of doing business, and burdensome regulatory demands.
The phenomenon of shrinking cities isn’t new but it has been exacerbated by the pandemic. Experience has shown areas most susceptible to this phenomenon are those with low economic growth, failing public schools, and high crime.
Arguably, this is one reason why a Brite Wash is built in a place like Leesburg rather than in a suburb of Baltimore.