Finishing Line

Obsolescence - Part of the Cost of Doing Business

By Robert Roman

11/01/17

Over time, most man-made things become obsolete. MP3 players once required ear-bud headphones connected by thin wires. Now, you can buy them with Bluetooth and wireless ear buds. This is technical obsolescence.

Some years back, PDQ notified the industry that its venerable Laser 4000 was deliberately being discontinued. Thus, inferring owners consider a replacement. This is programmed obsolescence.

Another form is planned or built-in obsolescence. This is the practice of designing a product with an artificially limited useful life, so it will become obsolete after a certain time period. The reason is to generate long-term sales volume by reducing time between repeat purchases — shrinking the replacement cycle.

For example, the replacement cycle for an in-bay automatic is between eight and 10 years. Perhaps some of this is planned, but it’s also due to harsh environmental conditions, technical obsolescence, and style.

Generally speaking, the depreciation tax shield is 20 percent annually (five year lease) versus actual obsolescence of 10 percent annually. Also, besides IBA equipment, there is obsolescence of structure and fixtures. So, the ongoing monthly operating cost at gas sites includes about $7,000 in capital expense. In other words, the wash wears out at an average rate of about $2 a car or $29,000 annually.

Conveyors are more difficult to quantify because assets wear out at different rates. For example, point-of-sale systems and PCs might last five to seven years whereas the motor control center may never be replaced.

Most state personal property guidelines classify expectancy of car wash equipment as short-life property (3 years), information systems (5 to 7 years), and long-life property (10, 15, and 20 years).

To illustrate, we applied these guidelines to a recent project and found the wash would be expected to wear out at a rate of $1.25 a car. So, at 100,000 cars, the wash would wear out at a rate of $125,000 annually. If unlimited is added, the rate of obsolescence would be $170,000.

If the strategy is to run it until it breaks and deviate from the maintenance intended by manufacturer, operating life of equipment will be shortened, increasing cost of obsolescence.

Experience shows overworked equipment results in higher cost and more downtime (less volume). Therefore, the consequences of a neglected wash can be considerable.

Arguably, this situation isn’t likely to improve given the structure of the supply side. For example, the number of major players making conveyors in the U.S. is fairly small. There are more suppliers of IBAs, but this market is dominated by four companies.

When the number is few, sellers are more likely to be aware of the actions of the others.  Consequently, the decisions of one firm often influence decisions of other firms. Evidence of this is greater parity in pricing of equipment.

Obsolescence may become a greater concern as car wash operators face increasing operating expenses such as higher minimum wages and escalating cost of utilities.

Another consideration is cost. Five years ago, equipment for one of my client’s projects was $750,000. Last year, another of my clients was looking at $1 million. Ten years ago, this would have built a self-serve with IBA including the real estate.

Another consideration is that the rate of obsolescence isn’t linear in real life as in our analysis. When new, repairs and maintenance will be the lowest and then the cost increases every year forward. As volume goes up, things wear out faster.

Another consideration is salvage value. Generally speaking, nothing is as worthless as used car wash equipment. So, operators stand to gain by carefully considering their needs in the planning stage. This begins with properly sizing. For example, is it really necessary to have three POSs and a 150’ tunnel when two and 100’ could do the job?

Likewise, choosing stainless steel can provide an advantage in protecting equipment from corrosion. Moreover, reconditioned and refurbished stainless steel equipment can be resold for more than twice the typical salvage rate.

And finally, there is professional classroom training of car wash personnel in equipment maintenance and repairs to help keep things in-house.

In the final analysis, obsolescence shouldn’t be viewed solely as a tax shield but rather as part of the real cost of ownership and doing business.

 

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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