Private-Equity Backed National, Regional Chains Growth Continues Threefold
Just a few years ago, there were only a handful of car washes backed by private equity. Today, that number has dramatically increased with now more than 20 private equity backed platforms funding chains, all with an appetite for growth.
In 2021, we are finding the current aggressive growth is not marginally more than last year it is materially more than last year threefold more. The subscription model has dramatically changed the car wash landscape and the ability for chains to scale their business. Because monthly plans offer a consistent revenue stream – finally addressing the variability of demand caused by seasonality or weather incidents out of an owner’s control – more funding, be it from financial institutions, strategic partners, or private equity groups, is available. And with that funding, the car wash industry has become a very competitive space.
The growth and development of new express car wash tunnels is exploding because of the incredible success people are having. We’ve seen established national car wash brands like Mister Car Wash and International Car Wash Group (ICWG) grow mainly through acquisitions year after year. And now there are national developers rapidly expanding their footprint with greenfield development. Brands like ModWash, Tidal Wave, and Quick Quack to name a few are getting in the game of really building out nationwide. This is all new territory.
Additionally, regional brands are expanding further and further outside of their own markets. In the old days, there was a level of comfort that if you built a car wash somewhere and you were successful, you would be pretty safe and not have a competitor build right next to you. Today, that is off the table. With the emergence of new money entering the space, there are no rules. No market, large or small, is off limits, even if there is a solid, established car wash group there already.
In a small Western market with a population of 90,000 and chain of five highly successful locations, we recently saw a national player announce they are building several washes in the area. The business model before was build it and be as successful as you can be in your neck of the woods. Now national and regional brands are looking to replicate successful markets and scale up fast to fill out their footprint and give customers more access to their locations; and they are okay with having a few lower volume locations because they still contribute to the brand.
What we’ve also seen in 2021, despite the Covid pandemic, is that we have no idea what how high customer demand will continue to rise. Because it is easy, affordable, and convenient customers are washing their cars far more. With rising demand, we are also adjusting how much volume a car wash can do. It wasn’t long ago for us to look at a successful site doing 20,000 cars a month; we are now looking at sites washing 40, 50 or 60,000 cars a month. Membership has had a huge impact on volume. Though chains are in a race to get big fast, it’s not always a bad thing having a lot of car washes in your market. Because at the end of the day if the washes are doing a good job the customer will get their car washed, somewhere, once a week instead of once every four months. Now for $20 a month you can get your car washed every week. It’s super affordable. Consumers are also spending more and more money on their vehicles and prioritizing taking care of it. Take Starbucks. We never knew we needed coffee so much until a Starbucks opened one every corner. Back in the old days, you made coffee at home before you went to work. Now you stop on your way or make a special trip to go to Starbucks and get a coffee. Why? Because it’s convenient, is relatively cheap, and the experience is acceptable or favorable to customers.
What we don’t know yet is how many car washes in one market is too many. Take Phoenix for example. You have multiple chains with 20 or more washes in the Phoenix-area alone – Cobblestone, Clean Freak, Super Star and Raceway – and more are still being built because the demand and the profitability is there. So, we have not seen saturation yet. There is a difference though in having a market that is responsible, where new guys are staying a few miles away from their competitors, than other markets where new guys are building literally next door to someone. As the platform becomes bigger in a market so does the ability to continue growing through advantages in marketing and sales – as you get scale in a market you are able to flip a switch immediately on opening a new site, and that new location will be in the black in many cases, in 30 days. With monthly plans bringing in immediate cash flow, that timeline to profitability has shortened considerably. When customers are given the option to go to a car wash that has 40-50 locations in their general region versus a smaller operator who has four or five locations, they likely go with bigger brand that offers more options. This leaves smaller car wash owners without a pathway to growth at risk. These newer players have so much private equity money behind them and will enter a market and build 20-30 sites quickly. If it’s a good site and good location someone is going to build near you.
Here’s the bottom line. The car wash business is a different business today. Go back to coffee. In the old days there was no business of going out and having coffee. Starbucks created that demand by making it fast, easy, and cool to get coffee, and the car wash business has reinvented itself just like coffee did. Changing from a necessity you did occasionally to a convenient thing that you can do every week – because it’s easy and cheap. And because it feels good to drive a clean car. Coming out of Covid, we’ve seen that you can make money in the car wash business even in a recession or pandemic. And that, coupled with the scalability of express car washes with monthly plans, has not gone unnoticed by private equity and institutional investors. The acceleration of anybody of any size growing is a massive race. We are finding people in a fury to build sites. For small car wash owners that means there’s a good chance someone is going to enter your market in the foreseeable future.
So now is not the time to stand still. It’s certainly worth considering growing to protect your market, or perhaps selling, and in today’s favorable environment multiples couldn’t be any higher.