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The high cost of building a business

October 11, 2010
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The United States appears to be in a period of economic recovery, which the average consumer seems to have not yet experienced, however most economists believe that we are not facing serious inflationary pressures.

While this may be the case with regard to the core inflation rate, it appears that the same cannot be said about the increasing cost of getting into the carwash business.

Water into money
According to our experience and research, many investors are discovering that it is becoming increasingly more difficult to justify the capital expenditure for a new carwash and secure funding.

This is due primarily to cost factors that are noticeably higher than they were merely several years ago.

There are a number of elements that investors must consider in the development of a new carwash.

Although the cost of some of these elements is rather insignificant in the grand scheme of things, the increasing cost of others can virtually be deal breakers for some investors.

Turning water into money has become more expensive by comparing the actual cost of building a new wash several years ago with the estimated cost of building the same wash today.

The estimated cost to build a comparable carwash in 2004 is now $468,000 more than it was in 2002. Moreover, the cash injection or investor contribution would go up by $93,600.

If we apply the same scalar to the typical cost of developing a new self-service carwash, an $850,000 facility in 2002 would now cost over a million dollars to build.

Similarly, the cash injection for this project would increase from $170,000 to $200,000.

Price of the property
Obviously, the price of commercial property can have a large bearing on the total cost of developing a new carwash.

According to Tony McLaughlin, director, Florida Real Estate Team, Re/Max, the price for prime commercial property in Florida has nearly doubled over the last ten years, now an average annual rate of 20 percent to 25 percent.

Land prices can also spiral upwards for other reasons.

For example, in a state like West Virginia, which is economically less robust than Florida, the topography is very hilly and the substrate is often difficult to work with.

As such, a great deal of commercial property is unusable and the scarcity of suitable land has driven prices to levels that are not commensurate with the market potential within many trade areas.

Increase in cost of building materials
The cost to erect a building has also taken a hit lately. According to some of the independent building cost indices, material prices have been trending upwards over the last several years with an inflationary pickup of 0.4 percent in 2002 to 4.3 percent in 2004.

Some price increases that have been driving this trend include: oil derivatives such as asphalt, PVC, primer and paint, roofing tar and shingles. Sheetrock and tile prices have also shown one year increases of 8 percent to 10 percent.

The hourly wages and benefits for bricklayers, carpenters, electricians and other construction trades have risen anywhere from 8 percent to as much as 20 percent.

Construction equipment prices are up from 3 percent to 8 percent, and even small items like porta-potties have seen rents increase by 4 percent.

Moreover, on-site fabrication and modular building systems, which are often touted for being able to reduce overall construction costs by 10 percent to 12 percent, will not be immune to the increase in the price of raw materials and the labor that is employed during production and installation.

Increase in equipment for your business

Carwash equipment prices have also shown some inflationary pickup from 1996 to 2004.

According to our independent survey of some of the leading equipment manufacturers, the average annual increase in the retail price for mini-tunnels and long conveyors is 0.5 percent and 2.8 percent, respectively.

We suspect that most of this increase, especially in the case of hybrid conveyors, can be attributed to inflated prices for finished materials and labor.

Some investors may also be facing increases in the cost of site improvements. This may be especially so for municipalities experiencing robust growth or for those trying to compensate for poor urban planning.

Government fees
In addition to water and sanitary sewer impact fees, municipal governments are increasingly adopting growth or concurrency management policies that govern infrastructure needs. Concurrency is the notion that infrastructure must be planned for and financially committed prior to approval of an occupancy permit.

Most often these policies are designed to manage the growth of large scale projects such as developments that have regional impacts.

However, many local governments have adopted similar polices for smaller commercial and retail businesses in the form of land use impacts where the investor is assessed fees based on the expected demand that the development of the site will have on roads, fire and rescue, emergency medical service, storm sewers, waste disposal and other municipal services.

Most likely, the use of these pay-as-you-grow fees will become more widespread and continue to drive up the cost of site improvements as the demands from growth further tax the limited resources of local governments.

Many local governments are also more frequently passing through to investors the increased cost of hooking up to and producing potable water and processing wastewater. Water and sewer impacts are usually computed on the expected flow rate of fresh water in terms of gallons per minute or equivalent residential consumption units (ERC).

Moreover, the impact fee rate schedule in many communities increases at an increasing rate. As such, any increase in the base rate can have a significant impact on the cost of developing a carwash site.

Professional fees
Investors should also expect to see an increase in fees for professional services as engineers and planners grapple with the same inflationary pressures as carwash operators do.

After all, there are few business ventures that are immune to the increasing cost of health care, insurance, utilities and other operating expenses.

Investors will need to come to grips with the fact that the days of low interest rates are starting to slowly disappear.

Although interest rates are not expected to increase significantly in the short term, most economists expect that the Feds will engage in a policy of gradually moving interest rates beyond the levels that many of us have become accustomed to during the 90’s.

What can investors do to stem the tide of the increasing cost of developing a carwash site?

According to the opinion of some architects who specialize in designing carwashes, investors should take the necessary steps to short-circuit the conventional thinking that has seemingly failed this industry.

All too often, investors have a preconceived notion of what they think they would like to have and side-step many of the strategic components that go into the making of a successful carwash business.

This seems to be especially so in the self-service segment where the capital and skill requirements are much less than conveyor operations with multiple profit centers.

Research and consider
Some investors often skim over the research, become pre-occupied with identifying the best brand of equipment and chemicals and then reach out too quickly for an equipment distributor or sales representative who will gladly take them by the hand, provide them with standardized pro forma and then show them how to turn water into money.

However, this is often done with far too little consideration as to dynamics such as consumer demand, competitive positioning, contestability of the marketplace and realistic expectations about the financial and operational requirements of starting up and growing a new carwash business.

Professional planners and other consultants who recommend team building and strategic planning as an alternative approach for helping to ensure the long-term success of a new carwash are certainly correct.

This notion is critically important for investors who are planning conveyor operations that feature multiple profit centers and, perhaps more so, for self-service investors who often use the cookie-cutter approach for building a new wash.

In addition, some planners may not be familiar with lean principles like a Flex-Serve carwash that demands greater attention to site layout, building design, material use, and equipment and operations.

As such, the project team should include qualified professionals that are familiar with these requirements.

A wealth of opportunities
Regardless of the increasing cost of getting into the carwash business, there are and will continue to be many good opportunities for investors to build new sites and renovate existing businesses.

However, the investor needs to acknowledge that the opportunity cost of building a new carwash is most likely going to continue to increase.

As such, investors would be well advised to consider alternatives to conventional thinking and seek out the advice of qualified industry professionals who understand the strategic planning process and that are capable of providing an independent and unbiased assessment and evaluation of the investor’s potential for getting into the carwash business.


Robert Roman is a former carwash and detail shop operator and is president of RJR Enterprises (www.carwashplan.com), a Clearwater, FL-based Company that provides professional advisory services to the carwash industry. Roman is also a member of PC&D’s Advisory Board.

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