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Business Operations

Avoiding overbuilt markets

October 11, 2010
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To my knowledge, there are 20 major variables to consider when someone is deciding to build a new carwash or to purchase an existing wash. In two decades of working in this industry, I have found that one of the most critical variables to determine is to clarify if you are entering a market that has room to grow, is mature, or is already overbuilt.


To understand the status of a market, you need to determine who your competitors are, estimate their volume, and establish the percentage of market that is already taken, and then arrive at what the market potential is that exists today. The role of market growth has to be considered as well.


Since overbuilt markets are a controversial issue, let me first define that term as I am using it.


Overbuilt markets


First, the word “market” that I’m referring to is a retail trade area or neighborhood. I am not using the term “market” as it refers to an entire city or metropolitan area.


Overbuilt refers to having more of a particular type of carwash in a market than the population or drive-by traffic can reasonably sustain financially.


To illustrate this concept, as an example let’s take the city of Tulsa, Oklahoma. Last year I was asked to conduct an assessment for an investor group that was interested in building a new exterior express carwash in the southeast corner of that city. This group had an option on an excellent piece of commercial property, had seen this new type of carwash built in their city, and wanted to confirm that the piece of property’s ingress and egress would be acceptable for the high volume of cars that they were projecting. They could see that, in their words, “This exterior express idea is just getting started in our area.”


What I discovered during my assessment was that, in this market, they were not at the beginning of the growth, but rather they were about to be the last one to build in an already overbuilt market. Here’s what I found.


Within approximately a 5-mile radius in the southeast corner of the city, there are four new exterior express carwashes (three of them charging a base price of $3), one new flex-serve conveyor carwash, two existing full-serve carwashes offering an exterior wash option, eight bays of rollovers, and 34 bays of self-service. I think anyone would agree that this submarket of Tulsa is overbuilt; certainly for the exterior conveyor type of carwash. However, there are several other trade areas or neighborhoods in Tulsa that do not have any exterior express conveyors at the time of this writing.


So, is Tulsa overbuilt for exterior express carwashes? No.


Is one submarket or neighborhood of Tulsa overbuilt? Yes.


Existing competition


To conduct a successful site analysis in a given area takes an understanding of the different types of carwashes and a process to determine the potential share of market. What follows is a process that I have utilized in the past with fairly accurate results to help clients both estimate their potential volume and revenue as well as avoided being trapped in an overbuilt market.


1. Identify the existing competition

When identifying existing competition I recommend that you list all the carwashes within a geographic radius. In addition, it is important to look at what is the actual trade area(s) involved in and around the site.


· Five-mile radius

Make a list of every carwash within a 5-mile radius of the intended site. Plot all of these carwashes out on the most detailed map of the area that you can find. Most people consider only the type of carwash they are planning to buy or build.

My recommendation is to start with every wash to determine a complete picture of the market. After that is achieved, start to segment by type of wash. The idea is that you want to find out how many total cars are being washed in a market.


· Trade areas

Determine for each of these carwashes what their natural trade area is. A polygon format is the most ideal method to use in mapping out a trade area.


2. Estimate the current volume

The operative word here is “estimate”. You want to get a sense of how many cars are currently being washed in the market. It would be similar to a hotel chain that was looking to build a new hotel finding out how many rooms are currently being sold in the market. You have to use many sources to obtain a rough estimate. There are several sources that you can access to determine this estimate.


· Local suppliers

Equipment, chemical, or software suppliers might be able to provide information on approximate volumes of competing area carwashes. Although suppliers will probably not give out exact numbers, most of them will give you a range, which is better than no hard data at all.


· Magazine surveys

Obtain the surveys for each type of carwash from leading industry trade publications. For example, Professional Carwashing & Detailing publishes surveys every year for each type of carwash. These surveys review the average volume for each type of carwash. Although these are not industry averages but rather samples of industry data, they still can be very helpful in making rough estimates.


· Consumer surveys

The International Carwash Association is the trade organization for the entire industry. A good place to start would be to review the ICA’s most recent Consumer Survey. They conduct one every 3 years. Educate yourself on how frequently consumers visit different types of carwashes. You will then have the framework to determine with each of the types of carwashes in the market around your location what the frequency of use of each carwash might be.

Some of the major software firms serving the carwash industry have conducted surveys based on their data from their tracking of actual customer visits to carwashes.


· Industry consultants


An industry consultant who is familiar with all types of carwashes can also visit every carwash in your target market and can perform this analysis for you as part of a site assessment.


3. Estimate the percentage of market taken


Using all the accumulated data, estimate the percentage of the market that is being served by the existing carwashes for the type of wash you are considering. When you’ve arrived at that number, you then know what portion of the market is truly non-competitive.


If that number alone gives you the volume you’re projecting for your wash, then your analysis is finished. However, if that number alone does not give you the volume you want, there is more work to be done.


4. Estimate market potential

If you estimate that most or all of the market is taken, you then have to figure what percentage of the market you will have to take away from your competition or how many people who are currently washing their vehicle at home you will need to convert to professional carwashing. Let’s look at both of those scenarios:


· Potential responses from competitors

Here is the trap that most potential operators fall into. They tend to look down their noses at competition and dismiss them as a problem that needs to be dealt with. The question that needs to be asked is, “What are operators going to do when you open a carwash near them?”


Most operators do not usually put up a sign that says “Closed for Business” because of new competition. They usually take one of four courses of action:


First, they could improve their operation. They could upgrade their equipment, give themselves a facelift, add services, and go all out to improve their operations. Or, they could lower their prices to improve the value proposition to their customers.


Second, they might sell their business to someone who comes in and improves their business.


Third, they hang on for a long period of time with reduced volume and still continue to take some business out of the market. They might be able to follow this last course of action because their mortgage is paid, and they can live on less, etc.


The reality is that most often it takes a long time to put another carwash out of business, and always much longer than a new operator coming into the business believes it will take.


The fourth and final possibility that exists is that you could be the one that doesn’t make it. That’s why this competitive analysis is so important.


· Frequency of customer visits to carwashes


There is much evidence to suggest that the pattern of customer frequency for visiting professional carwashes is changing. Therefore, some of the statistical assumptions that have been used in the past are no longer totally accurate.


Data that supports this change in frequency is the large carwash volumes sustained by the express exterior carwashes that are charging a low base price of $3 and offer free vacuums. Some of these carwashes have been built in very mature markets where the population and traffic count is not expanding but the carwash volumes are going up at an extremely high rate of growth. A logical conclusion is that people in that market are washing their vehicle more frequently.


Customer surveys that have been conducted at some of these low-priced exterior express carwashes have confirmed that a large percentage of the customers are former driveway washers. This change in behavior certainly expands the potential market. The downside to this change is that the self-serve and in-bay automatic segments have been adversely affected by the low-priced exterior express carwashes.


The other factor that is affecting carwash customer frequency of visits is the fact, supported by ICA surveys, that a higher percentage of people are washing their vehicles at professional carwashes as opposed to washing in their driveway at home.

As a result of the above changes, it has become clear that estimating carwash consumer frequency is a moving target, and this fact has to be considered in any market analysis.


Market growth


The role of market growth includes looking at increased population within the trade area, higher traffic counts on the primary street that the property rests on, and the availability of land within the trade area to build another carwash. In most markets these factors do not change the competitive equation much in determining market potential. There are, however, a few very hot growth markets where these variables do get added into the analysis.


Don’t underestimate competition


There are only so many people in a market, and they will wash their vehicle only so many times. What is recommended is that every carwash within the trade market be considered competition and that a share of market be determined that is realistic for a new carwash entering the market. If every new operator performed this analysis, there would be fewer instances of overbuilt markets and room for everyone to achieve their financial objectives.


Steve Gaudreau, a 20-year car wash industry veteran, has just released his newest book, So You Want to Own a Car Wash, subtitled Finding and Evaluating Retail Site Locations for Car Washes. This book can be purchased at Professional Carwashing & Detailing's online bookstore or Gaudreau can be contacted personally at steve.gaudreau@hotmail.com.

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