With more than half of 2022 behind us, it is clear things have changed since we started the year and some of the shining glow of optimism and unfettered growth has waned. Inflation, rising interest rates, continued global supply chain issues, the war in Ukraine and declining consumer sentiment are unfortunately a reality of today’s economy. As consumers tighten their wallets (and possibly their threshold for reoccurring subscriptions) the carwash industry, and most others, will likely feel the sting.
For carwashing, the barrier to entry is growing as well. What used to cost $4 to $5 million a few years ago now costs $5 to $6 million-plus to build an express tunnel carwash. Not to mention, supply chain instability could add months to a project’s timeline, tacking up the cost.
Once the carwash opens, hiring qualified team members to manage and grow the business is more challenging than ever before as well. Similarly, with interest rates on the rise, carwash owners are incurring more debt right off the bat. This means the stakes are higher and the pressure is on for operators to turn a profit quickly and establish a strong market presence before a competitor beats them to it.
And, there is another downer: multiples have likely peaked for interested sellers. Over the last few years, vast amounts of dry powder from institutional investors entered the carwash space, largely attracted by the adoption of revenue-stabilizing monthly
plans. Buyers were so eager to grow and grow fast, that they were willing to pay top dollar for existing washes in an effort to gain market share quickly.
Now, in an inflationary environment, private equity-backed investors are more risk-averse and as a result, have become more sophisticated in how they determine the current value of a carwash and estimate its future profitability. In some cases, new entrants have opted for greenfield development rather than pay a premium for an existing site. Additionally, as interest rates continue to rise and buyers incur more debt in an acquisition, their future returns go down and multiples tighten.
That being said, it is not all bad. Here’s some good news when it comes to carwash valuations: they are not going down that much. In fact, high-volume sites with a strong EBITDA (earnings before interest, taxes, depreciation and amortization) are still trading at attractive multiples for the seller.
How to maximize value
So, what can carwash owners do to protect the value of their businesses? Start by understanding what potential buyers are looking for. Armed with that knowledge, operators can adjust their focus to what matters most to future buyers while building up the bottom line today. Dialed-in operations, well-maintained assets, a strong leadership team, employee sales training, quality marketing, monthly plan memberships and curb appeal are critical. The carwash chains that have sold for the highest multiple are those with scalability and a development pipeline.
The plug-and-play ability to grow is attractive for many buyers who don’t necessarily want to be a carwash operator but recognize there is still a lot of upside in this space. Even as investors’ wallets tighten to some degree along with consumers, by and large, they need to deploy their funds somewhere and the carwash industry has proved more stable with better returns than most.
In order to keep profitability strong, never lose sight of who really makes the wheels turn: the customer. Be it a retail customer or monthly plan member, prioritizing customer service and understanding the customer experience has never been more important to commercial success.
Consumer demand for professional carwashing continues to grow due to its affordability and ease of use, even as more and more carwashes come online. With increasing options on where customers can spend their money and get their car washed, in all markets, big or small, there is no coasting.
While challenges remain in the face of these current headwinds, new opportunities also emerge. The carwash industry is experiencing a technology boom. Just look at carwash trade show’s exhibitor listings. The number of tech companies entering the carwash space continues to grow at a rapid pace. Experimentation with the use of artificial intelligence (AI) is rising and creating new ways to understand customers.
We have also seen meaningful advances in automation and outsourcing to address rising labor costs while providing a better service for the customer. There’s the old saying, “necessity breeds invention.”
At the height of the pandemic, the carwash industry was pivoting to accommodate contactless interaction and address doing business during an acute period of labor shortage. Overall, we faired pretty well. Investment in innovation and technological growth is a good sign of sustained forward momentum.
The strong get stronger
Big players in the industry will continue to change the game and recalibrate who is considered a “big” player. Weaker operators and weaker platforms will likely be absorbed during this time of continued consolidation, and measurable growth will come from strong operators who are able to replicate their success time and time again in markets across the U.S.
While it is foreseeable there will be a further commoditization of the industry in efforts to achieve scale on a national level on the path of the fitness or coffee industries, there is still room for smaller operators. Those who provide a consistently clean, shiny and dry car as well as great customer service can hold their own. There is a place for both the big chains and the smaller sites.
The long-term prospects are still very favorable for the carwash industry. There is plenty of runway ahead for continued growth. And, as COVID showed us, even in the face of new challenges and — dare we say — a potential economic recession looming, customers value today’s professional carwash model. How can we tell? Operators across the country report growing memberships, sales and volume. Not bad.
Lanese Barnett is senior vice president of business development at Amplify Car Wash Advisors, the number one advisor of carwash chains nationwide. With a mission of creating wealth for clients, Amplify helps carwash owners sell, partner or grow using practical industry experience as operators coupled with expertise in mergers and acquisitions (M&A) and capital advisory. Keep up to date on the latest carwash M&A activity with Car Wash M&A, The Podcast. Listen to Episode 6 for an interview with M&A expert Jeff Pavone to hear more on the topic of this article. Learn more at AmplifyWash.com, or reach Lanese at [email protected].
Check out our recent video interview with Benny’s Car Wash’s Justin Alford about the headwinds impacting carwashing in 2022.