Cleaning Up: Strong Fundamentals Drive Carwash Investments
The carwash sector is attracting strong investor attention due to a wealth of consolidation opportunities, excellent margin and cash flow generation potential, favorable industry demand dynamics and some degree of insulation from broader macro-economic downside risks. For operators already in the space, professionalization and equipment investments are a priority. And interest in the express-wash subsector is only getting stronger.
These were some of the key takeaways from the 2018 International Carwash Association show in Las Vegas, attended by Harris Williams & Co. Transportation & Logistics (T&L) Managing Director Jason Bass and Director Jershon Jones. In this report we share their insights from the show.
Strong Fundamentals Leading to Intense Interest
Investor interest in the carwash industry is strong and growing, says Jones. “There’s recognition that the sector has strong fundamentals, as well as similarities to other automotive aftermarket service subsectors in which institutional and family office investors have had great success, like collision services and repair and maintenance.”
For example, the segment offers a host of opportunities for acquirers to consolidate local and regional operators into larger networks that can benefit from such economies of scale as increased buying power, shared best practices, point-of-sale (POS) and enterprise resource planning (ERP) technologies, and enhanced marketing tactics, including subscription programs and social media outreach.
“We saw more wash operators and equipment providers willing to entertain conversations around consolidation, both as sellers and as buyers,” says Jones. “More private equity groups, family offices and alternative investors are willing to finance those consolidations, too.”
This momentum is supported by the presence of strong regional operators that can provide the foundation for those platforms, notes Bass. “There are some really good operators out there that investors can back as industry leaders.”
Another factor generating interest is the convergent nature of the space. “The carwash sector sits at the intersection of the automotive aftermarket, retail, consumer services and real estate,” says Bass. “If you have expertise in any of those, you have a foundation of knowledge that you can use to execute a winning strategy.”
The segment also enjoys a degree of insulation from risks affecting other industries, including technological obsolescence and economic cycle impacts. “You can’t Amazon a carwash,” says Bass. “And Uber drivers — not to mention their passengers — still want clean cars.”
“We’ve seen our clients in the space weather economic cycles pretty well,” adds Jones. “Carwashes are attainable luxuries that people tend to find ways to afford.”
The sector also boasts strong cash flow characteristics and margins. “It’s largely a cash-based business,” says Bass. “And once an operator has made the necessary upfront investments in land and equipment, capital expenditures are generally very low.”
Operational Improvements on the Agenda
Given the underlying strength of the carwash industry, significant benefits can be achieved through operational improvements.
Some larger platforms, for example, are adopting regional hub-and-spoke models. As Bass explains, “This approach can eliminate some of the cost structure. An entire region can operate from one small office, and then go out on a spoke and create another hub somewhere else. That creates economies of scale. There's also some benefit in having a few key professionals in a region to manage processes like repair, maintenance and staffing.”
Regional systems with shared professional staff can also enjoy more strategic advantages, says Jones. “They can scout new locations and potential acquisitions, and can provide the business with valuable market intelligence,” he notes.
The sector is also undergoing an increased focus on customer acquisition and retention, most notably via subscription models. Such plans can deliver substantial financial benefits: Not only do they typically smooth out revenue, but, in some cases, can generate enough revenue by themselves to cover operational costs.
Equipment Enabling Operators to Keep Pace
Ultimately, however, retaining customers depends upon providing a superior experience, which at least partially hinges on the age and condition of the equipment in use. “There’s almost constant activity in terms of improving and upgrading tunnels,” says Jones.
That demand, in turn, drives strong momentum for equipment suppliers, particularly those offering comprehensive bundles that can outfit an entire carwash tunnel. Typical popular upgrades include collision avoidance technologies, as well as retrofits that enable operators to convert full-service washes to express washes.
According to Jones, the express-wash concept continues to gain strength. “The economics of the express model make it very appealing to operators and investors. Express washes tend to require less labor, have a smaller footprint, and deliver consistent revenue and margins, particularly when subscription models are used.”
There is still a sizable opportunity for full-service washes, however. “It’s situation-specific,” explains Jones. “There are certainly markets and locations where full-service is the better choice, and the cost of converting to an express-wash model doesn’t make sense. Converting may or may not be the right strategy, depending on a variety of conditions.”
The carwash opportunity should continue to be appealing to a wide range of investors due to its significant fragmentation, position at the convergence of attractive and investable niches, favorable cash flow characteristics and long-term resilience. Operational improvements are on the agenda for many players in the space, while the steady growth in wash counts across the country reinforces the underlying strength of the industry.
Published May 2018