Many investors already know the remarkable resilience of the car wash sector. Now that the industry has proven its mettle through the depths of the COVID-19 pandemic, it's on the radar of many more.
In this Q&A, we explore the key investment opportunities and trends in the car wash sector with Jershon Jones, a managing director in the Harris Williams Transportation & Logistics Group.
How has the car wash sector fared through the challenges of COVID-19?
Jones: The last 12 months have been a difficult period for many businesses and their employees. While the pandemic has certainly impacted the broader car wash sector, the resilience demonstrated by the sector through this period has been eye-opening for investors new to the space. In many cases, we saw that both car wash operators and providers of equipment and technology to the sector were impacted for just 30 to 60 days before returning to nearly normal performance levels, which is pretty remarkable.
The result of that kind of performance is even more investor interest in the sector in the future and greater credibility for investors already building platforms, selling car wash businesses, and making investments for the future. What has been most interesting to me over recent months is the entirely new category of buyers who have been drawn to the sector after witnessing its outstanding performance throughout the pandemic. We estimate that over approximately the last 24 months, there were more private equity car wash transactions than at any point in the history of the sector.
Some buyers come from consumer markets, the automotive aftermarket, or other multisite retail areas, and they bring valuable expertise. They typically know how to evaluate and manage unit economics, for example, and how to manage, optimize, and properly price loyalty programs. Retail investors also generally can evaluate the strategic significance of real estate financing alternatives, manage equipment and technology, and develop talent from the store level up to the C-suite.
Are there any types of car wash businesses or business models that have attracted more investor attention than others?
Jones: There continues to be significant opportunity across car wash concepts. While the express wash model receives a substantial amount of interest in today's market, other concepts, including full-service and flex-service, continue to be successful for both operators and the companies that supply equipment, technology, and supplies to those locations.
As with any M&A investment, the private equity group's size and focus dictate which part of the spectrum they're targeting, but interest is strong along the full gamut. There have been several large, high-profile transactions in the category over recent months, while investor appetite for much smaller opportunities continues to grow as well. In fact, we've seen larger institutions express interest in smaller platforms as a way to establish a presence in the sector, recognizing the substantial opportunity to scale up through M&A and greenfield investments.
A recent example of success by starting small is Red Dog Equity’s investment in Mammoth Holdings. When we advised Mammoth on the sale in late 2018, the Company was a rapidly growing regional platform. In partnership with Red Dog, the platform has since grown to be a best-in-class business of substantial scale.
What should M&A investors be thinking about as they analyze the car wash sector? What should be on their radar?
Jones: The sector presents investors with numerous opportunities to create value, and it will continue to do so for many years to come. That being said, we think those car wash businesses that will be leading the sector in 2025 will have developed a number of key capabilities.
The "connected car wash" that leverages customer data to drive insights, programming, pricing, and retention strategies will develop important advantages in the market. Car washes can serve thousands of customers each day, which provides tremendous opportunities to use customer analytics to optimize service offerings, drive margin, enhance retention, build recurring revenue sources, and increase penetration of the local market. Operators who ensure a connected experience and effectively track data will be well positioned in tomorrow’s market.
There continues to be significant upside associated with developing and optimizing subscription programs. While the strategy is now widely used across the industry, there is still potential to optimize pricing, service plans, and customer targeting in ways that can drive tremendous value to the bottom line.
In addition, operators are increasingly thinking strategically about their broader car wash networks and how to best rationalize their footprints. As competition in the sector increases, advantages will accrue to operators with a cohesive approach to the market across store locations, a standardized customer experience, and a rationalized footprint and approach to growth. A sophisticated approach to M&A and greenfield development and knowing when to pull which lever will be critical in achieving competitive footprints. Platforms that make these sorts of investments will be well-positioned in a market that will become more competitive over the long term.
Finally, the sector continues to have numerous levers for long-term growth, some of which we’ve discussed: M&A, greenfields, advancing the subscription model, information-based decision-making through technology and data analytics, right-sizing the network, selective deployment of franchise models, leveraging the value of real estate to support growth, and many others. Few sectors combine the stable, long-term industry demand of the car wash sector with the ability to drive growth across so many dimensions.
Overall, we remain incredibly enthusiastic about the car wash sector. Tremendous opportunity remains for both car wash operators and the suppliers of equipment and technology to the sector. Despite the substantial amount of investor interest over the last few years, numerous attractive investment opportunities remain, and the sector is poised for continued multiyear expansion.
In addition to our knowledge of the car wash sector, the Harris Williams Transportation & Logistics Group has deep expertise in many other areas of the automotive aftermarket and the third-party logistics sector. Learn more here.
Published April 2021