Why I like express car washes as a niche investment sector
Automation has "digitalized" the industry and has created an interesting emerging sector in the quasi-real estate space
Call me old fashioned, but I like a clean car. I have washed my fair share of cars having started off washing neighbour’s cars when I was 12 years old. They paid me $5 for a full-service car wash that took me one hour. For them, it was cheap and convenient, for me it was a goldmine as I went back every weekend as the cars inevitably got dirty. But times have changed, it's difficult to find a 12 year old in your street that is on call 24 hours a day ready to wash your car when you need it washed. Such is the life of convenience that we are living today, and the same reason why I think this is a niche sector worth paying attention to. I hope the below provides some 'food for thought'.
What is an Express Car Wash?
An Express Car Wash typically consists of a 130 foot tunnel which uses a conveyor or belt equipment to move a vehicle throughout the car wash. They are located in similar trade areas to where you would find a Walmart, McDonalds, Costco etc. For the customer, the experience is fantastic. A camera detects your number plate and associated wash package. You pass through the gate and have a clean car in 3-5 minutes at a price point that costs $20-$30 a month. It is cheap and convenient. To see proof, click the link HERE.
Attractive operating margins
Express Car Washes are a low capex / high margin asset class. Automation reduces labor & maintenance costs, which drives 50%+ EBITDA margins with 95%+ free cash flow conversion. Monthly membership clubs drive recurring revenue and can account for 50-60% of customer base. Top performing car washes on average produce $2.2m in gross revenue per year and are capable of washing >200,000 cars per year.
Strong yield with short construction period
Both conversion of existing outdated car washes and new development is extremely attractive generating a 11% yield on cost (dependent on location) with a short conversion / construction period (6-12 months). Debt is highly accretive. With conservative debt levels you can achieve 15% cash-on-cash returns upon stabilization which often takes as little as 12 months. Total project costs including land range between $5-8m (dependent on location).
Digitalization embedded into the real estate
Much of the real estate industry still lags when it comes to digitalization. At its core, Express Car Washes are a technology business. So much so, that I can sit here on my mobile in Argentina checking traffic numbers passing through the car wash with real time revenue and expense monitoring. Express Car Washes are capable of washing 200 cars an hour and operate with a 'Netflix' like subscription model.
"Amazon-proof" business model
The convenience of ordering anything we want on our mobile and the expectation that it arrives 'same-day' is causing the death of traditional retail. The Express Car Wash is a low cost service-orientated business immune from technology disruption. Population growth directly impacts car use and in the same way that low interest rates correlate with increased housing activity, low interest rates lead to increased car purchases. Cars will always get dirty. Even Amazon delivery drivers need to wash their cars!
It is a large and fragmented market
The US car wash industry is a $11B+ market with approximately 10,000 conveyor washes, largely owned by small “mom and pop” and non-institutional operators. The vast majority of existing assets are small business owners, close to retirement with outdated or soon-to-be obsolete business models. The pandemic has accelerated the need to upgrade the model. The top 10 operators in the U.S. make up less than 3% of the total market, compared to the fast food industry where the top 10 make up 50%.
Asset class has validated institutional potential providing multiple exit options
There has been a significant increase in institutional investment activity, however, institutional ownership still represents less than 5% of the market. Portfolios with scale are able to execute a sale/leaseback transaction to unlock real estate value – buyers include public REITs, net lease funds and private investors. Alternatively, there is a wall of capital searching for yield and looking for strong operational businesses. Think about what happened in the fast food industry, the same will happen with Express Car Washes.