Investing In NEW Coin-Op Carwashes

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Patrick H. Crowe compared and contrasted two of his most recent adventures in carwashing - "New Versus Old" - building a brand new self serve and rehabbing a run down existing one. Judging by the numerous compliments on the article, it seemed to have struck a chord with quite a few of our readers. As many of you know, there are just not that many of those old "fixer uppers" out there waiting to be snapped up and transformed into "money machines". So we're doing a follow up on one half of that "New/Old" article. It's an edited and augmented "composite discussion" on what criteria and considerations Pat has when it comes to deciding on whether or not to build a new self serve wash. He has some insightful and interesting opinions on this subject. And, as our regular readers would expect, a number of Pat Crowe's opinions will be considered controversial if not flat out provocative ... at the very least, wide open to debate. Pat may have some Liberal leanings when it comes to his politics (check out his thoughtful comments in the "Letters" column of this issue), but his approach to carwash investments is quite conservative. With that said - pull up a chair, take the load off, and listen in on some pointed chit chat and Q & A on points of interest to anyone considering building a new wash... Where Ya Gonna Go?!!

SSCWN: Judging by the number of existing washes you have purchased over your last 25-plus years in the business, you seem to have a preference for them (2 built from ground up, 1 fairly new /existing, and 5 total rehabs.) So what's kept you from building a new one in the last few years?

Pat Crowe: First, it's a little tough to find a neighborhood or area that's not already being served. There's simply more competition than in earlier years. Despite that I found a good location not too long ago. It was a commercial corner, zoned correctly, and priced fairly. The lot was 80' x 125' (10,000 sq ft) and seemed perfect for a 5-bay ... or maybe a 6-bay. I was plenty excited and felt the same old thrill as I began to visualize my new, state of the art facility - a 100' long, 25' wide building with 6 bays, each 15' wide plus the equipment room would fit nicely across the 125' and, depending on setback requirements, I might even get in 7 bays.

SSCWN: Well, what stopped you?

The Incredible Shrinking Wash PC: I was particularly excited because I was not going to have to fight rezoning. I had seen that take a long time and I'm fully aware carwashes are not welcome improvements to some neighbors and so rezoning can be very difficult ... a long, slow, tedious process. I had owned a carwash in this municipality before, but hadn't built one there. When I made my preliminary inquiries I found very restrictive regulations. The usable length of 125' which would have allowed the 6 or 7 bays was about to vanish. First I was told that there was a special rear setback of 25' because the property adjoined duplex zoning. That left 100' of usable length. There was also a front setback of 25' from the street so I was down to 75' of usable length. But that's not all. The city thought it might widen the street at some future date and so they imposed an additional setback of 15 more feet from the street. The usable length had shrunk from a potential of 125' down to only 60'! The property would now accommodate a 3-bay wash (3 bays each 16' wide with a 10' wide equipment room) if I placed the building lengthwise on it. So, hard to deter as I am, I thought I'd use the 80' of width and squeeze in a 4-bay. Especially so when I was informed there was a new regulation requiring 5 cars of stack up room behind each bay! While I could not build a building on the land required for setbacks I could at least use it to stack cars on. But the side setbacks took their toll. On one side 5' and on the street side another 25'. That meant there was only 50' of width on which I could build. So here was a commercially zoned piece of property containing 10,000 square feet of land and the largest possible building could only be 60' by 50'! That might work for a multi story office, but not for a long, narrow carwash. When you put a couple of bays on a 10,000 foot lot, that ratio of 5,000 feet to one bay is 3 to 4 times what is needed - playing havoc with per bay land cost. This is just one specific example of a generally common problem nowadays - namely, municipalities have become increasingly difficult to deal with. That foiled my attempt ... as well as the one before it. The earlier one would have involved a zoning change and - though in a different municipality - the city development staff there made it very clear they would oppose a carwash on my proposed site with all the fervor they could muster. I recall asking the director of that city office to take the city map and point to any location in the southwest quadrant of the city where he would approve a carwash. He looked at the map ... shook his head ... and then suggested I try another city!

SSCWN: Okay ... sure there can be obstacles to getting city approval for a carwash. But new carwashes are being built all the time ...even in your area, Pat. How do people do it?

P.C.: The city seems more willing to allow them in some areas than in others. Second, I suppose some carwash builders are better at toughing out the building permit and zoning demands than I am. I could name 3 or 4 people who'd do one in the southwest quadrant of this city ... if the city would grant the permit. I know of two people besides myself who have proposed them. All have been denied. Carwashes have had a bad reputation. And the politics of building them in certain areas are just very difficult. Besides that, requirements for very large stack up areas can force the ground costs way out of sight - too few bays and too much "dirt". How Much Is Too Much To Pay For The Land?

SSCWN: So how much is too much to pay for the "dirt' ... the land? How do you determine how much you can pay for ground for a carwash?

P.C.: Before dealing with actual land costs allow me to make four introductory points about evaluating any potential investment.

Point One: To an investor the critical bottom line question is - What can I reasonably expect to be the annual Rate of Return on a proposed investment? Rate of Return on investment is a clearly defined financial concept. It is determined by dividing the net annual profit from the business by the total amount of the investment. Invest $10,000 in any venture, a year later receive $1,000 in profit and you have earned an annual rate of return on investment of 10%. Of course evaluating proposed business like carwashes is not that simple ... as you'll soon see.

Point Two: Basic investment theory states that the annual Return On Investment should be directly proportional to the risk involved in the investment. The higher the risk, the higher the expected rate of return should be. Carwashes can fail - "go belly up". There is risk in investing in carwashes ... certainly more risk than investing in government guaranteed Treasury bills. Therefore, logic and economics demand that folks considering investing money in carwashes should expect a substantially higher rate of return on their money than "safe" investments - like T-Bills or CD's.

Point Three: Starting, buying, or investing in a business like carwashing can be motivated by all sorts of vastly differing concerns. Some people start businesses primarily because they want "to be their own boss". To such people the rate of return on investment is a secondary concern. Some people buy businesses (or start or invest in them) because they cannot find a job. Or because they took early retirement and are bored. Or because they have kids or other relatives they would like to see put to work. For some people owning a business fulfills a psychological need or a lifelong dream. Their concern about annual rates of return can be minimal. To some people, if the business will simply generate enough profit to pay the necessary bills and "feed the family" they will deem it a "success" ... regardless of ROI. These kinds of personal needs and concerns are not well suited to financial analysis. They are real, genuine, and meaningful to the people involved. But they defy financial analysis. They're so very personal. How does one assign value to "being your own boss'? I can't. But I will address the fundamental economic notion of Annual Rates Of Return on carwash investments.

Point Four: The financial analysis of any business has to follow the same general outline. The five steps in the analysis are: Stepping Into Analysis

Step 1 - Based on known facts about the type of business being analyzed, how much can a potential investor/owner reasonably expect to take in each year? In business terms - what are the projected Gross Annual Revenues?

Step 2 - What fraction of the Gross Annual Revenue is commonly needed in this type of business to pay for the costs of operating it - the Annual Operating Costs?

Step 3 - Deduct the annual operational costs from the gross annual revenues and the difference is the expected Annual Operational Profit.

Step 4 - Divided the expected Annual Operational Profit by the total amount of money invested to determine the annual Rate Of Return.

Step 5 - What do the numbers mentioned in the first 4 steps tell a potential investor? How can they be used to determine what is a fair and reasonable amount to invest in a carwash? Calculations based on these numbers will dictate reasonable land, building, and equipment costs. Summing Up - A potential investor/owner, expecting to make a reasonable rate of return for the risks involved in carwashing can use projected gross annual revenues, expected operational costs and some math to determine how much is reasonable to spend on a carwash project. That's what I propose to do starting with Land Costs.

SSCWN: That sounds fine, but let me make two requests. I know you'll probably include it, but, in addition to land costs, tell us how to determine what makes a good carwash site. And second - you may not like this - for our readers not fond of mathematical calculations and statistical analysis, can you give us some "quick and dirty" rules of thumb about costs. We all know that could oversimplify a complex situation and may not explain all the how's, whys and wherefores of the conclusions. But those rules of thumb are about all the math some of us can stand. No offense intended to those who are mathematically inclined, but you math teachers (Pat's a math prof at a local college) sometimes overdo the number stuff. "Quick 'N Dirty Rules"

PC: I'll do just that. I'll start with my own "quick and dirty" rules of thumb and then and only then dig into the details. You're about to see that's almost always how business people begin their evaluation of a proposal. Only if it passes the "quick and dirty rules" is a proposal worthy of detailed analysis. Here we go on land costs ... Don't spend more for the land than you have good reason to believe the carwash will take in each year. Land cost should not exceed projected gross annual revenues. Here's how to make your best estimate of gross annual revenues. First, I'll show how I do it for my area. And then I'll give data about other parts of the country. But in the end, each investor has to make his own estimate for any particular site. First, you need to know the average Price Per Minute for self service carwash cycles in your locality. To determine that you simply go to several representative carwashes and check out their pricing. Time the cycle and divide the number of minutes you get into the cost of that cycle. Here in Kansas City the average price is about 33¢ a minute. The most expensive I've seen is about 40¢ a minute and the cheapest I've found is still just over 28¢ a minute. In averaging the results of 5 or 6 local carwashes it would be wise to drop out the data for the cheapest and most expensive. Once that's done you have the average cost per minute for your area. In Kansas City that figures out to be just a little bit more than a 33¢ a minute. On the East and West Coasts it can be double that or more ... and even here it's finally trending up. A potential carwash investor should base his income projections on that number ... on his market's average Price Per Minute. To start a business believing you could charge substantially more than that would be very risky indeed. I'd have to hear strongly compelling reasons before I'd ever believe I could start a successful carwash and charge substantially over the market average for a given area. I'd advise anyone who's considering that to cite the reason why he believes one can charge more and then test the theory on people. Ask people if they would pay half again as much to wash their car at a carwash that was super fancy or lavishly decorated ... or whatever. I'm sure there are exceptions, but I just don't believe self service carwashing targets the luxury market. Bottom line - knowing what price a given market will bear is a key factor in evaluating a proposed carwash. Back to the point ... once you know the standard for carwash pricing in your area: Multiply your market's average PPM (Price Per Minute) times the number of MPD (Minutes Per Day) each bay can reasonably be expected to operate. My personal data - based on my almost 30 years in the business and owning 8 self serve carwashes - tells me the range can be from as little a 100 MPD to as high as 200 MPD. Narrowing The Range that's too broad a range to evaluate a particular site in a specific region of the country. To provide more specific information, I used some basic math in combination with data compiled in the 1996 self service carwash statistical surveys published in "Professional Carwashing and detailing" (Latham, New York) and "Auto Laundry news" (New York, New York). I developed these broad regional guidelines for the number of Minutes Per Day an average bay operates: REGION Average MPD Northeast 100 MPD Southeast 132 MPD Great Lakes 152 MPD Plains 115 MPD Mountains 92 MPD Southwest 138 MPD West 145 MPD For purposes of projecting carwash revenues I believe these numbers are as reliable as any we can obtain. I'll be the first to grant that any statistical survey can have biases and errors. Personally I found them credible after checking these numbers against my own operations. What this tells me is that if I want to consider a new carwash in the Plains region I should base my projections on about 115 MPD of operation for each bay. Further, It's pretty clear that anyone basing projections on the basis of 200 minutes of operation for each bay each day is dealing lots of "blue sky". Not impossible ... just unlikely. The further you go beyond these averages the less likely it is to happen. At this point, a potential new carwash faces two bench mark numbers. First, the Price Per Minute which is being charged by the competition in the specific area. Second, the average number of Minutes Per Day that carwashes in that region are currently operating. These are critical factors in determining projected Gross Income - which determines what can be realistically spent on any project. Take for example an area where 30¢ is the common Price Per Minute and each bay can be expected to operate 100 Minutes Per Day. The projected daily revenue per bay would be $30 (.30 X 100). Based on that, a 6-bay would generate $180 a day and produce annual revenues of $66,000. To obtain the total annual revenues, income from vacuums and vending must be added. Based on surveys, personal experience, and anecdotal consensus such revenues range from 15% to 25% of gross wash receipts ... so I use 20% as a working average. That works out to be $13,200 in this example giving us projected Total Annual Revenues of $78,840. So it's likely that this 6-bay would produce in the range of $70,000 to $90,000 per year. Of course, you need an appropriate carwash site to produce appropriate income ... Competition And Demographics To sharpen the focus to a particular proposed site consider Competition and Demographics. Existing competition is known. Future competition is unknown. But there is a fundamental rule of economics which states excessive profits can breed ruinous competition. To believe that the absence of present competition means a virtual monopoly is foolishness. Moreover, how the existing competition will react is difficult to predict. Will they completely update while you're under construction and cut prices as soon as you open? To me what is necessary is demographic data demonstrating that there is sufficient customer base to support at least as many bays as are currently in the proposed area as well as the new ones you're considering adding. I know of case after case where there are simply too many bays in a given area and the business winds up being split so many ways that it's very difficult for any of the washes to be more than marginally profitable ... at best. Demographic data is available. Many municipalities will provide the data. The local Chamber of Commerce can be a good source to find out what info resources are available in a city. Libraries will have it in the form of census statistics. And there are companies that specialize in such service. Here are two firms that I know of that provide such data: National Decision Systems (619-942-7000) and Equifax Marketing Decision Systems (800-877-5560). Your Yellow Pages may list others providing these services. Such companies will take a specific location by street address and provide the numbers of households with in a one mile (to three mile) radius of that location. They can break out the data by age, by sex, by race, by income, by property value, by marital status ... almost any way you'd like it. The data is to be primarily used to determine if there is a sufficient customer base close enough to the proposed site to support additional bays of self service carwashing. The are no absolute rules of how many customers will be sufficient. My own bench mark figure is that within a 2 to 3 mile radius of a proposed site I want 10,000 people for each existing and proposed bay of self service carwashing. If there are too few people or too many existing, competing bays then the site becomes questionable. I'm sure there are knowledgeable carwash people who will find my bench mark figure too high. Some will say it is "way too high!!!" And I know there examples aplenty out there "proving" it to be too high. Let me admit I have here an urban figure - not intended to be applied to small towns but to cities.

Supply And Demand Rule I defend my figure on these grounds: I've seen many self serves go belly up ... most often due to competition which can get terribly fierce in this business. Supply and demand always rule! To believe that somehow a new wash will kill off the competition is silly. Equally silly is the "Build it and they will come" philosophy. Prudent financial judgment states otherwise ... especially for carwashes. Those who point to fast food restaurants and suggest that they group themselves close to one another are correct. But the trend is that people are eating out more and more. I do not believe there is a trend toward washing cars more and more often. Everybody eats several times a day ... every day. They wash their cars only when they're dirty and only when the weather is favorable. Moreover a variety of foods appeals to people's tastes in a way that carwashes are not apt to appeal. Finally, my reading of the fast food industry suggests their level of competition has put the squeeze on their profits. We need to kill the myth of any correlation between carwashes competing and fast food restaurants ... yesterday! I'll offer one final defense of this figure. I hope it won't sound immodest to state my revenues are well above average. Some part of that is good management. But most of the success is due to the fact that there is a sufficient customer base for me and my competitors to divide. Our level of competition is not so fierce as to dictate that any of us MUST take the other's business in order to be successful. Build where the customer base is thin if you like. Tell yourself the neighborhood will grow. Tell yourself that people will flock to a new wash because it's new and going to be exceptionally well managed. Tell yourself carwashing is like fast foods and that skilled promotion will attract customers from a far. In my opinion, such hopes rarely overcome an inadequate supply of customers ... nor do much to compensate for too many bays for too few people. Defy the law of supply and demand at your own peril. Still More Site Evaluation Factors A sufficiently large customer base is the first requisite, but there's more to site evaluation. The type of customer base, the traffic count, and the visibility are all factors. I'll illustrate each with examples...

TYPE OF CUSTOMER TRAFFIC: I know of a local wash built just a few years ago where there were ample people within a 2 mile radius of the site. The people did not mainly live within 2 miles, but worked within the area. The particular site was within view of one of the most successful convenience stores in the city - open 24 hours and very busy. Moreover there were people coming and going around the clock because many of the commercial enterprises there operated 24 hours a day. The wash, however, has been only marginally successful. To me it tested the theory about whether people would be willing to wash their cars on the way to or from work. In the main, that's not when and where people wash. For whatever reasons, they tend to wash close to home. The best type of customer base is households - the proverbial "rooftops" - and obviously those households need to own cars. All of which is to suggest that mere numbers of people near a proposed site is not necessarily sufficient. Clearly downtown New York would have great population density. But few of these people own cars and the land costs would make a carwash totally unrealistic.

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