A host of big-picture economic trends are driving today’s business environment. From labor costs to consumers’ buying habits, what do car wash operators need to know to stay ahead of risks and take advantage of favorable circumstances?
Good Times Today, but Be Ready for Tomorrow
Times have been good, not just for the car wash industry but for most sectors, and the economy is moving along exceptionally well. “The U.S. economy is thriving with record levels of activity,” said Connor Lokar, an economist at ITR Economics. Whether measured by the gross domestic product or industrial production, the economy is gaining speed and that’s been the case for a couple of years. Since about mid-2016, things have been building and bubbling with an accelerating growth trend that’s intensifying.
But (you knew there was going to be a but) nothing lasts forever. “It’s cyclical in nature, and we find ourselves coming toward the tail end of the accelerating growth phase of the cycle,” Lokar said. He anticipates growth to start slowing as we move into the later stages of 2018.
Before images of the Great Recession begin to replay in anyone’s head, Lokar said that’s not what we’re headed toward. Instead he described an anticipated period of turbulence in 2019, one that should be much different from the extraordinarily difficult times of the mid-2000s. “It won’t be either that severe or that long,” Lokar said. Having cash on hand could be important if the upcoming dip makes cash flow a problem, as Lokar said car wash operators may see slower growth than most have enjoyed recently. “Economic distress will pick up, but it will be subsided by the middle of 2020 and then it’s back to the races. It’s a speed bump or a blip at this point rather than a calamitous event.”
Evolving Investment Patterns
Chris Buscaglia, vice president and general manager of Zoom Car Wash, a two-location business in Stockton, Calif., said the car wash industry is certainly growing as a whole. Low interest rates are drawing attention from all over the map, and he sees a mix of investors in the car wash sector that fall into two general buckets. About half are independent investors – entry-level, mom-and-pop operators who view the market as an opportunity. “The other half of growth is coming from venture capitalists or private groups that are funded with private equity money,” Buscaglia said. These investment forces are coming in and “building car washes all over the place.” Buscaglia said they’re also behind many of the chains that are opening in multiple locations, some of which he anticipates are being built and positioned for an ultimate sale.
Economic distress will pick up, but it will be subsided by the middle of 2020 and then it’s back to the races. It’s a speed bump or a blip at this point rather than a calamitous event.
As the owner picture shifts, Buscaglia believes there will always be a market for full-service washes but he expects to see additional consolidation in the short- and medium-range timeframes.
“They will get expensive,” he said of full-service wash facilities. As minimum wages rise and real estate prices continue to shape the financial picture, operators may need to reevaluate their offerings. “Some people won’t be able to charge enough so they will go out of business or convert to express wash,” Buscaglia said. A larger number of investors coming into the sector may also opt for the less labor-intensive express model, possibly changing the competitive picture in local markets.
Changing Workforce Pressures
The labor market is undergoing some dramatic shifts, and while there have already been ripples across the car wash industry, it’s likely that operators haven’t yet felt the full effects. Buscaglia said he’s already seen a tightening of the job market. He employs a good crew and doesn’t experience a lot of turnover, but finding motivated, responsible workers is increasingly difficult.
With wages consuming more than a third of revenue across the car wash industry according to a recent IBISWorld Industry Report, changes in labor costs are also worrying some operators. At the state level, issues such as universal health are adding to the concerns. “California is also talking about predictive scheduling,” Buscaglia said. Workforce costs are also going up in a number of cities where minimum wage laws have altered the landscape and other municipalities are considering similar action.
Workforce strains have been a constant source of anxiety for the past several years, largely coinciding with the economic acceleration. “That’s been pushed to the hilt and intensified, and it’s not something that’s going away,” Lokar said. Given the escalating employment costs – coupled with the temptingly low price of financing – more operators may consider a transition to touchless car wash bays and other labor-saving equipment. “It’s making more sense to move toward the automation front and making that bigger investment,” Lokar said. The fast food industry, a canary in the coal mine when it comes to labor issues, is already making inroads toward kiosks and other automated processes. In the coming years, more car wash operators may also explore a similar route.
Shifting Consumer Behaviors
As always, consumers’ responses to economic trends have the potential to impact car wash operators as much as the trends themselves. Knowing the U.S. economy has been strong, it should be no surprise that most people are feeling pretty good about things at the moment.
According to the University of Michigan’s Surveys of Consumers, consumer sentiment in July 2018 was 97.9, which was a decline of 0.3 from June’s metrics but still above the start of 2017 (97.4). A strong employment market and good income figures are helping to maintain consumer confidence. However, worries about inflation, rising interest rates, and the effects of tariffs and the trade war may soon begin to erode some of that positive outlook.
Though wages are up, prices are also on the rise, which is putting consumers in an interesting position. “Consumers are facing a multi-pronged inflation attack that’s affecting their earnings and their spending potential,” Lokar said. “It nets out to almost no increases in actual spending and earning power.”
Seemingly small increases – a few cents extra on aluminum, for example – can cause concerns about how much consumers will need to spend on everything from canned goods to appliances and vehicles. “That’s eating into the consumer and mounting pressure to start affecting their decision making because of money lost elsewhere,” Lokar said.
Rising interest rates, though they’re still generally quite attractive, are another issue influencing everything from home ownership to credit card payments. “All of those microscopic cuts are building up on the consumer,” Lokar said. “We feel they will just keep building and ultimately lead to bit of a pause in economic growth.”
Discretionary spending is usually the first thing to suffer when consumers begin to pull back. If car wash operators haven’t felt they’ve needed to pay close attention to the economy over the last five or six years, Lokar said they should pay attention in the next 18 to 24 months. This is the period that’s estimated to include some pullback before we move into an extended swing of growth.
A strong focus on convenience, however, may continue to convince people to maintain their use of car washes even as inflation starts to take a toll. “Car washing is embraced by the consumer as a time saver,” Buscaglia said.
Offerings such as subscription-based pricing are one approach that could prove useful, where customers know how much they’ll pay up front and they can then manage their use to fit their needs. “It’s a good way to tie in that customer so they don’t go somewhere else in between,” Buscaglia said. Looking at the long term and building loyalty now can make a big difference when it comes to offsetting consumers’ concerns when economic pressures come around again.