What They Mean for Valuations: Featured in AutoLaundry News
What They Mean for Valuations: Featured in AutoLaundry News
What They Mean for Valuations: Featured in AutoLaundry News
Deciding to purchase a car wash is an enormous decision. As a purchaser, you want a complete picture and all the most important boxes to be checked, including site location, current financials, traffic patterns, equipment quality, and age. Is this information well documented, and are resources widely available for evaluating these car washes? And what about membership programs? How can the data surrounding a pre-existing membership program be used when evaluating the purchase of a car wash?
Firstly, knowing what makes car wash membership programs work is important.
Nearly all car washes stand to benefit from the launch and proper implementation of some form of membership, loyalty, or unlimited program. The key word here is PROPER. The truth is, like most things if done incorrectly, membership programs don't work. The culprit responsible for most lackluster membership programs is improper structure and implementation, typically and specifically being at least somewhat pricing-related.
Unlimited membership programs continue to evolve within the carwash universe. According to the ICA's most recent Industry Pulse Report, "The mean price paid is $25 per month and unchanged year-to-date. Average frequency of washing by members is 2.6 times per month, unchanged from May '23." Despite membership pricing changes, the adoption of membership programs has never been more ubiquitous throughout the industry.
The single attribute that makes the largest difference in whether a car washes membership program will be successful is the level of commitment the ownership has towards making it a success. It’s a practical embodiment of the adage “in for a penny, in for a pound.” One must either do memberships or not. One can’t “kind of” do membership. Making a less than full-hearted, concerted, and committed effort will result in a small membership program that consists entirely of the least desirable members. The nature of membership programs, like memberships in airlines, gyms, and other industries, is self-fulfilling and inevitably ends up being based upon the principle of adverse self-selection.
When laid out properly, demystifying membership program success becomes a trivial exercise. Below is a rudimentary yet illustrative portrayal of the segmentation of car wash customers for a given wash and the value proposition they feel when presented with a membership or loyalty program offering.
As shown, the “heaviest users” (those who consistently wash most often) will always be members, hence their indiscriminate “YES” in the bottom row of the table. It’s important to note that they’re a “Yes” regardless of how memberships are priced. The overall relative size and cohort constituencies that make up a resulting membership program population based on pricing are best visually demonstrated.
The darkest of blues, the “Heaviest Users,” are present no matter the membership pricing level and structure. Practically speaking, it’s impossible to price a membership program at a level for which the value proposition to this population doesn’t make sense.
Memberships work, and car wash loyalty programs are indeed the correct course of action for the vast majority of car washes out there. When done and priced properly, the wash will convert the more attractive and higher-value customers, that is, the “Very Lite” and “Lite Users,” into members.
The golden goose of car wash membership programs is when a customer who otherwise washes once every three months opts into a monthly membership. A washer of such frequency would opt into (and retain) membership despite them typically washing so infrequently because the membership offer is priced at such an attractive rate that they can’t rationalize not being a member. All else equal, even if membership is priced at 1x single wash ticket price, over twelve months, annual lifetime value and sales from this customer have increased by 3 times (1x pricing 4 times a year versus 1x pricing 12 times a year).
As expected, this is also where the largest margin expansion occurs from a profitability perspective in relation to membership programs. It’s this, the conversion of these “Lightest” and “Light” users into members, that offsets and drowns out the potential downside and relatively lower attractiveness of the unavoidable “Heavy” and “Heaviest” users. Of course, this is done synchronously, increasing the top and bottom lines to the most significant extent.
It’s important to keep this in mind when analyzing the state of a current membership program at a wash being evaluated for purchase.
Although incorrect pricing is the most common reason membership programs fail to succeed, many other causes exist. Other reasons include:
These other causes are less frequently responsible, far more qualitative, and, therefore, more difficult to gauge when evaluating a car wash for acquisition purposes.
The conclusions drawn from a pre-existing membership program depend on its current state and level of success.
A thriving membership program provides a car wash purchaser and future owner with a customer base that’s “theirs to lose.” If a new operator and owner, whether under the informal tutelage of the current owner through transition, the reverse learning from a shared unchanging site manager, or just from personal efforts, decides to make no changes, current membership levels provide a floor as to what the new owner and operator can expect moving forward. This, of course, is limited to times of stability on both a micro (new competition) and macro (state of the economy) basis.
The mere existence of a failing or subpar membership program alone is not enough to draw any conclusions. The valuable insight lies in understanding why the membership program is not doing well. Of course, the first thing to check for is incorrect pricing, but other potential reasons and causes should also be understood and explored.
If a new prospective owner is unwilling to change what is currently causing subpar program performance, this new owner should not expect a change in membership adoption. If the new owner can identify the root cause of a membership failure and wants to invest the resources to correct it, membership can and will revert to its proper level and potential.
The numbers, figures, and attribution rates of a subpar membership program alone provide no information or value to a prospective purchaser. Its performance is so good because it allows purchasers to be confident in their future projections and have the ability to change current performance.
Lastly, some car washes currently have no membership program of any sort in place. The non-existence of a membership program at a car wash is not a negative. Rather, it establishes an even stronger and more meaningful proverbial “floor” of performance than a successful membership program provides. This is because non-members are more resilient and “loyal” than members are over the long term and through exogenous shocks to the system.
The details as to why this is the case are topics that academics and tangential industry experts have written about and explored for decades. However, it suffices to say that consumer affirmative purchase actions (non-member single wash purchases) are stronger revenue sources than purchases due to a lack of action (members on recurring programs). This higher level of predictability, which can be attributed to non-members over the long term, is the reason that the non-existence of a membership program actually allows a prospective wash purchaser and future owner to put heavier and more confident reliance into financial figures when modeling and projecting for the long term or any downturn based pressure.
Many prospective purchasers looking to enter the car wash business view a wash without a membership program as a red flag and a sign that membership programs “don’t” or “wouldn’t” work at that wash and site due to some nebulous and intangible reasoning. Do not fall into this trap, as that is truly never the case.
Everything in life is easier said than done, and a car wash operator often doesn’t want to make the leap of faith and devote the resources required to do membership properly. There are indeed instances where a wash would incur net margin compression due to the introduction of a membership program. Still, the absolute levels of profitability (in addition to top-line) would increase simultaneously, resulting in an overarching and significant net positive for the owner.
The most common reason a car wash does not have a membership program is the current owner not getting around to it, not because memberships "do not work" or are “viable” at that specific wash.
The presence and performance of a car wash's membership program offer valuable insights when evaluating a potential acquisition. However, it's essential to recognize that the weight placed on this information should be carefully considered, as its value depends heavily on the program's current effectiveness and stability. A well-maintained, high-performing membership program can positively impact the car wash’s overall value, while an underperforming program may contribute less to its valuation.
Car Wash Advisory provides in-depth expertise in evaluating how pre-existing membership programs impact car wash valuations, offering insights into these essential data points. By thoroughly analyzing the program’s performance metrics, our team can help you determine the potential value and risks associated with each acquisition target.
Car Wash Advisory is an M&A firm solely dedicated to serving the car wash industry. Contact us to learn more about our car wash M&A firm.
Private equity doesn’t always “work.” Hopefully, this comes as no surprise. Private equity’s involvement in the car wash sector is no exception. The formula that combines outside money, tenured industry experts, and a fitting and applicable industry is far from infallible.
Private equity doesn’t always “work.” Hopefully, this comes as no surprise. Private equity’s involvement in the car wash sector is no exception. The formula that combines outside money, tenured industry experts, and a fitting and applicable industry is far from infallible.
