New US car cleaning concept could wash its face in Europe

Investment management firm Henley Smart Investing is rolling out membership-based tunnel car washes in the US and the company’s CEO Ian Rickwood explained to Real Asset Insight’s Richard Betts why he believes this spin on car cleaning might have scope in the UK and Europe.

Investment management firm Henley was formed in 2006. “We started just before the GFC, which was interesting timing, and have really progressed since then. It’s been a very entrepreneurial journey,” said Rickwood.

In the UK, the company has a substantial social housing business, it has a value-add and opportunistic business in Europe and a value-add and opportunistic business in the US.

“In Europe we’re focused on two or three specific strategies at the moment with a very development-led focus.

“We’ve done many things over the years in the US. We achieved some scale in multi-family and were fortunate enough to sell out of our assets in 2021, which obviously proved to be good timing.”

Today the company is focused on car washes in the US.

“We’ve been in the car wash business now for about three or four years. The reason why we got into the business in the first place was because the macros were so strong. We like it because it’s a just-under $20 billion market; it’s growing at 6% CAGR (compound annual growth rate); there are about 60,000 car washes in the US and yet the single biggest brand has only about 440, so it’s incredibly fragmented. 

“On top of that, the unit economics are very attractive. You’re talking about a 50% EBTDA margin business. You’re talking about recurring revenue with the membership programs something like 80%. So it’s very attractive macros and very attractive economics.”

In the US, the market is split Rickwood says. First, there are the familiar gas station forecourt, “rollover” car washes “which do a pretty lame job to be honest”.

“There are ‘inbays’ which are self-service in which people use the hose and clean their own cars, which in a world where people are expecting things to be done for them is a declining space.

“The bit that we’re really interested in, and where the growth is, is the express tunnels where you can have multiple cars being cleaned at a time and it’s an incredibly quick and convenient service.”

He says this portion of the market represents about a quarter of the of the tunnel number in the US but about 50% of the value, “so that’s where the growth is and that’s where the story really is.”

Even within that portion of the market it’s still fragmented.

“Rather than seeing that as a challenge we see that as an opportunity because it’s a market that’s been around for a long time, it’s a market that’s been underinvested and the play here over the next 10-15 years is going to be about a mass consolidation.”

There are 60,000 car washes overall. Within the total there are 15,000 “tunnel” operations, so the top operator’s 440 is a very small market share. According to Boston Consulting the 15,000 figure is likely to grow to about 35,000 in the next 10 15 years “so that’s where the growth is and it’s where we think the consolidation is going to come,” he says.

Rickwood says that the way that most expansion has been attempted is through M&A activity. There are many “mom-and-pop” operators, and brands with three to five stores and he says that a lot of people have tried to expand by acquiring them. “At times it’s been successful.”

“But what also people have found, and what we found initially with our first investment, is it’s not as smooth as it might be because the tech is really very last century.” Rickwood explains that much of the software in use has not been very good, much of it is not controlled by the operator but by a third party company.

“So, when I buy your business and you own three car washes and you’ve got several thousand members, I suddenly find that for me to move you onto my POS system is very difficult to do, if not impossible, and there’s a risk that I will lose all of your members. If 80% of my revenue comes from membership, I lose those members and have to get them re-sign to get them back onto my POS, you can imagine the risk of losing revenue through that process. So  the integration has been far harder than people probably realise.”

He also says that the capital expenditure required to improve a store can often be more than people realise and does not always yield the level of revenue growth that might be required.

“So that whole M&A piece has started to dry up a little bit in the last 12-18 months in the car wash business, after about three years of explosive growth.”

Henley’s strategy is now different: “We’re all about green-field development. We’d rather take a piece of dirt and build the most cutting-edge, best-in-class asset that you can do. That’s the approach that we’re taking, green-field development over M&A. It’s probably the big pivot that’s gone on, it’s where we’re focused, and it’s where others are starting to look now as well.”

In Europe there’s less focus the membership side of the car wash business but Rickwood says judging demand is a case of looking at consumer needs.

“Consumer need is one of convenience. If you go into one of these express tunnel car washes it’s going to give you a very good quality clean but, in terms of time, if you’re a member you’ll be recognised straight away, you’ll be able to drive straight into the tunnel. The tunnel will do seven or even eight cars at a time, depending on its length, and from the moment of driving onto the lot to driving off the lot can be three minutes.”

He points out that this is “incredibly quick” compared to petrol station forecourt car washes where it may be necessary to buy a token or a code number, drive around to the car wash and perhaps queue behind cars, each of which will take about eight minutes in the car wash. “Before you know where you are, you’ve used up the best part of half an hour to 40 minutes. So the convenience factor is huge.”

A frequent alternative across Europe may be on an “often dodgy looking” industrial estate where a number of workers are waiting to hand wash cars. There may also be a queue and a spell in a waiting room “that you wouldn’t put your worst enemy in”.

So far there are few tunnel car washes in Europe and Rickwood says that there is considerable growth potential.

“I liken it to when McDonald’s first came to the UK. Back in the 1970s, no one had ever heard of McDonald’s and of course it was a revolution. All we had at the time was Wimpy. It was a revolution also like the arrival of Starbucks in the 1990s was to the coffee experience. Twenty years from now you’ll have a very vibrant tunnel car wash business across Europe.”