Mastering Car Wash Metrics for Premium Valuations with Chris Jenks, CFA Part 2

Unlock the secrets to achieving premium valuations for your car wash business in this deep dive! Chris Jenks, CFA details the essential KPIs and metrics that sophisticated buyers scrutinize. Learn how optimizing customer lifetime value, managing acquisition costs, boosting labor efficiency, and leveraging strategic trade area insights can dramatically increase your enterprise value. This is the second episode in a three part series that is packed with actionable advice for operators looking to professionalize their business and maximize its appeal to investors.

What You'll Learn:

• The "flywheel metrics" of a subscription model: conversions and churn.
• How to calculate and significantly impact Customer Lifetime Value (CLV).
• The importance of Customer Acquisition Cost (CAC) and its relationship to CLV.
• Analyzing Revenue Per Car (RPC) within your local market context.
• Strategies for optimizing labor efficiency and minimizing margin leakage.
• The critical role of trade area quality and regional trends in valuation.
• The habits of top-quartile operators for consistent success.

Transform your car wash operations for sustained growth and maximum profitability.
#CarWashBusiness #BusinessMetrics #KPIs #ValuationStrategy #OperationalExcellence

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Transcript

SPEAKER_01 0:04

Yeah, there's a pretty consistent spread of about 250 to 300 basis points in a premium. And that premium just isn't simply about size. It reflects what scale enables, right? Which is denser operations, stronger management infrastructure, better customer acquisition strategy, and just overall more strategic relevance to buyers. But the multiple is often where the biggest value creation opportunity lies. You can't control where the market multiple is, but you can absolutely control how you position your business for premium multiples based on the KPIs and metrics that matter most to the buyer pool. Because these are really the two flywheel metrics of your subscription model. Conversions tell you how effectively you're adding members, while churn tells you whether the bucket is leaking faster than you're filling it. All right. Next want to focus a little bit on customer lifetime value. And you know, customer lifetime value tells you how much revenue the average member generates over the life of the relationship. And, you know, it's a simple but powerful measure because it combines pricing, retention, and customer value into one holistic number. And it really helps to shift the focus from how many members do I have to how valuable are those members, right? I think a lot of operators they get focused on just hitting, you know, I want 4,000 members, I want 5,000 members. But this really helps shift that focus to what is the value of each individual member. And in general, the stronger the lifetime value, the more attractive the membership base looks to a buyer. Customer lifetime value captures things like revenue durability, right? So how long does a customer stay and how much do they spend? It's a really good measure of your loyalty strength. So understanding retention and satisfaction combined, as well as pricing power, right? It's the real value of your membership pricing strategy. So we have here a work example, which really provides some guidelines on what best in class should look like. You know, average recharge, about $28 a month. And in general, we're starting to see the industry kind of move in lockstep, you know, to increase their planned pricing. But I'd say, you know, $28 a month is a really healthy target. You should be looking at for your average monthly member recharge. Uh, with an average customer lifespan of 13 months, we'll we'll dive into that here uh a little bit more in a moment. But you put that together, if your average monthly recharge is $28 a month and the average lifetime of your member is 13 months, that would suggest that target number should be around $364 for your customer lifetime value. Now, a lot of groups, as I have conversations around customer lifetime value, is you know, well, this is great. I know my average recharge, but help me understand like how do I know what the lifespan is of my member? And you know, it's a good question. Um, you know, lifespan is simply the inverse of churn, right? Churn is a monthly metric. So if you want to understand what your average lifespan is of your membership base, if you know your monthly churn, all you have to do is take one and divide it by your monthly churn. So, example, if you're at that 7.5% mark, one divided by 7.5% would be 13.3 months. So that would suggest that the average lifespan of your member is in fact 13 months. You know, conversely, if your churn is lower, let's say you're in that 5% range, one divided by 5%, that would state that the average lifespan of your customer, if your member is 20 months. And, you know, I really want to highlight this because that means that just the smallest reduction in churn has a very, very meaningful impact on the economics of your business, right? If you can reduce your churn, your churn from 7.5% to just 6.5%, you see here the lifespan increases significantly. It's a material change. And that math compounds fast across a large member base. So the more units you have, the more scale, the greater the member count. If you start really honing in your churn and churn reduction, you can get really significant incremental and material impacts to the lifetime value of your customer base. And this is exactly the type of hidden value that buyers are modeling today, even if it's not obvious from you know high-level PL. So really, you know, message here is don't chase the next car, you know, build the next 13 months of revenue, focus on churn because that 1% reduction dramatically increases lifetime value. Right. So again, going back to that example of churn drops from 7.5% to 6.5%, that lifespan increases from 13 to 15 months. And you extrapolate that across, you know, membership base of, let's say, 10,000 members, that's hundreds of thousands of dollars in enterprise value creation. So again, this is the method every buyer is modeling behind the scenes and um definitely the metrics that you should be thinking about as an operator as you evaluate just the overall attractiveness and success of your business. All right, I want to pivot now to customer acquisition costs. And this is really this measures how much does it cost to acquire a paying member here. And I think this is important, right? Um, I think promotional efficacy is something that is not talked about a lot in the car wash business today. And in competitive markets, you may have, you know, competition and car wash operations that are trying to bring customers over by way of promotion and promotion alone. And, you know, in my opinion, that's a dangerous game, right? That's how you find yourself in the battle of, you know, race to the bottom. Um, at the end of the day, you don't you really need to understand what is the real acquisition cost of my customers and my members? And this should include really all direct and indirect costs tied to acquiring a new member. This includes digital ads, direct mailers, the price of the promotion itself, right? So if you're offering, let's say, you know, a very slick 99 cent, you know, first month entry point on a $37.99 uh, you know, a limited plan, that'd be a $37 spend rate that should be factored into your customer acquisition cost. Your onsite signage, any commissions or incentive payment that you offer to your CSAs and attendants and greeters, as well as any sponsorships. Generally speaking, this can be a catch-all for all marketing spend. It does not include programs or general brand expenses. You should only focus on the marketing spend and the spend in general of getting a new customer and new member in the door. So growth without understanding your customer acquisition costs is dangerous. If you don't know what it costs to acquire a member, you don't know if your growth is profitable. And sophisticated buyers look at marketing efficiency with a very fine tooth comb. They want to see discipline here and they want to make sure that the growth is sustainable that they're looking at, and that you're not just essentially buying your members, right? Um, which a lot of operators find themselves doing. So let's say, no, again, a worked example here, and this will provide some guideposts in terms of where you should fall. Let's say you spend $8,000 a month. And again, this is an aggregate spend that includes digital signage, uh, direct mailer, any promotional cost, uh commissions, sponsorships, $8,000 of that spend. Say over the course of that month you spend, you know, or you you convert to over 400 new plans sold. That would be a $20 customer acquisition cost. And again, this generally aligns with what good should look like here. Um, but the most important thing here isn't necessarily just understanding customer acquisition cost. It's understanding that relationship between customer acquisition cost to customer lifetime value because that really tells you what it costs to grow, right? CLV tells you what that growth is worth. Customer acquisition cost tells you what it costs to achieve that growth. Putting the two together really helps you understand your promotional efficacy. So you can run a promotion and a campaign that could add members to your subscription counts, but how much is it really moving the needle and generating long-term durable profits to your business? You know, maybe you run a heavily discounted promotion and you get great adoption, but if it's a high term promotion, this can be quite expensive to the business. So the one thing you really want to understand here is that relationship between your customer lifetime value and acquisition cost. In general, if you're, you know, 15 times greater from customer lifetime value or acquisition cost, you have a very scalable, profitable growth engine behind you. And this really means that every dollar you invest in marketing produces predictable returns. And that is the difference between growth that consumes cash and growth that creates value into your business. Um, so again, I think it's really important for operators to understand not just the lifetime value of their membership base, but the customer acquisition cost and understanding again, is the growth of my membership base sustainable and profitable? All right. Uh, next factor I want to talk about here would be revenue per car, often referred to as RPC. And it, you know, really revenue per car, it captures a mosaic of different factors. And I think, you know, one caveat here is we get you know asked this a lot, you know, where should my revenue per car be? You know, it really depends on your local market dynamics, to be honest. Um, mentioned before, I operate in Chicago. Chicago has historically been a $3 car wash market. Okay. Um, we are aggressively trying to bring our pricing up to where national averages are. Uh, but you really need to kind of think about RPC in the context of brand perception, pricing power, and local market dynamics. Um, higher RPC usually means customers see value in your premium offerings. It's a signal pricing strength, brand positioning, service quality. Um, but you know, really it's again, you have to understand it in the context of your local market dynamics. It also brings in and reflects membership mix and pricing strategy, right? So the more membership counts you have, the greater the usage of your membership programs. You generally see a decline in RPC. So there's a lot you can learn there in terms of optimizing pricing, not just on your menu for single washes, but your subscription washes and making sure that your members aren't overusing and understand that drain on your revenue per car. Uh, but in general, as we look at kind of what best in class looks like, you know, if you're in a value slash economy market, again, I often think about Chicago as being squarely in this market. Typical RPC is in that nine to eleven dollar range. Uh conversely, if you look at kind of mid-tier suburban with a balanced retail membership mix, you tend to see revenue per car in that $11 to $13 range. Uh, if you go to premium high income areas and a lot, you know, Mark Florida is a really good example. Certain markets in Florida, you know, Tampa, uh, good example here. You see strong premium plan pricing, high perceived quality. You could see revenue per car up to that $13 to $16 range. Uh, but again, really important to understand and review in this lens of RPC, because you could learn a lot from it. You could understand, again, uh the overall membership mix and strategy and whether or not that's effective in driving economic performance at site, but also understand the dynamics in your local market to optimize pricing. So, revenue per car, you know, certainly something uh that's worth evaluating, but also evaluating it relative to your peers in your local market to ensure that you're you're hitting levels that are optimal based on the market you operate in. On the topic of understanding the relationship of revenue, um, you know, I want to talk about labor as a percentage of revenue. You know, and I think labor efficiency is something that's really important. You know, most operators, if you look through your profit-loss statement, labor is the largest variable cost in most car wash models, right? Small changes in labor efficiency have a significant impact on EBITDA. Um, every 100 basis points of inefficiency can translate into a significant loss to enterprise value at an exit. Um, so buyers will look at labor not just as a cost line, but as just evidence of overall operational discipline and management quality. Uh, well-run labor models signals that a business is scalable and controllable. So I would definitely not sleep on these metrics here. Um, labor is a percentage of revenue, we'd say best in class is that 13 to 16% range. You know, that would have optimized scheduling, tech-enabled labor management, strong demand forecasting. Um, I just love having conversations with groups and how they approach their scheduling and labor models. You hear a lot of different interesting ways to be thinking about the deployment to labor and how to better match labor to your demand. And that's definitely something we see, you know, some of the best operators in the country is really efficient labor. Um, conversely, you know, numbers that would suggest you need to improve, you know, let's say you have a static schedule, um, you're really not matching labor deployment relative to the forecasted demand of your business, you know, north of 20% would suggest you probably have some fat in the PL. Uh, but one important thing here, again, you know, you have to think what's in the context of the store vintage too. Um, a Sage operator once told me never look at a PL in the first year of your operation. You can make some bad decisions, right? Um, so for example, if you're trying to manage a ramping store with a million dollars in sales to a 20% revenue target, you're probably gonna have to pull back your labor significantly, which will ultimately deteriorate that customer experience in the long run. So, you know, a little caveat here, everything we're looking at is in the context of mature, stable store performance and how to understand labor as a percentage of revenue for some of the best in-class operators in the country. And that number again falls in that 13 to 16% range. All right, looking at a different view of how to think about labor here, uh two metrics employees and cars per labor hour. So employees per labor hour tells you how many employees you have per every labor hour on site, where cars per labor hour tells you how many cars each employee will process, right? So EPLH tells you how many people are on the clock, CPLH tells you how productively they're being deployed. And you know, you really need to understand both metrics together. They're not in isolation. Um high staffing density with root weak productivity is one of the clear signs of margin leakage. And this is where a lot of sophisticated operators separate themselves. They understand demand patterns and staff to them. Um, you know, interestingly, I was in Florida probably about two to three years ago. Uh, really, you know, beautiful car wash, express car wash. Uh it was Wednesday afternoon, so not a tremendous amount of volume. You know, there are maybe, you know, two cars in the pay lanes, uh, one car in the tunnel, four or five cars in the lot vacuuming. And as I was looking across the store, I counted two employees at the pay stations. Uh, there's a loader. They had two employees floating across the lot, and one employee just kind of sitting around in the lobby of the car wash. And I asked the store manager, you know, hey, how many employees per labor hour are you averaging? And he looked at me like I had three heads. Came back two days later, sent me an email, you know, hey, you asked the question, want to look into it. We're at about seven employees per labor hour, right? So it's really important to understand kind of how you're staffing, how many employees you have on the clock relative to that bell curve of demand, which is incredibly relevant car washing, right? We all know that bell curve where you start with your early morning, you know, maybe you have a little commuter traffic here, but generally speaking, your volume is lower that tends to pick up as you kind of move into the evening commuter hours, which will then taper off as you move into closing. And that's why it's also really important to understand cars per labor hour, some good benchmarks for both. You want to have about on average three and a half employees per labor hour. And this would affect reflect, again, not static scheduling, but matching your employees per labor hour to just the needs of the business. You know, maybe you open with two, they could do all of your pre-opening routines. You bring that third employee in, you know, mid-morning, fourth employee in ahead of the afternoon rush, maybe bring in a fifth to offer some backstop support. And you move into your closing procedures, you start to pull employees back. In average, you're at three and a half employees per labor hour. Conversely, as we talk about cars per labor hour, you know, again, anything greater than 12 is a pretty good number here. So, based on you know, the number of employees you have on site, let's say you have four. If you're at 12 cars per labor hour, that would suggest that your volume's at about 48 cars per hour. Um, once you start breaching, you know, it's not on this slide, you want to be greater than 12. Uh, but once you start breaching, you know, 30 cars per labor hour, at that point in time, you may want to start reviewing, you know, hey, do I need to put more employees on site? Because that could put a pretty big strain on throughput if you're not properly staffed to manage that volume. So it's not necessarily, you know, getting that number as high as you possibly can. It's really straddling between that, that, you know, 12 to 20 cars per labor labor hour range here that's optimal. But as mentioned here, you know, it's not just about labor efficiency and utilization just to, you know, pull back staff and uh, you know, not waste payroll dollars. It's about managing and aligning labor to the demand of your operation and optimizing throughput, right? So managing scheduling and forecasting, having cross-location benchmarking too. I love incentivizing managers to this and understanding kind of which managers are better and more proactive in their scheduling versus managers that maybe are wasting a little bit more. Uh, but overall, you know, understanding that relationship between cars per labor hour and employees per labor hour and just revenue as a percentage of sales helps you improve productivity, helps you match labor to the demand of your operation. Even a one to two percent swing in labor percentage, given how much you spend can materially impact EBITDA. So, again, it's not about cutting people, it's about scheduling intelligently and understanding what my metric should be. Um, sophisticated operators often align labor with their traffic patterns, and that discipline translates directly into margin expansion. So, as we look at kind of what's ideal here just from an example standpoint, so you have five employees on the clock, uh, you're washing 100 cars per hour, you're at 20 cars per labor hour, your sales are about 14% labor, uh, labor's percentage of sales. That tells you you have the right people, the right time, productivity is high, and labor cost is low. That's optimal. If you're look at this, you know, let's say morning lull uh compared to the commuter rush. Let's say you have the same static scheduling, you have five employees on the clock, but you're only doing 40 cars per hour. That would suggest eight cars per labor hour. You see your labor as a percentage balloons out to you know north of that 20% mark, which would suggest that you have, you know, the same staffing, which means half the demand, and even a leakage, right? That's that's a big problem because every every operator should be focused on kind of margins, margin control, but more importantly, how do I better manage my labor to align it to demand, delivering this exceptional customer service, but doing so in a way where I'm not introducing too much bloat in my PL. All right. Next, I want to talk about trade area factors that really drive the multiple here. We talked a lot about different KPIs and metrics, and want to talk a little bit about now about some of the non-quantifiables from a KPI perspective. Um, I think you know, one of the most underappreciated drivers of evaluation in the car wash sector is just the general area, the trade area and the quality of the trade area. Um, you know, going back to what we're seeing today in terms of drivers of consolidation, you know, I talked a lot about discipline and kind of fundamentals being important today, focusing more on quality over quantity. A lot of that is relevant in trade area dynamics here. Um so really understanding trade area quality. Buyers look closely at things like household income, commuter patterns, you know, your site location. A lot of these buyers will prefer that you are on the right-hand turn on the commuter pattern coming home from the highway. Um, really understand competitive white space, population growth dynamics, but you know, strong trade areas support better membership mix, higher RPC, and just overall better growth visibility. And again, you know, having more growth in the business equates to a premium multiple. So definitely understanding the trade area drivers and dynamics of your of your platform, certainly important here. You know, weak or overcrowded trade areas. So let's say you're in a town, you know, median income is 60,000, you have 30,000 people and five express car wash tunnels, you know, that could compress pricing power and reduce underwriting confidence and overall have a significant impact to your multiple. So you could have some of the best KPIs, but again, if you're in a trade area that doesn't have some of those markings of what would be considered attractive to in a buyer, um, you know, portfolio quality is ultimately built by, you know, site by site. Um, making sure you have those attractive markings are certainly, you know, important consideration here. And with that, also understanding kind of regional trends in white space. Um, looking back at where we're seeing just so much activity today, you know, the Northeast and Mid-Atlantic is a great example. You know, these are geographies that are generally speaking tougher entitlements, um, landlocked, not a lot of competition. You have a lot of good density within those markets and geographies. So as a result of that, we're starting to see a lot of interest again in the Northeast, mid-Atlantic, out kind of in Southern California, even the Chicagoland market. Um, so again, really important because not all growth markets are created equal here. So as we bifurcate kind of the country across four regions here, Southeast is you know, area remains highly developed, um, still attractive. You know, you have some pretty good secular drivers with population growth within the Southeast. Um, but as you look at you know, states like Florida, Georgia, you're starting to see some really competitive markets there. Tampa is a good example of having a highly competitive market. If you look across the broader Atlanta MSA, you know, definitely some high quality operators there. Uh, but again, the the geography itself is supported by population and migration. So certainly, you know, attractive feature for the Southeast. Uh conversely, if you look at Texas, you know, competitive market, you have a lot of scaled operators there. Um, so as you look at some of the kind of the major metropolitans, such as the DFW marketplace, um, really kind of um, you know, a lot of competitive intensity with the likes of you know quick quack growing aggressively within market there. You're starting to see, you know, more selective suburban and secondary markets offering opportunity there. Uh, but Texas, you know, really some great at-scale operators that are driving consolidation of that market today. So you look at the mountains southwest regions, you know, these regions continue to attract interest based on you know merging demographics and growing retail corridors, um, some similar markings to what we're seeing in the southeast there. You know, as you think about is Arizona, you have you know, cobblestone and superstar, who are two behemoths. Um, Nevada, you know, you have Wild Car Wash, that's a big player out there. Utah, Colorado, again, a lot of um, you know, attractive features, certain subsets within the mountain west, mountain and southwest. You're finding you know higher competition, but you do also see some expans attractive expansion zones, you know, with Utah, uh, Colorado, et cetera. And then finally, I've already talked about the Northeast Mid-Atlantic here. Um, remains comparatively underbuilt, you know, pretty big gap here in terms of meeting consumer demand. So that's creating some really interesting long-term white space opportunities. I think a lot of the buyer groups today are really focused on that region in particular. Uh, but again, point here, we can talk about operational KPIs, trade area, geography still matters a ton in this business, and it matters a lot. All right, as a round out here, you know, I just want to talk a little bit about what top quartile operators do differently than most. Um, you know, if we talk about you know platforms that we have transacted that sell to premium versus you know that may sell to discount, a few habits show up over and over again. First and foremost would be relentless KPI tracking. The numbers are reviews, reviewed weekly, they're actively managed, and frankly, you know, it becomes really the culture of the organization. Um, I will tell you the performance of my business changed substantially once I gave my teams optics in terms of the KPIs that aligned their performance with the overall performance of the business. Um, you know, use the adage all the time, you cannot measure manage to what you cannot measure. Um, so I think some of the best operators in the country are those that track relently to KPIs and they align their teams uh to performance that tie to those KPIs that they're trying to hit. Uh second is really a true membership culture. Conversion is owned at the site level and really incentivizing teams to aggressively build the membership based. Um, third, you know, commitment to maintenance. I cannot tell you how many groups that we see trip up as they scale their operations around their maintenance infrastructure, right? Um, if you deviate away from that golden 80-20 rule in which 80% of just your routine and preventabil maintenance is on-site with your GMs and your site-level employees, as you start to deviate away from that as you grow, you find yourself with this massive cost center in the business. Um, so I think having, you know, commitment to maintenance and appreciation and infrastructure that can support maintenance and having an on-site culture that appreciates the virtues of well-maintained facilities, you know, this is super important today. Um, telling you right now, deferred capex always shows up in diligence and it's becoming increasingly important for the buyer pool. So definitely don't want to don't want to sleep on the fact that having commitment to maintenance is critically important today. And then fourth, you know, professional financial reporting, you know, having clean books, having a disciplined closed process, having a quality of earnings ready of information, that's pretty important. You know, a lot of operators still will just get PLs annually through their CPA for tax returns. You know, better to have clean books with more frequent, you know, visibility and having a really strong financial muscle in your business that you can layer some KPI reporting over. Um, you know, I think this really kind of ties in that first point with relentless KPI tracking, but having professional financial reporting that you can layer insights over, um, you know, definitely a differentiator for top operators. So, you know, even if you never want to sell your business, building the business this way creates optionality. And optionality is king, and there is certainly a price for having that optionality in your business.

SPEAKER_00 25:02

Stay tuned for part three airing next week, where the discussion continues on another exciting episode of Behind the Business. Till next time.