Childcare Plan

Question #1: Is the car wash industry an attractive industry for consolidation? Why? Are there potential economies of scale in the car wash business? What are the potential hurdles to a roll-up strategy?

Barriers to entry in the carwash industry have historically been considered low, due to low capital investment and little regulatory control. The car wash industry is highly fragmented and unorganized. Many car wash operations are family-run businesses. Some owners have more than one car wash establishment, typically all held in a certain state, territory or geographic region. As noted in the case, only 1.2% of exterior-only and full-service operators owned 10 or more location and 8.7% owned four to nine locations. ^[1] With the large amount of competition in the industry, consolidation is an attractive strategy.  There is an opportunity to consolidate the small players and create a national or regional chain of car washes under the same brand.

There are some economies of scale in the car wash business, but not many. First, the back office functions of the car wash industry are an area where economies of scale can be leveraged. Utilizing the same human resources, marketing, advertising, and finance offices for several car washes would reduce overhead and administrative costs. Through economies of scale, there is a possibility of keeping costs low by buying suppliers and equipment sin bulk and leverage relationships with suppliers. While there may be few economies of scale in the industry, the expertise of the industry can assist with successfully maintaining and operating several car washes.

There are several potential hurdles to a roll-up strategy. First, this strategy assumes that you will be able to leverage economies of scale and cost reductions. Additionally, the successfulness of the strategy is dependent on the ability to upgrade or improve the current operations of performance of the car washes acquired. More importantly, the improvements to the operations of the car wash must provide value to the customer. In the car wash industry, the profitability of individual car washes depends on having a favorable location and efficient operations. Therefore the roll-up strategy really depends on the ability to acquire car washes in a desirable location and large customer base.