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Why Private Equity Is Buying Up Car Washes – The Journal.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Kate Linebaugh: Our colleague Miriam Gottfried never goes to the car wash. Do you own a car?

Miriam Gottfriend: No. I own a Vespa, which I would not recommend taking through a car wash,

Kate Linebaugh: But Miriam does have some memories of going to the car wash as a kid.

Miriam Gottfriend: I actually have a friend who, when he was a kid, he wanted to go to the car wash every year for his birthday and so we would go to the car wash for his birthday.

Kate Linebaugh: What was that like?

Miriam Gottfriend: You know, it’s so fun. You get to like line up your wheel onto the conveyor and then you put it in neutral and you just kind of like let it go through. And then you get to watch all the brushes sweeping over the window and you come out clean.

Kate Linebaugh: In those days, car washes were different. She remembers her parents going inside to pay a cashier and after they’d head out of the car wash a swarm of employees would dry the car and wax it. But now-

Miriam Gottfriend: You pay by sticking your card in a machine, you pay for whichever type of wash you want. You make a selection. The gate opens, you drive up. There’s one person standing there who gives you the thumbs up when you’re ready to go and makes sure your wheel is in the conveyor. And the machines do everything that you paid for.

Kate Linebaugh: And this evolution has caught the attention of a very different industry.

Miriam Gottfriend: Driving around the street, you go to the car wash. You don’t think, oh, what if this car wash is owned by private equity? But chances are these days it is because it’s such a popular investment for private equity.

Kate Linebaugh: Welcome to The Journal, our show about money, business and power. I’m Kate Linebaugh. It’s Friday, August 19th. Coming up on the show, why private equity is buying up American car washes.
Car washes are nearly as old as cars themselves. They date back to 1914 when two guys from Detroit set up what was then called an automobile laundry.

Speaker 3: … car care. In regular auto laundry cars go from bath to shower and then get additional hosing down. Car laundries crop up in all major cities and, with crews constantly scrubbing and rubbing, dusty car came clean in one minute.

Miriam Gottfriend: At the very early, early phase of car wash history, they might have 10 or 12 people who would have to actually physically wash the cars or dry the cars

Kate Linebaugh: And push them through.

Miriam Gottfriend: And push them through or pull them through on a chain. You know, there were all different stages of this innovation process.

Kate Linebaugh: Pulling cars on a chain and physically washing them, that meant paying a lot of people. And with driving taking off in the ’20s, ’20s, and ’40s, these car wash businesses looked for ways to automate.

Miriam Gottfriend: The drive throughout the arc of car wash history has been to reduce the number of people who needed to be involved in washing a car. Because when you do that, your margins go up and you get more consistency in terms of the evenness of the water and you waste less water if a machine does it, because it can spray just the exact amount of water, the exact amount of chemicals. Basically the evolution of the car wash is sort of a process of mechanization. It starts with people doing most of the stuff and it ends with machines doing most of the stuff.

Kate Linebaugh: That process has been going on for decades. The first automated car washes opened in the 1940s and innovations kept coming.

Speaker 4: The oscillating nozzles bathe it completely with detergent. You can actually see the surface dirt as it’s stripped off and washed away. And now you see the side brushes going into action.

Kate Linebaugh: Car washes developed conveyors to guide cars and overhead brushes to clean the roofs.

Speaker 4: The top follower brush really does an effective cleaning job. It follows the contours of the car, cleans the v-strip on the windshield which is often missed. It has a gentle touch and doesn’t even disturb the windshield wipers.

Kate Linebaugh: And those car washes were so popular that more and more started popping up all around the country, including in Miriam’s home state of Oregon.

Miriam Gottfriend: Oregon did have a car wash pioneer, a guy who designed and made a lot of the machines for car washes.

Kate Linebaugh: And he had a car wash chain called Rub-A-Dub.

Miriam Gottfriend: Which I never went to, or maybe I did and I just don’t remember.

Kate Linebaugh: I think you’d remember. Rub-A-Dub is a pretty great name.

Miriam Gottfriend: It is a great name. That is one good thing about car washes. A lot of them have great names.

Kate Linebaugh: So many great names like Wiggy Wash, Quick Quack, Golden Nozzle, Wash and Roll.

Miriam Gottfriend: Over time you’ve kind of evolved toward having fewer and fewer actual humans necessary at a car wash location. Drivers go through without having to really interact with any person, and they’re completely fed through and no humans have to touch their car. And the whole point is volume. You want to have as many cars go through as possible.

Kate Linebaugh: Car washes had cut down on labor costs, but their revenue was still unpredictable.

Miriam Gottfriend: You had uneven revenue because, if you think about it, on a rainy day nobody gets their car washed. On a snowy day, nobody gets their car washed. So depending on what market you were in and what kind of weather you had, you could have very uneven sales. You could say, oh, I have 10 people scheduled to work today to wash and dry cars, but it’s raining. And now all these 10 people are sitting here and I’m not making any money and I’m just having to pay all these people. So you could have some days that were very low profit.

Kate Linebaugh: But they can’t fix that. I mean, they can’t stop the rain.

Miriam Gottfriend: They can’t correct for rain, but in a way they can. And the way they do it is through subscriptions.

Kate Linebaugh: Subscriptions for a monthly fee. Drivers can go to the car wash as many times as they want. Take Brown Bear Car Wash in Seattle. The top tier, called the Beary Best, is 44.99 a month. That compares to $18 for a single wash.

Miriam Gottfriend: And those people who have a subscription just pay in advance. It’s charged to their card, just like your Netflix subscription. And when you show up at the car wash, you have a little sticker on your windshield and a machine reads that and it lets you go in without even needing to do anything, because you’ve already prepaid. And people go, people use it. They go like three times a month on average, I’ve heard. And it doesn’t matter if it rains, you know, half the month. They are still paying.

Kate Linebaugh: What has all this automation meant for the business of car washing?

Miriam Gottfriend: It’s meant that car washing has become much more profitable and much more predictable as a business. It’s become like a much more sophisticated, professionalized business and much less a kind of by the seat of your pants business. And even the individual ma-and-pa owner-operators who own these companies are very sophisticated now too. And they buy very high-end machinery for their businesses. They have these subscription models. They’ve all kind of figured out this formula.

Kate Linebaugh: And this new formula attracted this new interest.

Miriam Gottfriend: That’s right. It attracted private equity.

Kate Linebaugh: After the break, private equity comes for the car wash.
Over the century, car washes have come a long way, and so has their business model.

Miriam Gottfriend: Car washes were going on a natural evolution toward becoming a more consistent, stable, high-margin business. And as soon as that happened, as soon as they became a consistent, stable, high-margin business, private equity was like, “Oh, here’s another business that we can get into and we could professionalize.”

Kate Linebaugh: A private equity firm called Leonard Green was one of the first to recognize the potential of car washes. It set its sights on Mister Car Wash.

Miriam Gottfriend: The thing that attracted Leonard Green about Mister Car Wash was it had subscription models. It had high margins, but it had even higher margins than peers because it was really good at getting a lot of volume through the car wash, meaning tons of cars would go through their car washes.

Kate Linebaugh: Leonard Green bought Mister Car Wash in 2014 and quickly began expanding the operation by buying businesses around the country. One of the chains they acquired was Octopus Car Wash. You might remember it. It was in Breaking Bad. In the show Walter White had a part-time job there before he started cooking meth.

Speaker 5: Hey Mr. White, make those tires shine, huh?

Speaker 6: Oh, my God.

Kate Linebaugh: Mister Car Wash bought a lot more businesses and now has 400 locations. Last year it went public and Leonard Green got a huge payout.

Miriam Gottfriend: And Leonard Green made 10 times its money. So that’s a huge return for a private equity deal. And everyone in the industry was like, “Oh, I want to do that too.”

Kate Linebaugh: And a lot more private equity firms followed suit. Car washes were more profitable than ever, and with subscriptions they had a steady source of cash flow.

Miriam Gottfriend: Private equity firms could take this fragmented industry that was previously run by ma-and-pa entrepreneurs and make it a professional, institutionally backed company.

Kate Linebaugh: How typical is it for private equity firms to invest in like such small, fragmented businesses?

Miriam Gottfriend: It’s actually much more typical than the average person thinks. The way that private equity made its name is through doing large leveraged buyouts. You might have heard of Blackstone or KKR or Apollo buying a company, taking it private and changing it around and trying to sell it again. That’s really like the stereotypical idea of a leveraged buyout, but there are thousands of small and middle-market, private equity firms around the country that specialize in buying small and mid-size businesses. That’s all they do and that’s all they’ll ever do.

Kate Linebaugh: And what are those kind of businesses?

Miriam Gottfriend: It could be anything. It could be makers of pet food. It could be dentistry clinics. It could be fertility clinics. It could be small manufacturers. It could be hair salons.

Kate Linebaugh: Many people, when they think of private equity, think of like major restructuring, bringing in new management, cost cutting, job losses. Is this what is happening with car washes?

Miriam Gottfriend: No, it’s not. They generally keep the same employees on staff because they still need people to staff that location. But what they do is they train them in their playbook. They might put in place a new subscription pricing tier that they have figured out is more effective at attracting customers. They might put in new technology. They might say, “This is our new sales practice. These are our target goals. Here’s how we maintain our machines.” And they teach the employees that and they basically bring them into the fold.

Kate Linebaugh: Miriam says one business that kind of typifies private equity’s strategy is a car wash company called Mammoth Holdings.

Miriam Gottfriend: Mammoth Holdings was started by two entrepreneurs who had been in the car wash industry for a while. They were based in Atlanta and they bought up eight different car wash locations and they had owned them for a while.

Kate Linebaugh: Mammoth was small, but its subscription model helped make it really popular. And this caught the attention of private equity firm Red Dog, which saw the potential to expand its business using a similar strategy to Leonard Green’s.

Miriam Gottfriend: So Red Dog backed these two entrepreneurs in starting to acquire more and more car wash locations and pursuing a roll-up strategy. And the idea was that they could bring their subscription model, which was so well thought out according to Red Dog, to the rest of these locations and kind of give them this extra oomph with this better subscription model.

Kate Linebaugh: The Mammoth founders stuck around as partners. And they used their connections to the car wash industry to look for companies to buy, and it worked. With Red Dog’s backing Mammoth bought up a bunch of chains. None of them, though, are actually called Mammoth.

Miriam Gottfriend: They have different brands for different regions. So they actually have Ultra Car Wash. They have Swifty, they have Marc-1, Finish Line, Wiggy Wash, PitStop, PureMagic, Silverstar. And there are other brands that they’ve bought beyond that.

Kate Linebaugh: A few weeks ago, Miriam went down to Atlanta to check it out. She visited an Ultra Car Wash at a busy suburban intersection. She noticed there were only two employees there, one to guide drivers into the conveyor and the other to sell subscriptions.

Miriam Gottfriend: I met a young woman who was there selling people subscriptions. She was very nice and energetic and like trying to convince people to sign up, to try the membership program, 9.99 for 30 days. Because a lot of the people who come each day aren’t members, they’re just going for a one-off car wash, and the goal at that car wash location was to convert five to 10% of the people who come through who don’t have subscriptions into subscribers. And then there was another lane that was for people who already have a membership, and they could just sail right through without needing to interact with that person at all.

Kate Linebaugh: Mammoth has continued to grow. The company now has 107 locations and plans to open 60 more by the end of the year. And this could be the future of car washes.

Miriam Gottfriend: And not just car washes but so many businesses that you might patronize around your community. You don’t know that this small business is actually a small business owned by an entrepreneur. It might be a private equity-owned business and in some cases it definitely is. It depends on the industry, but there’s some industries that have become completely dominated by private equity and increasingly car washes are one of them.

Kate Linebaugh: Is this sort of the natural evolution of small business in the American capitalist system?

Miriam Gottfriend: It’s a really good question, and it’s something that I’ve been exploring. We’re at a point in history where a lot of baby boomers are selling their businesses. And they don’t want to sell oftentimes to a larger corporation because that could mean their employees lose their jobs, but they also might not have heirs who want to inherit their business. And private equity has stepped into that, and I think that it’s definitely playing a big role in the transfer of wealth in America at this point.
And the question is what will that mean for society? I think it’s still an open question. The flip side is America is a land of entrepreneurship and new businesses are constantly being formed. So it’s not like ma-and-pa businesses will go away. There will be new businesses, but certain types of businesses may no longer be ma-and-pa businesses in the future. And car washes, I think, could be one of them.

Kate Linebaugh: That’s all for today. Friday, August 19th. The Journal is a co-production of Gimlet and the Wall Street Journal. Your hosts are Ryan Knutson and me, Kate Linebaugh. The show is produced by Melvis Acosta Chrisostomo, Annie Baxter, Katherine Brewer, Pia Gadkari, Rachel Humphreys, Matt Kwong, Annie Minoff, Laura Morris, Kim Nederveen-Pieterse, Afeef Nessouli, Enrique Perez de Rosa, Sarah Platt, Aaron Randle, Alan Rodriguez Espinoza, Vladislav Sadiq, Pierce Singgih, Catherine Whelan and Victoria Whitley-Berry. Our engineers are Griffin Tanner and Nathan Singhapok, with help this week from Peter Leonard. Our theme music is by So Wiley. Additional music this week from Katherine Anderson, Emma Munger, Peter Leonard, and Blue Dot Sessions. Fact checking by Nicole Pasulka. Thanks for listening. See you Monday.

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