It is, simply, below market pricing, which is intended to build volume by bringing people out of their driveways to car washes, also by killing the self service carwash industry, and also by killing off higher priced tunnel competition. This pricing model has caused some benefits as well as some damage to the industry, and will likely continue to do both.

“Wal-Mart’s low prices routinely reset our expectations about what all kinds of things should cost — from clothing to furniture to fresh fish” is an excerpt from Charles Fishman’s book “The Wal-Mart Effect”. Price unfortunately has become the single largest factor in marketing everything today, primarily because of the Wal-Mart Effect. Many of the goods purchased in the United States today are produced in low wage, low cost of living countries.

Retailers are able to sell these goods at what seem to be excessively low prices. In fact, the biggest retailers can chase the lowest wages as a way to continue to drive prices down for a continuing competitive advantage. But at some point, if we are not satisfied to pay the price for goods which have been produced by workers earning a “decent” living, ultimately, no workers will be able to earn a “decent” living. The world’s biggest retailers continually chasing the lowest wages is simply a way for them to remain profitable while killing off their competition.

In the late 1980’s, the once thriving Detroit car wash business began its demise, when the $2 car wash appeared. An exciting price point in a $4 to $5 exterior wash market, $2 drew in crowds of customers! Operators figured out how to operate as cheaply as possible, until they removed almost all of the quality and service from the experience. But unlike the big retailers, car washes can’t chase the lowest wages in the world, and if they could, labor isn’t a big enough factor in an exterior car wash to change the cost significantly.

Now the typical price for an exterior wash in the Detroit market has come up to $3 (20 years after it was a $4 to $5 market!) But unlike the large retailers, there are not less car washes in the Detroit market, in fact there are more than ever! Not good news for any chance of profitability. Most car washes in Detroit have no money for reinvestment, repair, or improvement, and certainly no real profit. It is a perfect example of the long term implications of predatory (below market) pricing in the car wash industry, in a market which is too big to be dominated by any one player.

In the 1990’s, it was recognized that the southeast part of the US had virtually no exterior washes. In fact, most of the southern and western regions of the country had few exterior washes. The exterior wash was always a Midwestern and northeastern phenomenon, due to the seasonal cleaning needs brought on by northern winters. The southeastern region and most of the south and west had only full service and self service washes for many years. So the people who built exterior car washes in the southeast dubbed them the “express” model, with free vacuums and auto cashiers becoming a “typical” part of the offering, and a $3 price on the street dominating. Price, just like in Detroit, was the magic ticket to educate the public about car washing. The success stories are in cities where the major player owns the market, and in the biggest success stories, has multiple businesses on the site.

1964 was when US oil companies first discovered car washing, and decided, with the help of car wash equipment companies that “a free car wash” with a fill-up was good business. It did sell them a lot of gas. But they were shocked when they found out that their equipment investment was junk in 5 years! The oil companies have been in and out of car washing a lot, and will continue to be. As automation has continued to play a bigger role, building a car wash has become more a question of access to capital. And oil companies have capital.

Still, the car wash business hasn’t stopped needing management on site. I’m reminded of a personal friend who called me one day, telling me she was stuck in the middle of the car wash, and it wasn’t moving. I asked her “which car wash?” because I thought she meant one of ours; she was actually stuck in the gas station mini tunnel near her house, they weren’t responding to her honking horn, and she couldn’t find their phone number! I got them on the phone, and told them they had a customer stuck in the wash. They hung up after telling me they would get to her in 10 minutes or so! She eventually got out. So the unattended gas station model has some issues.

As an operator, I’m not concerned about oil companies as competition, as long as our industry stays healthy. The primary thing they have going for them is convenience, and while that’s huge, they will never get into the part of the business that includes great service. It’s just not in their lexicon. The people who do concern me are the investors who are being duped into the $3 business model, by the equipment purveyors, because they will ultimately destroy the health of our industry.

While there are true stories of tremendous success using “below market pricing”, these success stories have a couple of pretty important “due diligence” caveats. One, you need a unique and underserved location. And two, you need to have multiple profit centers on a site to be able to sell the car wash at “below market” pricing. Now wait, does that mean that the car wash itself may actually lose money, and need to be subsidized by other profit centers? When you consider a long term return on investment and the ability to produce a sustainable business model, yes, it does mean that the $3 car wash model does lose money on its own, most of the time!

All over the country we see new investors putting $2-$3 million or more into a car wash location, and selling car washes for $3. There’s enough magic about the $3 number that it will build volume. Price takes away any objection your customer may have to low quality, lousy (or no) service, and poor throughput. You may end up with a customer who is not very satisfied, but who drives away and says to himself, “what do you expect for $3?”

This pricing model can build a customer base by taking customers out of their driveways and getting them to wash, and by grabbing customers from car washes who charge higher prices. Remember that it costs several dollars every single time you wash a car, in addition to your need to amortize depreciable assets, which costs several more dollars. The car wash also has (relatively) large investment costs, which need to be amortized. The land cost can be amortized over 30 years, but the building will deteriorate over 15-20 years and require major repairs or replacement, and the equipment requires maintenance and then replacement after a finite number of washes.

car wash businesses are tough to zone, and getting much more expensive to build due in part to restrictive and expensive utility connection fees, not to mention the actual cost of those utilities. They’re single purpose buildings, often built on odd shaped lots that accommodate a car wash but may not as easily accommodate something else. So if you drive a car wash out of business with predatory pricing, do they close up and become a fast food joint? Not usually.

What happens is that someone else buys that car wash (cheap), and runs it cheaper (like at or below your “below market pricing”). And now you aren’t the only game in town, and soon you’re the target. Now that your model succeeded, a car wash only has a $3 value to the consumer! And quality that could be part of the equation isn’t affordable when your primary business model is losing money. You need to operate on the cheap! Many low priced car washes pay below market wages, bend the rules to avoid paying overtime, and provide few if any benefits.

You’ll hear how a $3 price will bring you a $6+ average ticket, and you’ll wash double or triple the number of cars than you might otherwise. Where do you hear this? From the equipment manufacturers and distributors who promote this model. It’s the biggest thing to happen to car wash equipment sales in the history of the industry! Lots and lots of $3 car washes, washing volume (at minimal or no profit) and then time to replace equipment!

If you’re unable to deliver good service, or have a bad location, or are in a saturated car wash market, low price may be your only option. When the glitter comes off the low price, the fact that you don’t deliver good service will kill you. So if you’re a stockbroker from out of town, or whatever your day job is, and you’re looking to invest in the car wash industry, I have some advice. Spend the money to put in a car wash business with a quality service model; use chemicals, utilities, equipment and methods that can produce a high quality car wash, then manage these assets with well trained people who earn a decent living doing so, and you can prosper long term. Charge at, or near, or above market prices, for quality and service that make you proud, and make your business model sound.

The equipment guys that want you to charge $3? They only care about your success if you buy their equipment. They are not giving you sound business advice. What about the franchise opportunities? Save your money. They are promoting below market pricing as a business model, because short term it gets new investors excited and sells franchises! Soon we may all find we’re in a business which has driven itself into obsolescence through predatory pricing. And nobody wins.

That’s when the oil companies are going to own the industry. They have the convenience. And that will be enough. Oh, by the way, Sam’s Club (Wal Mart) recently opened a two bay automatic in our town – cost over $1 million. It’s a nice facility, two bay automatic, clean, well maintained. And their basic wash is $6.