The U.S. car wash industry has been cleaning up.
Americans are taking better care of their vehicles and maintaining them with frequent washes because they plan to keep them longer. Subscriptions for unlimited monthly visits are drawing customers and providing steady revenue for operators.
Private equity firms are investing in the industry, helping to drive a boom in openings. About 900 new locations debuted annually in several of the past few years.
But property investors are being cautious now after signs of weakness suggest the shine of the car wash business may have dulled a bit.
In February, one of the nation's largest privately owned car wash chains filed for voluntary Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Texas. Plano, Texas-based Zips Car Wash, which has roughly 260 locations across 23 states, said it expects to emerge from the prearranged bankruptcy quickly, in two to three months, under the ownership of its existing lenders.
Another operator, Driven Brands Holdings, recently said it wants out of the business, divesting its entire domestic car wash fleet of nearly 400 locations, for $385 million.
Zips' comments in its bankruptcy documents mirror the financial challenges that chains such as Big Lots, Party City and other retailers have cited in their Chapter 11 proceedings. Zips and retailers said downsizing their real estate portfolios was a top priority, and in Zips' case, it is looking to reject "burdensome" leases for at least 41 locations.
In addition, businesses that borrowed money to expand during and right after the pandemic, like Zips, are suffering because of their debt load. Zips and other companies are now burdened with having to make payments on loans whose interest rates have soared. Also, inflation has put a damper on some discretionary consumer spending, which has caught up with and put a crimp on car washing, causing sales to dip, according to Zips and its rivals such as Tucson, Arizona-based Mister Car Wash, which is publicly traded and is the nation's biggest car wash chain with about 500 locations.
Heightened competition
Competition has been exacerbated in the car wash industry, with new players coming in and incumbents expanding, according to Zips. In the midst of all that change, the industry is also undergoing consolidation.
The Census Bureau estimated in 2020 that there were 17,584 car washes with paid employees — the tunnel-style car washes that use conveyor belts to move vehicles. Car wash retail sales in North America were roughly $15 billion in 2022, according to the Federal Reserve Bank of St. Louis. The construction of U.S. car washes has slowed down from peaks of 936 in 2021 and 943 in 2022, according to Eric Wulf, CEO of the International Carwash Association, but the industry is still growing.
"As one measure of growth, stores are still being constructed ... but it certainly has slowed from the high point," Wulf told CoStar News.
Kevin Nystrom, Zips' chief transformation officer, detailed the company's challenges, including ridding itself of $279 million in debt and facing new rivals, in an affidavit filed in bankruptcy court.
"Zips operates in a highly fragmented and competitive car wash industry," he said. "A recent rise in new players and an influx of new capital led to a significant increase in competition, particularly as the industry migrated from a 'do-it-yourself' model to a 'do-it-for-me' model. Over the past five years, upwards of 900 new car wash sites have opened annually across the United States."
Private equity's role
Much of the expansion has been driven by private equity investment, according to John Feeney, senior vice president at Boulder Group, an investment sales brokerage company that specializes in single-tenant, net-lease properties, including car washes. Investors tend to favor net-leased properties because the tenant is responsible for property-related costs including taxes, insurance and upkeep.
"Private equity found the car wash industry appealing due to the following attributes — relatively low labor costs when compared to other service businesses, opportunity to 'roll up' local or regional operators at scale and the predictable reoccurring revenue associated with monthly subscriptions," Feeney told CoStar News in an email.
For example, private equity firm Atlantic Street Capital is one of Zips' investors, while Oaktree Capital Management is an investor in Whistle Express Car Wash, based in Charlotte, North Carolina. Last summer, KKR & Co. acquired a stake in Quick Quack Car Wash for $850 million. And roughly three years ago, Warburg Pincus purchased El Car Wash.
In its initial round of court filings, Zips — operating under the Zips Car Wash, Rocket Express Car Wash and Jet Brite Car Wash names — sought approval to reject leases and close 41 locations, or about 16% of its fleet. In November, Zips retained Hilco Real Estate to assess its footprint and to do a site-level evaluation to identify sites for immediate closure and those with off-market lease terms, according to Nystrom.
New lease terms
Zips has initiated discussions with some of its major landlords to renegotiate lease terms, the company said. One of Zips' issues, according to Feeney and Jim Ceresnak, vice president of investment sales at Northmarq, is the higher rents it is paying rather than fundamental flaws in the car wash industry.
"It's a great business with strong fundamentals from a unit-level sales perspective," Ceresnak told CoStar News. "There's not many net-lease properties on an acre parcel that can do the kind of sales and the kind of margins that a well-run express car wash can do. Margins are very strong."
The burst of new locations caused oversaturation in some markets, but that issue is becoming less of a problem.
"I think the explosion of growth for growth's sake, is over to some degree," Ceresnak said. "Most of these operators are growing in a much more principled fashion and are looking to not put sites in locations where they're not defensible."
Feeney also said he expects car wash operators and owners to be more cautious.
"Given the recent Zips news, investors will scrutinize any future investments into car wash real estate," Feeney said. "At the end of the day, investors are still buying real estate and they will need to focus more intensively on real estate fundamentals, including the relationship between in-place and market rents, unit-level performance data, and the operator's overall financial health."
In addition to closing locations, Zips is also whittling down its portfolio by selling some sites. In early February, El Car Wash, Florida’s largest and fastest-growing car wash operator, acquired six Zips locations in Orlando, Florida, and three Spin Car Wash locations in Broward County for roughly $50 million. Zips also plans to close on the $20 million sale of car washes in St. Louis as part of its Chapter 11 process.
As for the ultimate number of closings it expects, in an email to CoStar News, Zips said it would continue to evaluate its footprint.
"This assessment is an important and regular part of portfolio management for multi-site operators, regardless of their financial position," Zips said.
In addition to Zips, Mister Car Wash and Charlotte, North Carolina-based Driven Brands, parent of Take 5 Car Wash, has reported softening demand from consumers. In fact, last month Driven Brands said it was getting out of the car wash business domestically, entering into a definitive agreement to sell its U.S. business to Whistle Express Car Wash for $385 million. The combined company will have 530 locations across 23 states.
“This transaction will enable Driven Brands to reduce debt and enhance our focus on our growing Take 5 Oil Change brand and our stable, cash-generating franchise brands,” Jonathan Fitzpatrick, president and CEO of the company, said in a statement.
Popular sale-leasebacks
On the real estate side, sale-leaseback deals play a big part in the car wash industry, according to Feeney and Ceresnak. For instance, Mister Car Wash reported that in the fourth quarter, it completed sale-leaseback transactions for $97.5 million, bringing the full-year proceeds from such deals to $134.9 million.
"We expect to remain active in the sale-leaseback market during 2025," Jed Gold, chief financial officer at Mister Car Wash, said during an earnings call. "Sale-leasebacks remain the most attractive source of capital for Mister. We are targeting proceeds of $40 million to $50 million a year with a focus on leveraging the influx of buyer demand to further improve deal economics."
While the car wash arena remains crowded, Mister Car Wash CEO John Lai expects the influx of new entrants to decelerate from the high in 2023.
"Over the next few years, we expect the industry to rationalize, and we are confident Mister will be well positioned to capitalize as market share and consolidation opportunities present themselves," Lai said on the earnings call.