The Business Of
Cars | Mister Car Wash | What Are Their Margins?
Morning All!
So, yesterday we dug into how Mister Car Wash makes money. And we saw that the company has ~1.9 million subscription customers! The average subscriber pays ~$26/month for unlimited car washes. Which meant the company made a whopping ~$596 million in subscription revenue in 2022. Plus an additional ~$281 million from non-subscription customers!
But anyway, that’s enough about revenues. Today, let’s switch our focus to margins and start by looking at how Mister Car Wash’s cost structure is split…
And as we can see from the chart above, the majority of MCW’s costs fall into 2 buckets - the ‘cost of sales’ and ‘other store operating costs’.
Now, it’s not that obvious what either of these cost buckets really mean! So today, let’s break down what those costs really are. And get one step closer to really understanding The Business Of Mister Car Wash! Let’s crack on!
Limited Cost of Sales = High Gross Margins!
Okay so, ‘cost of sales’ really comprises of two main components - employees and chemicals. Let’s start with employees. And the first question to ask is - ‘does Mister Car Wash really need many employees?’ I mean, it’s an automatic car wash, right?! Where do people come into this? Well, it’s not quite that simple! From the company’s reports, we can see that MCW actually employs ~3,500 full time staff.
Which works out to ~8 staff per car wash location (~3,500/436 car washes). But what are these 8 employees actually doing at these locations?
Well, Mister Car Wash’s reports don’t give us too much detail. But there are 3 main roles for employees at each of their locations. One, is direction - MCW employees need to direct drivers to their car wash lane to prevent confusion! Two, is cleaning - whilst all Mister Car Wash locations have automatic car washes, some of them also have internal car vacuuming/cleaning which is carried out by employees!
And the third role for employees, is conversion - this is where employees will be speaking to the non-subscriber customers about the benefits of starting a subscription! We saw yesterday how important this conversion element has been for Mister Car Wash’s revenue growth! And so these ‘conversion’ employees are super important. The images below show us these employees at work…
Okay, so ~3,500 employees. Unfortunately, we don’t know how much these employees get paid on average. But let’s estimate that they get paid an average of ~$60,000 - slightly above the US average wage. This would mean that total employee costs would be ~$210 million (~3,500 employees x $60k).
But hold on - because there’s one other major cost line for Mister Car Wash in their ‘cost of sales’ bucket… and that’s chemicals! Now, what on Earth do I mean by chemicals? Well, let’s think about it. These cars that arrive at Mister Car Wash are expecting a good old wash. But what are they getting washed with? Just normal, standard, water? No, no, no! They get washed with Mister Car Wash’s specially made chemicals!
Now, what are these special chemicals? Well, to be completely honest - I have no idea! But a key point about the chemicals used - is that Mister Car Wash can really CONTROL their chemicals costs. What do I mean? Well, in MCW’s reports, they tell us that . And this is amazing. Why? Because let’s say MCW go through a tough time with revenues. The economy is struggling and subscriber growth falls. What can the company do to reduce costs?
Well, it sounds like they can just use less chemicals in their washing liquid! I mean, how on Earth would customers know if MCW were using more or less chemicals in their car wash anyway?! And the gross margin chart below would kind of support this theory! The amount Mister Car Wash has spent on employees and chemicals has grown at a far slower rate than MCW’s revenue growth. Which has led to gross margins expanding nicely from ~54% in 2016 to ~69% in 2022!
Mister Car Wash Needs To Have A Different Marketing Strategy To McDonald’s!
Alrighty, let’s move onto the second main cost bucket for Mister Car Wash. And this cost line was very helpfully named ‘other store operating costs’. Which really doesn’t tell us much! So, what types of costs are actually involved in this cost line? Well, two of the main costs are marketing and D&A. There are other costs involved - but these are the two we’ll focus on now!
And first up, let’s look at marketing. Now, when Mister Car Wash talk about marketing, there’s a couple of interesting sentences they use. First there’s this one - . And then this - . Now why are these lines interesting?
Well, the reason they’re interesting is because of the focus on LOCAL marketing. What do I mean? Well, let’s take McDonald’s. They’re a global brand. They have restaurants all over America. And so McDonald’s marketing will be very much nation-wide. However, does it make sense for Mister Car Wash to have the same strategy with their marketing? Absolutely not! MCW only has car wash locations in 21 states (as we can see below).
Which means that in 29 states - there would be no point in advertising to American citizens… because there are no MCW car washes for them to go to! And this is the first time on TBO we’ve actually seen this. Most of the companies we see on TBO are massive, global brands. But Mister Car Wash’s more limited presence shows us the importance of making sure your advertising is targeted. Oh and in our next series - The Business Of Eyeballs - we’ll be looking at Google and Facebook! And seeing exactly how these tech giants help companies like MCW target their advertising!
Okay so, the final cost to mention for Mister Car Wash is D&A (Depreciation and Amortisation). Now, what comes under D&A for MCW? Well, we’re going to dive into this in quite a bit of detail tomorrow. So to keep it brief, Mister Car Wash spend a lot of money every year purchasing land and buildings for their new car washes. And purchasing equipment to transform the old car washes, into their technology-enabled car washes.
And it’s these capital expenditures (Capex) that are recognised as depreciation and amortisation costs in their income statement. As I said, we’ll go through this in detail tomorrow. But for those of us who want a little refresher on capex and D&A - you can give this simple article a read!
Who Would’ve Thought Car Washes Would Be So Profitable?!
Alrighty, let’s wrap up and bring it all together. We’ve looked at the main areas Mister Car Wash spends money on to operate their car wash business. And we’ve seen that gross margins have been on an upward trajectory. But what about EBIT margins?
Well, as we can see from the chart below… EBIT margins have also been improving nicely (if we discount the one-off COVID year which saw car washes closed for several weeks)! In fact, Mister Car Wash boasted an impressive ~21% EBIT margin in 2022! Which is more than impressive, it’s incredibly impressive!
Especially when we consider some of the other huge companies we’ve covered on TBO with lower margins - Tesla ~9%. PepsiCo ~13%. Netflix ~18%. The car wash king stands above all of them!
14th Feb 2024
And that’s a wrap for today! I hope you enjoyed diving into Mister Car Wash’s cost structure. Who would’ve thought a car wash company would boast such nice margins! Tomorrow we’ll move on to look at where Mister Car Wash spends all their profits. But fair warning… things aren’t quite as rosy tomorrow!
Have a fabulous day!
The Business Of Team