The Business Of

Cars | Mister Car Wash | What Do They Do With Their Profits?

Morning All!

Yesterday we put together Mister Car Wash’s costs with their revenues. And we’ve covered a fair amount this week. So let’s have a quick recap…

• Love: The car wash industry is a much-loved one in the US. The average American washes their car ~13x/year. And for MCW subscribers, it’s ~30x/year!

• Growth: This love for clean cars has helped Mister Car Wash grow their number of locations from 60 in 2010 to 436 in 2022. A strong growth of ~17% CAGR!

• Control: With a limited need for employees, and a strong control on chemical costs, MCW has grown gross margin to ~69% and EBIT margin to ~21%!

And speaking of margin. It is a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include Mister Car Wash. And who would’ve expected that at the start of this week?! Mister Car Wash has the highest EBIT margin of all three companies we’ve looked at in The Business Of Cars!

Now, there’s a couple of reasons for this. But arguably the main reason is that Mister Car Wash’s subscription model gives the company incredible visibility of revenues. What do I mean? Well, put yourself in the shoes of Mister Car Wash’s CEO for a moment. You know that in 2022, you had ~1.9 million subscribers. Who each paid ~$26/month.

Now, let’s estimate that ~5% of subscribers cancel their subscriptions next year leaving you with ~1.8 million subscribers. What does this mean? Well, it means that you have a very clear estimate of what your company’s revenue will be the next year! And this visibility of revenues means that you can control your costs next year (employee hiring, chemical usage) to make sure you hit a strong margin figure!

And by the way, this is exactly what we saw last year when we looked at The Business Of Netflix. And it’ll be the same in whatever subscription business you choose to look at! The monthly payments provide great recurring revenue for businesses. Which leads to great visibility of revenues… and great control of margins!

Want To Grow? Not Enough Cash In The Bank? Ask Investors For Cash!

So, to kick us off, let’s as always look at the waterfall chart below. Which shows us how Mister Car Wash have spent their cash from operations (CFO) since 2018. And we see something interesting.

Mister Car Wash spent more on acquiring companies than they actually made in cash from operations! And they’ve had to offer debt and equity to raise the cash to fund these acquisitions.

Now, what’s going on here? Well, to keep it nice and simple - Mister Car Wash is a company with strong growth ambitions. They knew that in order to grow, they needed to acquire more and more car washes. And they knew this would require cash - cash they didn’t have! So what did MCW do? Well, they asked investors for cash - in return for interest/equity - to help them fund this growth!

Okay, but is this unusual? Well, no not at all! This is something we’ve seen multiple startups do over the years - Uber, Airbnb, and plenty of other companies have used lots of outside cash (from venture capital, private equity) to help fund their early growth. With the hope that one day, they’d be making enough cash themselves - so they can walk on their own 2 feet and fund their own growth!

Buying Local Competitor Car Washes Is Expensive Business!

Alrighty so, we’ve seen that acquisitions have been the largest part of Mister Car Wash’s cash use over the years. And we saw on Tuesday, that these acquisitions have been vital in driving the company’s revenue growth. But here’s a question - how much does it cost Mister Car Wash to buy one, individual car wash location?

Well, by looking at MCW’s annual report, we can see that in 2022, the company acquired 12 car wash locations. And spent ~$86m to purchase these locations. So, how much is that per location? Well, it works out to a pretty considerable ~$7.6 million per car wash! And as we can see from the chart below, it was even higher in 2021! MCW bought 37 car washes, at a whopping $13.9 million per location!

Now, some of us may be thinking - surely that’s a bit expensive right? I mean, I know these acquisitions are adding revenue and profit to Mister Car Wash. But we saw on Tuesday that Mister Car Wash make an average of ~$2 million revenue from each of their car wash locations. With a ~25% margin, that’s a profit of ~$500k/car wash. Which means that the payback period is fairly lengthy on these >$10m acquisitions!

So, what can Mister Car Wash do? Are they stuck, needing to make these expensive acquisitions in order to grow their revenues? Well, fortunately, the answer is no! And in fact, since 2018, Mister Car Wash have actually decided to prioritise another strategy for growth!

What do I mean? Well, up until 2018, Mister Car Wash only focused on acquisitions. That was how they were going to grow their number of car wash locations. However, because of the high prices for acquisitions, MCW have since decided on a different tactic for growth - building their own car washes from scratch! Which MCW calls their ‘greenfield strategy’. Let’s take a look at this new growth tactic now…

The Tesla Of Car Washes…?

Okay so, we’ve seen that acquiring other local competitor car washes has proved to be fairly expensive for Mister Car Wash. Especially in recent years. But surely building your own car washes from scratch is going to be just as expensive, right? Well, surprisingly… no!

We just saw earlier that in 2022, Mister Car Wash paid an average of ~$8m for each of the car washes they acquired. Well, guess how much it costs them to build a car wash location from scratch? Just $1.8 million - considerably less! And in the table below, we can see how much the payback periods differ when MCW acquire a location vs when they build a location…

An expensive ($10m) acquisition can take 20 years to pay back! Compared to just 3.6 years if MCW build their own car wash!

So, that’s clear. This cheaper, greenfield strategy seems to make a lot of sense given the recent high acquisition prices! And by growing their number of locations in a cheaper manner, Mister Car Wash can hopefully start funding their own growth soon - instead of relying on outside investment! Fingers crossed!

Now, to wrap up, there’s one final question to answer today. That $1.8m Mister Car Wash spend on building their car washes. That’s still quite a bit of money! So what is all of that cash being spent on? Well, Mister Car Wash’s locations aren’t just your standard, run of the mill, boring car washes. They’ve got some pretty fancy technology in them! What do I mean?

Well, for one - all of MCW’s locations are RFID-enabled, which means that each car is scanned and tracked by cameras. So, for a customer, they (i) never have to leave their car, and (ii) the whole car wash experience is much quicker compared to a normal car wash. On top of that, each location is kitted out with MCW’s proprietary water systems which help reduce water usage by >10% vs a normal car wash. Great for the environmentally-conscious!

Now, there’s plenty of other technological advances MCW has which sets it apart vs other standard car washes. Unfortunately we don’t have time to get into all of them now! But this focus on speed and ease (enabled by technology) is one of the main reasons why Mister Car Wash has seen such strong subscriber growth over the last decade!

15th Feb 2024

Nigel Jacob CFA