Did too much PE money kill the U.S. car wash golden goose?

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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As an asset class, car washes hold enduring appeal among US celebrities. Jason Derulo has a stake in Rocket Car Wash, a rollup. Travis Kelce is an investor in Club Car Wash, another rollup, dropping by to perform an occasional powerwashing job himself. 

And why wouldn’t they?  

The US car wash market is enormous. A $15B TAM made up of 60,000+ stores. 

It’s a fragmented market. 80% of the supply remains independently owned. The top 50 operators control a measly 8% stake. Mister Car Wash (Mister, or MCW) ties with Whistle Express for the pole position with 500+ locations. And yet Mister and Whistle each command a <1% share. 

It’s a growing market. More car washes were built in the past decade then in all the previous years combined. 

Last, but not least, it’s a market with eye-watering unit economics. Mister claims 3-year payback on new sites, with “four wall” EBITDA margins exceeding 40%. 

No wonder Private Equity has been piling into the sector. Mister has been under Private Equity ownership since 2007 (ONCAP and Leonard Green). Oaktree, Warburg Pincus, Access Holdings and KKR have all backed their respective consolidators.    

But dig deeper, and a more nuanced picture emerges. Mister’s share price is lingering 50% below the IPO levels. 

How’s that for a purportedly low risk investment? 

Further, while Mister is financially robust, a number of aggregators are struggling under unmanageable debt and rent levels.  

Let me rephrase. Mister is the largest car wash operator in the world’s largest economy. It is doing $1B+ in sales and $200M+ in operating cash flow. It is growing. It is a highly experienced acquirer with 100+ completed acquisitions. 

So how come Mister’s IPO investors are out of pocket? 

Luckily for you, we went looking for answers. 

Read on to learn: 

1. How car washes make money. Why tunnels + membership = 40%+ store EBITDA margins

2. Subscriptions may be dying in SaaS, but in car washes, they are all the rage

3. How Mister Car Wash struck gold for PE - twice 

4. The Covid Era gold rush, the hangover that followed - and how the aggregators fought back

5. The 3 things Mister did right - and the elephant in the room

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Tunnels + membership = 40%+ store EBITDA margins 

Mister Car Wash and its competitors all offer unlimited car washes starting from $25 per month. 

How is this economically viable? 

Two things happened:

• The introduction of automated pay stations was a surprising catalyst for institutionalising cash flow. Historically, a lot of transactions were cash and not fully accounted for

• The proliferation of the “express model”: conveyor belt style washes

Let's double click on the second point. Motorists drive through fully automated tunnels 100-150 ft long (30-45 m) in 60-90 seconds. These tunnels, like the one pictured below, have a much higher throughput compared to their “full service” brethren, where the car gets washed and vacuumed manually.

According to an industry expert: “A car wash can wash one car per foot of conveyor per hour. Let's say you have 150 ft. conveyor, you can typically do a reliably good job on cleaning 150 cars an hour. If you have a 70 ft. tunnel, you have 70 cars [per hour]” (source: Tegus expert call transcript). 

Express tunnels are not cheap to build. Mister’s greenfield sites cost upwards of $6M. There is a workaround: sale-leasebacks. Let’s say you bought a car wash for 12x EBITDA. If you then sell the real estate at a 6% cap rate, you are divesting a portion of the business for 16.7x even - creating an arbitrage of 4.7x! Bottom line: Mister’s net capex is “only” $2M per greenfield site after sale-leaseback (source: Raymond James broker research). 

Remember another property heavy rollup that use sale-leasebacks to release capital?

Main Street Auto: the Rambo of car repair rollups 

Moreover, the ramp-up period is short - 0 to $2M revenue in 2 years - and the overhead can be low. According to an industry insider, “Most or typically, even a busy car wash, will have just 3 people working. One at the point of sale, one in the tunnel and one roaming the parking lot” (source: Tegus expert call transcript). 

Bottom line: you are looking at gross margins in the 70-80% range and store level EBITDA margins above 40%.  

And the crazy part? Many of the cars queuing up aren't even dirty. 

Why are people doing this? Because of the unlimited memberships. 

Subscriptions may be dying in SaaS, but in car washes, they are all the rage

Mister has operated a membership scheme called Unlimited Wash Club, or UWC, since 2003. However, it wasn't until a couple of years ago that memberships began to take off. In 2024, UWC made up 74% of Mister’s total sales - up from 45% in 2020. In other words, within just a few years, the business model completely flipped. From transaction-based to subscription-based. 

Membership schemes hold three key advantages for cash wash operators. 

Number one, predictability of earnings: a crucial factor in a real estate heavy business with high operating leverage. Raymond James’ analysts estimate that 60% of Mister’s store costs are fixed. 

Number two, customer loyalty. Only 5% of Mister’s members churn after 1 month, and almost none thereafter. Members average 2-4 car washes monthly. 

Number three, higher customer spend and higher margins.

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