In the Wash

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In the Wash

By Mitch Morrison - 06/17/2002
Not again. That's the refrain of many petroleum/c-store operators these days.

Hypermarkets, those big-box, musclebound retailers accused of swiping gasoline share by the gallon while steadily draining margins, are trespassing yet again on turf historically governed by traditional fuel operators: the car wash.

BJ's Wholesale Club Inc., the Natick, Mass., warehouse powerhouse, plans to roll into the car-wash business in fiscal year 2003. This comes after the company increased its number of gas stations from 34 to 55 at the end of fiscal year 2002. BJ's intends to open as many as 25 new fuel stations in 2003 and add car washes wherever possible to complement the fuel program.

"At this time, we're looking at car washes, but we don't have an assigned dealer," said BJ's spokeswoman Julie Somers. "We look at it as another service to add value to our member's paid membership. I don't know what others are doing, but we see some value in car washes."

The move, albeit a bit sketchy at this point, has drawn applause from some Wall Street watchers. "This strikes us as a good idea," said Linda Kristiansen of UBS Warburg. "We believe car washes will enhance the destination aspect of BJ's clubs and thus drive incremental club traffic, as well as enhance the value of a BJ's membership."

Where BJ's and other high-volume retailers will go with car washes is unclear. What is certain is that BJ's is not alone in its car-wash curiosity. Other big-box giants entertaining or rolling out car cleaners include Wal-Mart Stores Inc., Albertson's Inc. and Meijer Inc., said Mark Thorsby, executive director at the Chicago-based International Carwash Association.

"What they don't want to have to deal with is the mess of maintaining equipment," Thorsby said. "They're looking to lease equipment and split the revenues. Wal-Mart, from what we know, is conducting analysis to put car washes at their New England sites. I think you're going to see a number of big-box guys getting into it.

"The challenge is, what is their business strategy — because they're not really car-wash operators. I think they're using it as an impulse buy. It wouldn't take much space and it could give them some quick revenue," he said.

Numerous messages left at Wal-Mart were not returned. But Albertson's confirmed its interest in car washes. The number-two U.S. supermarket chain (behind Kroger Co.) with more than 2,400 stores in 32 states has opened a half-dozen car-wash operations as part of its rapidly expanding fuel-center program.

And that's just the beginning. "We're making plans to open 69 fuel centers in 2002, of which 30 percent will include car washes. That's pretty significant," said Rhonda Clements, Albertson's director of media relations.

"Our decision-making is all based on neighborhood marketing and understanding the needs of a community," she continued. "We will only build car washes in neighborhoods where there's a need and we're confident it can be successful. For us, it's the idea of one-stop shopping and taking care of our customers' needs."

Albertson's is placing Vector touch-free, in-bay automatic washes by Belanger Inc. of Northville, Mich., on sites with a minimum of 2,000 square feet with a six-pump fuel island.

That the supermarket giant has turned to car washes as another revenue stream is not surprising. By all accounts, car washes generate handsome margins, typically between 50 and 60 percent, depending on bells and whistles such as colored foam and wax. Convenience stores, in fact, have also taken a big interest in recent years, doubling their output of clean machines since 1999, and several major oil companies, including Exxon Mobil Corp. and BP plc, have incorporated car washes in their most recent strategic designs.

Nonetheless, few in the c-store channel expect car washes to generate the angst triggered by big-box's entry into gasoline.

"We don't see car washes having the same draw as gasoline," said John Eichberger, motor fuels director at the National Association of Convenience Stores (NACS), which has been cautioning convenience retailers about hypermarkets' aggressive incursion into retail fuel.

"The limitations on car washes will be on available property. It takes land to build car washes and most supermarkets don't have the land for it," he continued. "But if you can build one, car washes are a huge profit driver and you can make a lot of money on each wash."

Eichberger said he would not be surprised if Wal-Mart or other behemoths place car washes at select locations. "Wal-Mart's model of doing business suggests to me that if they see car washes adding to the one-stop shopping experience, then you'll see them do it," he said. "It's a huge return and if you put it in with a competitive price and offer a variety of services as well, why wouldn't you put a car wash in?"

For c-store operators that means one less exclusive category. "It takes another competitive advantage away that some convenience store chains have used as a distinctive offering," said Eichberger, who suggested that c-stores must become more price competitive when packaging car washes under the convenience rubric.

Rich Mione, director of marketing at Wilmington, N.C.-based Worsley Cos. Inc., supported Eichberger's assessment. "The grocery business has become a me-too business," he said, when told of Albertson's rollout. "They're like us in that they are also trying to find a way to battle Wal-Mart.

"I don't know if they're doing it to make money or to offer another [destination] point. It's pretty scary," said Mione, whose chain operates more than 150 units branded Scotchman and Young's Food Stores.

Not Interested

Just because HVRs have moved into gasoline with gusto, don't expect them to necessarily repeat with car wash. For all its profit potential, car washes are a costly venture, running a minimum of several hundred thousand dollars.

Additionally, unlike gasoline, where big-box titans have successfully driven down retail margins as they grow greater market share, scores of independent car-wash operators and service-station dealers already offer free or bargain-basement washes.

"Car wash isn't a high priority because of high liability issues and because we would want to show value. There are a lot of car washes out there charging $4 to $5 that give a good wash," said Paul Latham, vice president at Costco Wholesale Corp. of Issaquah, Wash.

"To make it fit Costco's price demands, we would have had to sell it for $3 or $3.50 a wash and that wouldn't have been worthwhile," he said. "We've looked at car washes a lot of times in the past. But there were too many issues against it, including one being that we don't have the space."

In contrast, Costco is much more ambitious about its gasoline program, incorporating fuel islands at virtually all new locations and retrofitting older locations to include gas, wherever feasible both logistically and legally.

That's not to say that gasoline has consistently delivered a buck for its bang. Latham lamented that persistent low margins have somewhat undermined Costco's expectations for gasoline. While fuel's primary purpose has been to increase membership and buying frequency, it was also hoped that margins would improve over time.

"At some point margins have to normalize," he said. "As large players like us saturate the market and fight for share, margins are losing. We expected that. But we also expected that at some point the aggressive pricing would be replaced with the need to operate efficiently and with a long-term strategy."

In that respect, Kristiansen of UBS Warburg especially likes BJ's move into car washes. In addition to delivering another point of differentiation, the Wall Street analyst said, "Car washes should improve the economics of gas stations, which are a low-margin to break-even business at best."