What Rising Gas Costs Mean To Carwashes
No one should underestimate the severity of the fuel shortage and the threat that rising prices at the pump pose to every business, especially an automobile-related one like carwashing. However, the frightening "gas crisis" headlines tell only part of the story. A closer look at key economic data reveals not only causes for optimism, but also areas where efforts to market a carwash are likely to reap rewards.
Reporting and Reality
The jump in retail fuel prices may be making news, but it hasn't made much of a dent in consumer spending habits, especially among the middle class and more affluent consumers who make up the lion's share of a tunnel carwash's customers. According to the most current Bureau of Labor Statistics survey, which was conducted in 2004, the average American household spends 3.7% of its budget ($1,598) fueling its vehicles.
Retail fuel is certain to take a bigger bite out of our household budgets as a result of recent price increases, but analysts don't expect this to be significant enough to alter middle class spending habits. The American Petroleum Institute in Washington estimates that retail fuel will account for 4.6% of the average household's budget in 2006. Although nothing to dismiss, this increase "is something that most households can cope with," according to Carl Steidtman, chief economist at Deloitte Research.
The difference in what the average family will spend on gasoline this year, and what they spent in 2004, is projected to be $10.62 a week, about the cost of going to a movie. It's important to keep in mind too that this is for all households. For the 26.4% of households making over $70,000, the increase in retail fuel spending represents only 0.79% or less of annual income.
Market analysts widely agree that retail fuel prices will have to rise to at least over $3 to $4 a gallon, and remain there for a sustained period, before they seriously impact the shopping habits of middle class and more affluent consumers. Few see this happening in the near term. According to the federal government's Energy Information Administration, the retail price of fuel should fall by about 4% between now and 2007.
If this happens, it should make consumers feel even better about spending money on services like carwashing. Not that they need a shot of confidence. In April, the closely watched Consumer Confidence Index reached its highest level since May 2002. This, despite that fact at the national average retail fuel price for the month jumped 12%.
Upper Market Segment Performs Better
Of course, not every consumer will react to higher retail fuel prices in the same way. Proportionately, low and moderate income-level consumers are hurt much more than their wealthier counterparts when they have to pay more at the pump. So understandably, they will drive less and cut back on other expenses, particularly "luxuries" like carwashing to compensate for the higher cost of filling up.
This has already been reflected in the general retail sector of the economy. Big Lots, Dollar General and Wal-Mart have all cited rising fuel costs to explain disappointing earnings results. This April, overall retail sales increased 6.6% on the national level. Industry leader Wal-Mart barely kept pace at 6.8%, far behind upscale retailers like Neiman Marcus (9.5%) and Abercrombie & Fitch (17%). Wal-Mart was even compelled to warn analysts that it expected lower sales throughout 2006 from its least affluent customers, and touted its strategy to market higher-end goods to more upscale shoppers to maintain growth.
The same pattern could be seen in other industries, including automobiles. Sales of luxury vehicles were up 6% in the first quarter of this year, while overall car sales were up only 1%, according to JD Power and Associates.
Retail Fuel Costs and Carwash Pricing
If the same pattern holds true in the carwash industry, this should mean that washes that base their appeal on quality over price will perform better than "$2 washes," service station rollovers, and other discount washes. If, as expected, the low-end carwashes lose market share, it's not likely to be picked up by higher-priced tunnel washes, since customers who abandon the discounters will probably turn to driveway washing, or simply wash their vehicles less often.
As retail fuel prices rise, carwash operators can evaluate the impact this development has on customer behavior by tracking sales for their different menu options. If higher prices at the fuel pump affect any part of a carwash's volume, chances are it will be seen in basic washes, rather than the deluxe options that appeal to more affluent customers. Click
here to learn more about SiteWatch Customer Tracking.
If this happens, an operator's natural reaction might be to lower basic wash prices in an attempt to regain lost customers. This is understandable, but it would also be counterproductive according to marketing experts like Nick Wreden. Writing in the Harvard Business Review about pressure driven price cuts, Wreden acknowledges that although price cuts can "buy time" when customers defect and "boost sales quickly," they also can have a lasting downside, making it more difficult to regain profits when business rebounds.
"Pricing should not be viewed as a Band-Aid strategy for bleeding income statements," writes Wreden. "They should be part of a long-term business strategy."
Rather than lowering prices across the board, carwash operators might want consider offering indirect incentives to attract customers impacted by rising retail fuel costs. For example, an operator can offer discounts on prepaid washes or timed discounts that are good only during specified hours and days. "The more you can slice and dice your prices and offerings without affecting your brand, the more you can sustain profitability," says Eric Mitchell, president of the Professional Pricing Society. Click here to learn more about timed discounts with SiteWatch.
According to the accepted standards of pricing strategists, carwash operators that lost basic wash customers because of rising retail fuel prices would be better off making up for this dip by raising the prices of their deluxe packages slightly, or adding a new more expensive deluxe option, than discounting their less expensive wash.
The theory here is that as an operator, you're more likely to get deluxe customers to accept a small price increase, than you are to win basic customers back through discounting. Chances are your lower price is still going to be too high for someone who is in a cost-cutting mode, so you'll just be receiving less for your basic wash from customers who were going to buy one anyway.
Research conducted by McKinsey & Company, the highly regarded Pittsburgh-based research firm, illustrates this principle. According to the company's report, a mere 1% increase in prices will boost a company's operating profits by 8.6%. As is shown in the chart below, a price hike is far more effective at elevating profits than a jump in volume.
| Change |
Impact On Operating Profits |
|---|
| A 1% price increase | Profits up 8.6% |
| A 1% reduction in variable costs | Profits up5.9% |
| A 1% increase in volume | Profits up 2.8% |
| A 1% decrease in fixed costs | Profits up 1.7% |
Source: McKinsey & Co. Maintain Marketing
Carwash operators who are concerned about losing customers as a result of rising retail fuel costs, would do well to maintain, or even increase, their marketing and advertising. Business history is replete with examples of companies that compounded their difficulties when times got tough by making deep cuts in their marketing budgets.
In the early 1920s, Moxie soda outsold Coca Cola. Then after a serious spike in sugar prices, Moxie all but eliminated its advertising. Moxie soda soon fell by the wayside, and is now only a small regional player in parts of New England, while "Coke" is one of the world's most recognizable brands.
Companies that maintain or increase marketing during tough times enjoy sales increases 256% greater than competitors that pull back, according to a McGraw Hill Research study of 600 firms.
Prepaid gift cards provide operators with an effective tool for marketing to fuel pump fatigued customers. As the National Retail Federation study cited at the start of this article indicates, rising retail fuel costs don't dampen our enthusiasm for gift giving. The carwash that markets prepaid cards as part of a gift package (for example by inserting them an attractive gift envelope) is likely to reach customers regardless of their concerns about gas prices. Click
here to learn more about selling prepaid gift cards with SiteWatch.
Commenting on the strength of overall gift sales, National Retail Federation spokeswoman Kathy Grannis said, "Consumers are getting used to high gas prices. Gas prices were high during the holiday season, and people were still out there spending money."
It seems that even when their confidence is shaken, consumers are still ready to purchase gifts and other luxuries. In the third quarter of 2005, the confidence level of affluent consumers declined to its lowest level in almost two years, according to the authoritative Unity Marketing Luxury Consumption Index. Yet at the same time, spending on luxury items by consumers in the survey group increased by 24%.
In light of this, carwash operators concerned about the impact that rising retail fuel prices might have on their business would be well served to "pump up" their volume by taking a proactive approach to marketing gift cards and deluxe options to upscale customers.
