Thank you very much, everybody. We are so excited to have the team from Mister Car Wash with us. Mister Car Wash has been such an interesting story to get to know, you know, in part because it's become the leading player in an industry that has evolved considerably over the last 20 years. I've really enjoyed getting to know the leadership team, and I'm sure you'll see why today. To my immediate left is John Lai, who joined Mister Car Wash in 2002 at the age of 24 and became president and CEO in 2012. Do I have that right?
Correct.
Jed Gold is to his left, who is the Chief Financial Officer of Mister Car Wash after having a long and distinguished career at several places including Yum! Brands. So he has a wonderful perspective on not only consumer companies but also site-based consumer companies. I wanna start our conversation at a very high level. John, you've been part of this industry, the wash industry, for a long time, and you've seen it change quite a bit. How, you know, as it stands today, how do you see it playing out from here in terms of, you know, growth rate for both revenue and units after what has been a really good run for the wash industry up until now?
Sure. So welcome and nice to be here.
Yeah.
I wanna start with a comment on your sock game, which is, next level.
Yeah.
But to answer your question specifically, starting with it's, it's a big category. It's a big industry. So, 300 million cars in the U.S., rounding up slightly, huge car park. We believe that there's roughly 13,000, and that's a guesstimate, conveyorized car wash units, express exterior conveyorized car wash units. So the real question is around TAM and what is the potential for growth. We see a lot of underserved pockets throughout the United States. And in the markets that we're in, we have roughly 20% share in technically about 70 of the MSAs, and we cluster them into operating regions of about 50.
And in those 50 markets that we're in, we could double our footprint over the next several years, and it's gonna take us about 10 years to double our footprint, to get to what is today a 500, close to a 500-store chain of car washes to 1,000. So we've reset our vision to get to now 1,500. And as we look at tangential opportunities to expand, not just in our core but then in markets that are adjacent, as we continue to fan out, it's a tremendous upside for us, and feels unlimited.
And, you know, coming back to the original question, is your view, yeah, there's been a lot of growth in the industry, and maybe the industry's leveling off into a more sustainable, albeit maybe slightly slower rate of growth?
Yeah. So a lot of conversations around competition and what has happened over the last five years, and there's been an insane amount of growth, right?
Yeah.
So the last 5 years, there's been a number of private equity firms that have entered into the category, a lot of them through the M&A kind of path to try and grow scale their way, grow their way, to material size. And then in more recent years, a lot of new unit growth, greenfield growth, that has now started to taper off, and we're using words like moderate and crest. But we expect this year, 2024, to be the year where things start to flatten out, and there will be a deceleration, if you will, of new units into 2025, and we expect that to continue. And that's a good thing.
Yeah. And it's an in it's a fascinating industry, not only because they have very colorful characters who operate it, but there are really powerful drivers that are at bay that are influencing the growth of the wash industry. You know, I throughout the time that we got to know each other, there was a lot of talk about how consumers feel really, you know, have an affinity to their vehicle. They wanna keep it clean and tidy. Wouldn't you say, though, that there are other factors, the fact that vehicles today are made of composite materials versus rust, you know, more metallurgic materials back in the day where.
Correct.
If your car's rusted, then is that gonna help to get a Titanium 360 wash? But now, if you have a vehicle made out of composite materials that lasts for 15 years with the same chassis, you wanna make sure it keep it, keep it clean. Plus.
Right.
Global warming is creating havoc on.
Yeah.
all assets, physical assets. And then the rise of ride-sharing. These are like the folks who go to the buffet and, you know.
They're going crazy.
Maybe go a couple of times. But it's really all these three factors have come together in the last couple of years to, you know, create a really interesting backdrop for this industry.
Yeah. Well, so I think we're fortunate 'cause the demand for our service has remained omnipresent and consistent. Cars will always get dirty. They'll always need to get clean. When you look at the, you know, average age of a vehicle, which is, I think, now pushing 12 years on the road today, we tend to service that 0-12. We're not washing a whole lot of cars that are 17-18 years old.
but those folks like to keep their assets clean. And so to have a business where there's just this recurring kinda nature of they get dirty, they need to be cleaned, and really, why do people clean their car? You know, there's this perhaps utilitarian benefit of feeling that your asset is clean, but it's more of a feel-good experience. For many Americans, their automobile is more than just transportation. You know, there's a symbolic/aspirational element to their cars, and to that end, we play directly into that. So having a nice, shiny car is awesome. I was at a SEMA AAPEX show , which is Automotive Aftermarket Show, a number of years ago. And at the time, the big three automobile manufacturers were promoting or using as their showcase cars these matte-finished vehicles.
Yeah.
Which for a short minute were kinda this trendy cool thing. And I thought, is that perhaps a headwind to our space if, you know, people adopt matte finishes and kinda this dull, blank look as the new cool? That has quickly faded away. And so at the end of the day, shiny objects and shiny vehicles people are naturally gravitating towards. So what we do is we make them shine, and we make them pop. And that's what our Titanium service is doing.
Ah, literally inside baseball, they both measure the performance of the washes by whether or not they can see their reflections. And if you had smiles like these two guys, wouldn't you wanna see your reflection in the vehicle?
Yeah. Yeah. So all jokes aside, can you measure the reflective value? And there's a tool called the reflectometer.
Yeah.
So where we'll shoot a ray of light off of a painted finish and measure the refraction rate, and we're able to actually quantify the level of shine and the depth of shine. But to that end, if I can just do a quick commercial on titanium.
You do it.
So our titanium.
Prospective members here.
Our Titanium 360 is not just a 360-degree layer of protection, particularly for the underchassis, which a lot of folks north of Mason-Dixon Line are concerned about, rust to their underbody. But more importantly, this, this depth of shine and, and the reflective value is absolutely amazing. The word titanium, just for the record, we launched that pre-Apple's titanium phone. So, if there's any concerns about us copycatting, they copycatted us.
Invert, yeah.
Yeah. But it, it at the end of the day, you can get somebody to try something once with a special offer, but is it gonna stick? And do people truly value do they see the value, and is it demonstrable? And so what we're seeing today with our Titanium launch, and the stickiness of that membership base that is trading up to it, is supporting the fact that we're providing real value in that package. And that package, for those of you that are familiar with our pricing structure, is $39.99 per month. And for retail purchase, it's about $25.
Gotcha. We will get more into this, and we'll dive deep into some of the geeking out on.
Yeah.
washes in a sec. But before we move to more about the Mister Car Wash story, I wanna make sure that we discuss some of the dynamics in the industry because one of the key debates has been how is the competitive landscape rising as consumers, you can see a new wash pop up on, you know, a lot of street corners in the United States.
Right.
Which is interesting because these are capital-intensive businesses.
Right.
They are good unit economic businesses. The way I typically describe the allure of a wash is the incremental profit of adding one car through a wash is really quite compelling. You should see Jed's light up when he talks about it. Perhaps that's why there has been an increase in competition. With that being said, how do you see the competitive landscape playing out over the next few years? Is there gonna be a shakeout because of the capital intensity? Now, some of these folks who thought they could operate and take share are, you know, gonna reconsider those decisions, and that'll provide an opportunity for Mister Car Wash.
Yeah. So I, I would simplify it by saying there's three big buckets as we see it. And in the first two buckets, there's these private equity-backed platforms that have looked at this category and said, "Hey, fragmented space, primarily mom-and-pop. I mean, with our close to 500 stores, we have less than 5% market share." So there's an opportunity for two or three players to, you know, create a super regional or perhaps someday a national brand. And so through acquisitions, through M&A, there was a lot of frothiness and a lot of people leaning in to pay up for businesses that looked attractive. But what many of them underestimated was the capital, the CapEx requirement to reinvest back in the business, the operating model, the operating infrastructure, the team that's required to actually deliver the service consistently. And so there's a lot of deferred CapEx.
There's a lot of folks that have unusually high leverage and a lot of debt service to support. As a result, they have underinvested and are now struggling, quite frankly, in trying to figure out what is their next course. There's another bucket that is also PE-backed that have good operating models, have healthy balance sheets, and good management teams, and they're doing quite well. That's the minority. Then there's a third bucket, which is the regional operators that we have the utmost respect and deference for, that are really, really good at their craft and have stayed kind of within their capabilities and haven't grown too quickly. There will always be a place for that regional operator that delivers great service.
but what we do really, really well, and we see ourselves as operators first and foremost, is these very basic fundamentals, which sounds a little bit mundane but critical to our equation.
Which is quality, speed, customer service, and doing it consistently at scale. And we've been able to deliver that because we're myopically focused on technology, mechanization, automation, and being able to deliver that car by leveraging the things that are not manually intensive or labor-intensive. And, as a result, we've created this expectation and, and the value proposition to our customers where they know that they can get in and out of our stores in under five minutes. And speed has become one of the key points of differentiation. Where we elevate that and take it to the next level is on the customer service side, which is hard to quantify, but one of the things that we do particularly well is greet our customers as if they're treasured guests that they haven't seen in a long time.
They can feel that warmth, that etiquette, the professionalism that we've been able to deliver. And it's become our calling card. And what we hear most often from most of our customers is, "How do you get your frontline team members to wave and smile and hustle and have a skip in their step?" And we're quick to say that we don't do it by cracking a whip or putting a. smile poster in the back room. We treat them well. We pay them well. We train them. And we support them. And we create a culture where they know that they're super important to the equation, and that sounds a little touchy-feely, but it's absolutely been the key to our success.
So there is a lot to unpack there. Number 1, I want to dig into the competitive landscape. It sounds like the thought process right now for the wash industry is that there will be a few leading players that rise to the top.
Yep.
In most cases, they will dominate certain regional or super regional markets. So you'll have Mister who's great in Minneapolis, Minnesota, you know, certain parts of Arizona, you know, other, big, big markets. You might have a few other operators who do well.
Right.
So that's.
But there's a race to densify, right?
Race to densify.
So there's this.
Maybe explain why densification is so important.
Yeah. So there's this notion of the fortressing, right? Domino's famously coined the term, but it's building out this network effect where we have, within a 7.5-minute drive time of wherever you are in the Twin Cities, you can find a Mister Car Wash. And so the value proposition for you as a member of signing up for our $19.99 program or our $29.99 or $39.99 program is that wherever you are, you get your car wash. That value pro compared to an independent car wash operator that may have one or two or three stores is much greater. Now, whether or not you use more than one or two stores is a whole nother matter, but the fact that you have that optionality and that ability to is huge. And we hear that a lot.
Tucson, where we're based, we have close to 20 stores. Wherever you go in Tucson, there's a Mister Car Wash.
Right.
Wherever you go in the Twin Cities, there's a Mister Car Wash.
Yeah. And to put in you go, Jed?
Yeah. And, I think, Michael, just to jump in there and put a finer point on this. When we look at our 2.1 existing.
2.1 million.
2.1 million existing members today, over 30% of them will use multiple washes. So that network effect, obviously, the more densified the market, you see that, that percentage of cross-utilization increase, and then the lower densified markets, it's quite as high.
As one of those 2.1 million members. As kids who do use sports, and I'm driving all over the community on the weekends, and I can drop my kids off, go get a wash at the local club, it puts in very real terms the benefit from having a network.
Competitive advantage, right? What is our strength vis-à-vis the new guy that opens up across the street? The person that gets there first, and it's not just one player, right? There will be room for two or three in any one market.
Yeah.
But there will be consolidation. There will be this kind of densification, if you will. And right now, that race to be the top three in any market is going on throughout the U.S.
It does seem like that having that ability to get in and out of a wash very quickly is a key distinct advantage for Mister Car Wash. If you had to compare yourself to the average player in the industry, how would you characterize or, or quantify the benefit of Mister Car Wash's throughput.
Yeah.
In its washes?
So I think the ultimate litmus test is during peak periods where demand is at an all-time high. So, and let me pause for a second, take a step back. So because of our Unlimited Wash Club model, where 70% of our revenues and volume is subscription-based, we've actually had a flattening, a smoothing of, if you will, of our demand curve, where back in the day, it was Saturday, Friday, Sunday, and then kind of a Monday through Thursday in terms of how the, the peaks and valleys would look. And then within the day, there would be a 10 to 2-ish kind of bell curve. All of that has smoothed out because our Unlimited Wash Club customers are coming in during some non-peak periods, and that's made it easier for us to operate.
That said, there are still the Saturday at noons when you have a whole lot of retail customers that are coming in, and how well do we perform during those peak periods? And I think, again, that's one of the points of differentiation where we can wash easily 150 cars per hour. We have some stores that are pushing the envelope north of 200 cars per hour, which is pretty quick while delivering good quality service. And I use this I Love Lucy example, but the demographics in this audience are too young to remember I Love Lucy. But there's a famous scene where she's working on a chocolate factory and.
There's a couple guys in the back that might remember.
The conveyor belt gets churned up. So you can churn up the conveyor belt, and then all of a sudden, shit hits the fan. And so can you balance speed and quality, you can churn up the conveyor, but if your quality starts to diminish because you have less time to wash that and dry that vehicle, customers are very finicky, and they're very particular.
Yeah.
They will notice if there's water drops on their windshield, their hood, side mirror drip, backs of SUVs. We have to balance the wash process and have the equipment in place to be able to deliver that quality. The other points that we and we use musical terms like tempo and rhythm and pacing, and, and there's a flow.
Conductor?
There's a flow. And our general managers are the conductors in the Philharmonic. But.
Yeah.
There's a flow to our stores where the American consumer is insanely obsessed about their time.
Right.
They are we are freakish about waiting in lines. God forbid, it's like, "You're the king of Siam, that you have to wait three cars deep. And don't you know who this is, Michael Lasser.
Who I am.
He's gotta he's gotta get through. But we recognize that. So when we look at our stores and what we've done to increase the throughput, we look at every pinch point, every bottleneck, and say, "How can we where is there friction?" And the first point of friction is in the transaction section where, oftentimes, we have unattended sales kiosks. There's someone that's unfamiliar with the technology on the retail side. On the membership side, we have, on average, three lanes. Two lanes are dedicated to membership. The other lane is dedicated to retail. But the way we've set up our membership plan, it's we call it windows up. Their windows are up. And, and again, here's another kind of weird commentary on the American state of affairs. People don't wanna talk to anybody, right?
So they, they don't wanna interact in some cases. So your windows are up. You have an RFID tag, and you fly through the store. I say fly. You go through the store very, very quickly. But that all helps you get in and out and on with your day. And if there's any pinch point, it's kinda like the easy pass. You're.
Yeah.
If you're the retail customer that's, you know, fumbling and bumbling with your credit card, trying to get through the turnstile, and that actually adds an additional why you should get into the membership plan. If I could just hang on the membership plan value prop for a second. Initially, the model was launched through this lens of you can save money on your third or fourth visit, right? A lot of people.
That was the pitch to me.
A lot of people start yeah.
Spend $10 or get a.
They'll do the calculus and say, "Hey, you know, if I'm paying $15 for today's car wash, for $5 more, I can come in every single day for the rest of the month." And so on my second or third visit third visit's free. But what we found over time is that while there's always this value component to saving money, it's more about their ability to, quote-unquote, "skip the line.
Yeah.
Because you don't wanna wait in that long line. And, and that has become really, really powerful. And I think, you know, if I could borrow from Walmart, they used to be, you know, "We can save you money," but now they're.
Right.
We can save you money and save time." And that's really what we're, you know, this convenience factor, which has been the explosive kind of growth of express exterior car washing and subscription, and then keeping your car clean all the time is why we feel, again, very fortunate that we've got this massive, you know, at the IPO, there was a lot of bankers that were saying, "You need to position your company as a subscription company that happens to wash cars." And we're like, "Take it easy. Take it easy." We're still a car washer, but.
Yeah.
The subscription piece has been absolutely game-changing for us.
Yeah. For sure. I mean, and also on the IPO, a big part of the story was Mister's ability to build the muscle around opening organic locations. This way, you control your own destiny. You get the inlets and outlets that you want. You are able to commit the capital in the way you want. How has this journey of building that organic greenfield muscle been going, and where do you see that from here?
So it actually started 25 years ago. So we've, we've grown to almost 500 stores primarily through acquisitions. So the original model and again, when folks look at this space, fragmented mom-and-pop, ripe for consolidation, it's a roll-up play. Our approach was different, though, because when we went in as operators, we were looking for and this sounds a little weird, but we call it reverse synergies. Where we were looking for best practices, we were also identifying perhaps mistakes that were being made. But over the course of 25 years, we've acquired over 100 companies. And if you think about it, those were 100 different experiments where we were able to see both good things, and we've learned from every single business that we've acquired that has been now baked into our operating model, all those good things.
But also, you know that old adage in sports that you learn more about yourself from a loss than you do from a win?
Oh, I know that one.
We've learned a lot about ourselves through some of the things that others have other mistakes. We've made our share of mistakes too.
Yeah.
But it's all about experimentation, right, and learning from each one of those. So over the course of 100 businesses that we've acquired in 25 years of learning and figuring it out, we have baked that into our greenfield operating model, and that's why these stores are absolutely crushing it. So the AUVs, which you guys are probably already aware of, you know, north of $2 million a store, close to $1 million in EBITDA, you know, four-wall margins that are 50%. You know, we get to, in three years, a full payback on that $2 million in invested capital.
Yeah.
But you know, we are really crushing it on the greenfield side to the point where we're almost so as we've been very acquisitive, but we've pivoted, and we like to build. The con to the build is that it just takes longer 'cause it's about a 22-24-month cycle to get a store, you know, up and off the ground, versus you can buy very quickly, but you then need to operate them.
Yeah. Michael, let me jump in and just provide a little bit more color there. So when you think about the greenfield program, and it's something that we're really optimistic and excited about. So last year, we built 35 greenfields. In 2022, we did 28. In 2021, we did 17. So it's been this ramping. About the time of the IPO, we made some material investments on the G&A front to build out this in-house greenfield development team. They're doing a great job. As we look ahead, we're gonna start to leverage some of those investments. We expect this ramp to continue. We've got it to approximately 40. So that flywheel, that momentum, and with each one of these greenfields, we learn something.
We're able to apply those learnings to where we're becoming just more and more efficient with each one. As John had highlighted, we're seeing great year-two cash-on-cash returns of about 45%.
And so, Jed, that means maybe two things. One, you will see the benefit of the different vintages of new washes that are coming online, picking up steam, becoming more profitable over time. And two, you, by virtue of learning, and getting better, will also be able to refine and optimize the model, which will help.
And the other point that I think's a relevant one, when you're looking at this re compared to other traditional retailers or restaurants, is the lead time, that cycle time to build these, it's just a little bit longer. So the CapEx that we guide to in 2024, while some of that will go to our 2024 new builds, some of it also goes to the 2025 and also the 2026 pipeline as well when you think about a roughly 22-month cycle from the time we start site selection until we actually get that location open.
Is there a limit to how many locations you feel comfortable opening in any given year at this point?
Yeah. I think the constraints are really gonna be around the people side and making sure we're disciplined. And one of the key pieces to this equation is making sure that we've got the team to run and operate these up to the Mister standards. And then, obviously, you have capital constraints, and we wanna lean in and take advantage of the white space and the opportunity in front of us. But there's some real capital constraints for any business and making sure we're balancing those two different dynamics.
It's a judgment call, right?
Yeah.
So nobody wants to churn up the knob quicker than us. And so back to if we're as we define it, about in about 50 markets, technically 70, but 50 as we organize them, and our bandwidth today and what we feel is a reasonable rate of growth is 50 stores. That's one store per market per year. That's not enough, right?
Yeah.
So we need to turn up the knob, and we need to go grow even faster. But if we get in over our skis and if we grow too quickly where we can't support it, and to Jed's point, if I could double-click on that, building a store in the 22-month cycle, 24 months in some cases, is one piece of the equation. But getting an operator that can handle 150 cars per hour consistently over the course of 10 hours during the day, you have to be well-trained, completely dialed in, and it takes at least a year, if not two, to be in that position where you can plug into a store and handle that. You thought your job was hard.
Many of these people have to analyze 150 companies during a reporting season. So they get it.
Okay. You gotcha.
They get it.
You got it. Yeah. So it's.
It's a lot. I got you. How are you gonna complement the organic growth with opportunistic acquisitions? You've done some of that. Florida, and what you did there comes to mind. And, and speaking of which, where, where does the.
Yeah.
M&A market stand? Like, multiple's got pretty frothy, and, and now where do they stand?
So we've cooled our jets. We've always prided ourselves of being very disciplined and measured and making sure that when we identify an opportunity, it's a quality asset with a clear upside and that strategically, there was a benefit that part of our investment thesis. So it was never about, you know, we can buy it right, but it was does this strengthen our position in a market, or does it allow us to move into a new market with some girth so that we can then build out in that market? So we did a deal last year called Cruisers in Los Angeles. We were really desirous of moving into the heart of L.A. When you look at California and we have a little north of 50 locations in California right now, it's one of our most productive states.
When you look at the top three in our 21-state portfolio, it's Texas, Florida, and California. California and Florida are very, very close in terms of number of units. But when you look at the AUVs and how productive the California stores are, there's something in the water in California. And what it is, is California is a massive car culture.
Yeah.
Massive state that's underserved from a car wash standpoint. So we leaned in, quote-unquote, to move into Los Angeles. That gave us this presence and allowed us, to Jed's comment earlier, to support the infrastructure that it takes to actually then fan out from there through bolt-ons and/or greenfields. But it's important to note that we are agnostic in terms of unit growth. We will always be acquisitive, but at the right price. And so to your earlier question, prices have gotten a little bit.
20-20 multiples for EBITDA multiples for assets?
Yeah. Yeah. And kinda where we're trading, which we're not happy with.
Yeah.
You know, we had to have a really clear path to say, "Can we lean in? Do we see the ability to grow that EBITDA line and lower the effect of multiple?" And if we can answer those questions definitively with confidence, then we can do the deal. But we were happy to sit on the sidelines and watch others overpay for, in some cases, very average to below-average assets. And that's their choice, but they're now having to live with that. You know, we have to run those for the next.
Sure.
20, 40 years, right?
Yeah. And Michael, on the so with the greenfield program, this is where it comes in nicely, right, is when we look at acquisitions. So we did 35 greenfield last year, 6 acquired stores. But it's, it's not because there were fewer M&A opportunities or we're out of the M&A business. It's just we have a benchmark now of, "Here's how much it costs to, to build a greenfield. Here's what the return looks like." And we stack acquisitions up and, and look at it through that through that's one of the main lenses that we'll stack an acquisition up and, and look at it through.
Rationality has set in. Deal flow last year was.
Multiples have come down?
Multiples have come down. The deal flow was down 75% last year.
Yeah.
Multiples that were trading in the super high double digits in the 20 range.
Yep.
Are now down in the 12-15 range. There's still a disconnect, though, between private valuations and publics.
What replacement costs?
Who's right? The public markets or the private markets?
Yeah. We will see. Time will tell. One of the reasons why.
I wanna turn the question on this guy.
One of the reasons why, maybe the stock has been trading like it has is due to concerns around the state of the consumer, how the consumer sees the wash industry. We got a question. Are you seeing consumer slowdown, less frequent visits, buy-downs as inflation sticks, and COVID cash savings diminishes?
Yeah. So I wanna go back to my earlier comment. Everyone loves a car wash. We serve multiple demographics. When you look at our portfolio of close to 500 stores, we have this beautiful distribution of stores, and we can segment them any way we want, but through a very simple lens of average household income, the bulk of our stores start at $50,000 a year on average and then move up to $150,000+ . And they do consistently well across each one of those segments. We have a handful of stores, small handful, that are just below that in the 35-50,000 range. They're under more pressure.
Yeah.
But even inside.
That's household income.
Household income.
Yeah.
Yeah. Yeah. Yeah, but we see a negative comps in that quadrant, small stores.
And that's 5%-10% of your stores?
Yes. Yeah. It's a small percentage.
Small percentage.
But we do know that there's a segment of the motoring public out there that's under more pressure financially. We do believe that their frequency so it's not like they have abandoned car washing. They're just coming in a little less often right now. That's why we're feeling some pressure on the retail side. It's that coupled with a little bit of increased competition, but we're not unaccustomed to competition. So if there's a brand new shiny car wash that opens up, you know, within a three-mile radius, they may go try it. But we do know that over time, they're gonna, we're gonna win them back.
And in your view, this is having an impact across the wash industry.
Absolutely.
With, you know, other players have been referencing the same thing. Do you have a sense for how long this lasts? Would you expect a shakeout over the next, you know, several quarters? Is this gonna take more like years?
The shakeout's happening.
Yeah.
Over the next five years, there's gonna be kind of this bifurcation of, again, those that are well-capitalized that have good operating models, good teams, good visions, etc. Then those that were financially engineered, that were looking to flip it to somebody else, they're gonna probably have to take a haircut on the sale of that business. It will create a number of opportunities for those that are well-positioned, a lot of Mister Car Wash. So we expect M&A for us to come back, but we're gonna be, again, very disciplined in our approach to acquiring good businesses at the right price.
Michael, I think we needed when we jumped in and talked just a little bit when you talk about the macro backdrop.
Yeah.
Right? 'Cause you go back 18 months ago, everybody was talking recession. Recession is looming. Questions around a newly publicly traded company. What's gonna happen to the consumer? What's gonna happen to our 2.1 million subscription members? But I think it's important to note that those 70% of the over 70% of the sales, that subscription segment, it's a really sticky customer. We haven't seen an uptick in our churn. We don't see those members trade down. It's a really predictable, consistent revenue stream that helps insulate us from a lot of these macro factors that you're highlighting. It's really that retail customer that tends to be a little bit more transient, and we'll try to go down to the shiny new box down the road or some of the macro pressures that may be impacting their wallet and ability to spend.
I think it would be helpful, Jed, for you to provide a little bit more color on what the path has been with that. 70% of the business is the wash club members, very recurring revenue nature, stream. 30% is more retail. Retail, by definition, is gonna decline because you get a lot of retail members when you open a club, and then those members convert to become those retail customers convert to be members. So normally, you would see a mid-single-digit decline in retail by virtue of them just converting. It's over the last few quarters, at times, that's been more like high mid- to high single-digit declines. At worst, it was a low double-digit decline. So if you could just walk the.
Yeah. That's right. That's right, Michael. I mean, so if you think about it and this is where, in hindsight, we've probably talked about this the wrong way. Your retail customers, our goal is to trade them out of retail into subscription. It's essentially a mixed shift. And so when you look at just that segment of retail customers, it's declining year-over-year. And historically, it's declined on a mid-single-digit basis. But the biggest driver of that decline is because they're trading into the subscription program. The reason we like that is you take that retail customer that comes in, let's say, 3x per year and pays $19.99 per a visit, and if you can trade them into the subscription program where they're paying $29.99 per month, you're getting about a 6-time sales lift as you trade them into the subscription program.
6x sales. Pretty good. I want to touch on some of what you introduced before, which is this exciting opportunity 'cause Mister Car Wash is not sitting still and just letting the macro dictate the terms of your financial performance. You're rolling out this higher-tier membership. So if you could even ground the audience in where your tiers stand today, what is the introduction of Titanium 360, and functionally, what does it add? 'Cause when I go through the wash, I see some, you know, new bells and whistles. And how does that work?
Yeah. When we first launched the program, we intentionally set us.
And then you launched it last year.
Actually, I'm gonna go back to the very beginning.
Okay.
Right? So when we first launched it.
There was Adam and Eve. Go ahead.
There was a good and better plan.
Yeah.
At $19.99 into $29.99. There was no best in that model. So in marketing parlance, they would call it a topside anchor, but to have a premium offering that could help position your Platinum as well as the customer that just wants all the bells and whistles. And so if anything, you could argue that, again, we've left a lot of money on the table by not pursuing that. But over time, pre-Titanium, this 2.1 million member mix has naturally evolved into what had been, and now a 55% premium mix to 45% base mix pre-Titanium. Once we launched Titanium, we're now looking at this mix shift in its early innings right now. But we're really seeing this huge opportunity to trade base into Platinum, Platinum, and base into Titanium. And so our focus has been and this is part of the launch and learn.
What had been historically our approach of taking, to Jed's earlier comment, retail customers into membership, there's that old sales adage: before you go acquire a new customer, "Have you done as much to have you done enough to maximize the value of your existing customers?" So we've never had a conscious trade-up plan. We don't even use the word sales inside of our organization. There's no commissions. There's no incentives. We just naturally and we actually use the word educate and inform. We allow a customer to make their own informed decision.
Now we're saying, "Hey, there is an opportunity for us to tell them, a base customer, about our HotShine Carnauba Shield , our wheel polish, our tire dressing application that's in the Platinum, as well as the Platinum members to introduce them to Titanium and the benefits of Titanium." So we've repositioned our guest services specialist into the membership lane so that they can take the existing 2.1 million members and see what we can do to trade them in. And right now, we're expecting, I think, 15% mix into Titanium.
More than 15% into Titanium.
Just to put that in context, normally, what would happen is a customer would go through when in automatic lanes, they would put their credit card if they're an à la carte or retail member.
Right.
Or a customer, they would put their credit card in. A guest specialist would walk over and say, "Hey, you know, can I help you? You're gonna do a retail membership." You know, if you just spend $20 instead of $12, you can come unlimited per month. So now the conversation is less about, "Hey, do you wanna sign up for our membership?" But it's coming over and saying, "I see you're a, like, Michael Lasser, $20 member per month. Do you know about the benefits of the Titanium 360?" Which could, in theory, take away from the ability to sign up for some of these customers.
Right. So it's a decision that we're making to focus on membership upgrades, not at the expense of but, you know, there's a little bit of a trade-off. So we're gonna de-emphasize retail conversion while we're focusing on membership upgrades. But if you think about it, so we're gonna do $1 billion in revenue this year, and of that, $700 million is subscription. The opportunity for us to and we look at percentages. Percentages can sometimes like, what does that mean?
Yeah.
Right? Quantify that in pure dollars. So we're looking at it now through a revenue per member incremental revenue per member lift perspective because, really, therein lies the, "I can give you 100% of a penny," right? But.
Yeah.
But if it's a $10 lift today from the $29.99 to the $39.99, what does that 15% translate into our overall member base on an incremental revenue per member per month basis? And it's huge.
It's big. So just to also level set, you were 45.
That's right.
Base, $55, slightly higher tier.
50, yeah.
So now you're gonna add in this 15%. How does that distribution look? Is it 30, 55, 50?
No. I think just to give the audience some math that.
Yeah.
To kinda think through this and help model it out. So 45% of our customers pre-Titanium, we're sitting in that base package at, call it, $19.99 per month. And then 55% of our customers.
We'll call that the Michael Lasser package.
55%, we're at the Platinum package at $29.99. What we're seeing is this with this new $39.99 package, that's mixing just north of 15%+, most of those customers that are trading up into Titanium are coming out of that Platinum package. We're seeing a little bit of Base trading into Platinum as well, but that's been actually a tailwind of the business for a while. You go back 4 or 5 years, and Base was actually 55%. Platinum was 45%. So there's always been this natural. But it's with a third package, it's just accelerating that. As we put more focus on educating our customers on the benefit of Titanium, we expect that Titanium mix to continue to increase. The one variable in this is the timing of which they start paying the full $39.99.
So as we've launched this, one of the learnings is introductory offers to help incent trial is a key part of the equation. Call it about three months of promotion. And then you have three months of post-promotion to where you see this, the mix in these markets where we've launched kinda settle in. And like we said, we're externally north of 15%, but internally, and over time, we believe we're in early innings, and we're certainly targeting a higher number than that.
Okay.
Of course.
Double question. So increasing our revenue per member while not touching our base value offering, I think, is gonna also give us this beautiful opportunity. Here's the beautiful.
I, you said it 3x or 4x .
you know, so for those that are price-conscious, price-sensitive.
Very.
Thrifty.
Very.
Frugal, you'll still have that extreme value on the $19.99.
Yeah.
While we introduce this super premium.
Yeah.
Best of both worlds.
Without a doubt. A couple of points I wanna make sure that we cover before our time concludes. Number one is how deep of a drag do you expect on new member growth as a result of this pivot, just to help lay the foundation, plant some seeds?
Yeah. I think it's important to note we still expect member growth during 2024. So the way that we've thought about this and modeled it, last year, we grew membership, UWC memberships by just over 10% in 2023. We would expect something south of that during 2024. And that's what we've reflected in our guide, positive but a little bit south of what we did last year.
Can I add too? So our industry-leading members per store, we're close to 5,000 members per store. As a comparative benchmark, 'cause that number, what does that mean? There's another large player out there that's averaging 1,500 members per store. So again, we have done an amazing job back to our 70% subscription where we have 5,000 and that's the average, right? So we have some stores that are 10,000+ members. And that's awesome. But it also is suggesting that we need to continue to densify and add more stores because the demand is so strong in those stores that we're enjoying 10,000 members.
I think the kids call that a humble brag.
Okay.
Lastly, I wanna touch on the profitability. I think this has increasingly become in focus for the investment community over time. You've been navigating through this environment of increased costs both on labor, chemicals, development. You do have these beautiful profit drivers, because one of the allures of this Titanium 360 program is you add $10 to the monthly revenue per member. It could be a, you know, 50-300,000 members who do this, and you get $10 more per month. You give them a little bit more soap, maybe a little bit more love. But the profitability flow-through should be significant. So what are the.
It's not soap. It's titanium dioxide, which actually.
It's expensive. It's expensive. All right. Well, we'll tamp down expectations a little bit.
Okay.
We got you. But how does the profitability flow over here? Because margins have been under pressure for the last few years.
Yeah. When we think about the year 2024. This will be the big part of the profit driver, profit equation. Those sales, that incremental $10 will flow through. We're modeling it at 90%, very little incremental cost associated with those Titanium washes.
And then, are there offsets, you know, especially not just this year?
Yeah. So when you work your way down the P&L, I mean, just for a little bit of insight for folks, I think let's start with G&A. We've made some investments that I had talked about, about the time of the IPO. We do expect to start flexing G&A when we look at G&A as a percentage of sales during 2024. When you look at the other store operating expenses, we do fund our expansion through sale-leasebacks. So there's some incremental rent. We've guided to about $11 million of incremental rent in 2024. So that serves as a headwind to margin. And then the bigger investment that we make, we have the cost structure of more of a consumer services company. And so when you look at that store-level labor and chemicals line, labor makes up about 90% of it.
What happens with the labor market? One of the key pieces for us is making sure we get that tier-one, top-frontline team member that's gonna represent the face of the brand. That comes at paying a little bit of a price. We've modeled in wage inflation in 2024 consistent with what we saw in 2023 and 2022, which was meaningfully higher than what we've.
Yeah.
We'd seen in earlier years.
But net margins of 30%, that's a beautiful business.
Beautiful. Beautiful.
Okay.
For 45% four-wall margins, that's a beautiful business. Without a doubt. Who knew the wash business was so fun, beautiful, and exciting? Please join me in thanking the team from Mister Car Wash for helping us understand the story.
Appreciate it. Thanks a lot.