Here’s How Industry Consolidation Works Through Private Investment
Market confidence has spurred multiple acquisitions and investments from private equity firms in recent years.
“You’ve got the dynamic where people on the service side are moving more and more into this ‘do-it-for-me’ world rather than the ‘do-it-yourself’ world, which provides additional support for general industry growth,” says Joe Conner, managing director of the transportation and logistics group at Harris Williams.
Conner was involved in one such deal in 2017, when Express Oil Change and Tire Engineers changed hands between two firms— from Carousel Capital to Golden Gate Capital. Harris Williams advised on the deal.
That’s hardly the only deal in the industry. Roark Capital Group acquired Driven Brands in 2015. Driven runs brands like Take 5 Oil Change, Meineke, Econo Lube N’ Tune and Brakes and others.
In 2017, the firm CenterOak Partners took over FullSpeed Automotive, which owns Grease Monkey and SpeeDee, among other brands. The largest Jiffy Lube franchisee, Team Car Care, was acquired by Wynnchurch Capital in 2018.
Often, those brands acquire other independent operations as well, leading to a wave of consolidation in the industry. The last decade has been a time of growth, but private equity in the business is hardly a new phenomenon.
It’s the resilience of the industry that attracts investors, Conner says.
“You think about people looking at investments saying, ‘I've got the opportunity to grow the business in good times, and in bad times I'm going to do just fine as well,’” he says. “That’s why people have flocked to the aftermarket over time.”
In a recent interview, Conner offered his insight to what makes the quick lube industry an attractive investment opportunity and how more consolidation might be in the industry’s future.
As an advisor to these types of deals, Conner says that he works to identify a company’s needs and match them with a private equity firm that specializes in that need.
“We get introduced to companies all the time,” he says. “We meet the management teams. We learn a little bit more about what they want to do, what they want to accomplish and, frankly, what they need. And we try to help them find the right partner.”
There are firms that might specialize in real estate development or another that’s skilled in boosting a company’s marketing operation. If successful, that combination helps private equity and the company get returns on their investments.
The economy has grown since the recession a decade ago, and investments went alongside that trend. And shops are dealing with newer and newer technologies in vehicles, which require training investments. Shops are expanding services to try to stand out in the market, also requiring investments. Sometimes, joining a larger network is the only way to fund those developments.
“We’ve seen that dynamic play out really across the aftermarket, where guys can invest in systems, technology, training, equipment—really, anything that requires scale,” Conner says. “It becomes harder and harder for a mom-and-pop or a single location to do.”
Conner says that the automotive service landscape, like quick lubes, repair shops and tire shops, is a fragmented market. Even though there are lots of large chains around, there is still a huge market for independent shop owners and regional chains.
At some point, a growth opportunity might require a jumpstart from private equity.
“And they get to a point where bringing on a financial partner that can provide additional resources, capital to grow, helps them build a bigger business and now you're able to go make acquisitions and consolidate the market,” Conner says.
That can be the case for company-owned or franchised shops. It’s just a different revenue model for each, he says.
Benefits of the System
One of the benefits of private equity ownership is that, in a lot of cases, the company’s executive structure remains intact. That could allow for a smoother transition with the added capital for growth.
“What they are looking to do is partner with existing business owners, existing management teams to help support their growth plans. It’s not going to be private equity–driven growth plans,” Conner says.
Consolidated shop networks also benefit from having a single purchaser for supplies. It’s like a family going to the store and getting a good deal on a pack of 20 toilet paper rolls rather than five.
Big quick lube networks also work that way. They seek to get better deals by buying a lot at once.
“So, you're thinking about all of your input costs,” Conner says. “Oil, filters, any consumables in your shop. With scale comes some pretty big purchasing benefits.”
Conner says that investors are increasingly interested in aftermarket automotive services because they’ve seen successful campaigns in recent years. A strong economy accelerates that trend.
“You're just seeing the interest in this space where people are continuing to look for opportunities to put capital to work,” he says.
The short-term trends might point to more investments and more acquisitions in the future for those chains looking to increase their scale.
“I think you're going to see continued consolidation there,” he says. “There are plenty of opportunities in the market. There have been lots of successful investments in that space over time.”