Is the Quicklube Business Dead?

In the space of one year, two of the largest quicklube operations in the country have filed chapter 11. Heartland, Jiffy Lube's largest franchisee (400 stores) filed in January, and now, the 80 store EZ Lube Chain has sought bankruptcy protection. Contrary to what you might think, these bankruptcies are not, in my view, simply the result of our lousy economy, nor do they signal the end of the quicklube business. While I will admit that much of what I have to say is hindsight, it is also an interesting look back on what has happened to a very successful industry. I could write an entire book on this subject, but for this short post, I will concentrate on Heartland and EZ Lube. In the case of both of these companies, they were originally started by entrepreneurs. Heartland was originally a combination of some of Jiffy Lube's most successful franchisees that decided to combine their operations and sought venture capital. EZ Lube was started by two very aggressive individuals that built the chain rapidly, and then sought venture capital to continue expansion. Both groups wanted to take some money off of the table by selling parts of their companies, and raising capital. In the past decade, both of these companies expanded quickly. As new stores were built, each company could sell the completed store to a "third party" investor at a very beneficial cap rate. They could then lease the store back from this owner. The higher the lease rate, the higher the purchase price, and thus the greater the profit to each of these companies. These "profits" could then be distributed to the venture capital companies that owned them. My guess is that both companies had forecasts that indicated they could pay the substantial lease rates for 20 years. More than likely, they figured on an "average ticket" that was based on the sales of many other services to consumers getting oil changes, and likely also included some substantial "sales bonuses" to managers and technicians. In my view, there are a couple of fallacies here that doomed both companies. First, high lease rates (that accelerated as they aged) required both companies to continue to press for more sales. As "incentives" are paid to front line employees and managers to sell more there is a greater chance that customers could be "oversold. Both of these firms were eventually attacked by news media in their markets, which accused them of various misdeeds, including selling unneeded items, charging for items not performed, etc. Both firms promised to make changes in their business practices. Even so, the media was back one or more times only to find similar practices still occurring. There is a case to be made that higher gasoline prices caused the public to drive less in the last couple of years (they did), and that rising oil prices caused the margins to decline in the quicklube business (they did), but the foundation for failure was already in place for these two companies prior to these events. The quicklube business is alive and well, even though it is a bit "long in the tooth". Good operators can still make an above average living by doing homework and running an honest, consistent operation. I should know. I have done just that for over 30 years.