Consolidation within the collision repair industry is at the forefront of many shop owners’ minds this year. Following the announcements by several groups over the past few months with intentions of consolidating shops in their local market, even the most profitable and successful repair business operators are thinking about their position in an ever-changing marketplace.
For a large proportion of INSIGHT’s subscribers, growth is their primary goal. Whether an expansion of an existing facility, the purchase or building of a new location, or the acquisition of a competitor, the pace at which the largest shop operators are growing is unprecedented in the history of the industry. This growth is changing the level of competition and make-up of the industry.
With this article, INSIGHT begins an in-depth examination of the forces propelling industry consolidation, how individual repair facility operators are responding and what effects consolidation will have on the insurance and supplier industries.
To fully understand consolidation requires an examination of the factors affecting the industry and creating the opportunity for growth.
The forces affecting the collision repair industry’s future have in large part been present for several years. The growth of DRP, the increased use of computers in the estimating process, and greater attention to sales, marketing and financial performance by the shop front office are well known topics to regular subscribers to INSIGHT. Taken individually, each of these factors has made a major impact upon the typical repair facility. But, looking at each of these factors as a small part of a larger whole paints a picture of an industry in transition.
One of the largest factors driving consolidation is the apparent oversupply of collision repair facilities. To understand the reason for this oversupply, one needs only divide the total dollar volume in the collision repair market by the total number of repair facilities. The chart on page 12 details both the dollar volume and shop populations for the industry for the years 1994 through 1996.
As the chart illustrates, the average sales per repair facility has been fluctuating in the mid-$400,000 range for the past three years. To put this figure into perspective, the average technician will produce roughly $135,000-$150,000 dollars in labor and parts sales. Using this figure, the average shop would employ just three technicians.
The second chart illustrates shop population in terms of sales. As the chart details, roughly 9000 repair facilities have sales of less than $200,000 per year. Another 13,000 facilities have sales of between $200-300,000. Shops with sales of between $300-450,000 represent another 12,500 units. That’s a total of 34,500 repair facilities with $450,000 or less in collision repair sales.
On a unit basis, the repair facilities under $450,000 in sales represent roughly 70 percent of all collision repair facilities in the U.S.
These under-$450,000 facilities are the hardest hit by consolidation and the growth plans of larger facilities and more importantly the increasing costs associated with regulatory compliance, computerization and increasing equipment needs.
The second largest factor affecting collision repair facilities is the growth of DRP and the insurance industry’s need to control repair costs. As DRP grows it moves more work into a smaller number of efficient repair facilities.
(Editor’s Note: For a complete review of DRP and its past, present and future impact on the collision repair industry, see the feature articles in the August, September and October issues of INSIGHT.)
The third factor affecting consolidation is the growth in collision repair facility computerization- and more specifically the growth in electronic data interchange between shop and insurer. The ability to communicate electronically is a growing trend and one that will have substantial impact on costs and service turn-around times for both shop and insurer.
While many shops complain that the costs of computerization are falling more heavily on the repair facility, there are front office productivity benefits of electronic estimating and management systems for the large repair facility that help offset some of the cost. But, smaller shops, think back to those 34,500 repairers with $450,000 or less in sales, may not be able to afford many of these capabilities. Another advantage for larger repairers.
The economy of scale afforded large shops is also another crucial factor pushing consolidation. Faced with increasing pressure to control costs, larger shops have more leverage to deal with suppliers of parts and materials. The larger shop also is more able to invest in new equipment to meet the productivity challenges of changing automobile technology.
Another factor affecting consolidation is the greater access to capital available to larger repair centers. There is currently very strong interest from the investment community in what many venture capitalists perceive as a "classic" industry consolidation ready to take place. Also, as shops grow larger and more professional, their accounting records become more attractive to traditional lenders.
Finally, one of the largest factors is the broad changes in service retailing in the U.S. Much is made from the broad change in business from small, mom-and-pop service businesses to large, nationwide chains. The corner grocer has given way to the mini-mart. The downtown business district to the WalMart. These chains strive to provide a consistent level of quality, customer-pleasing service.
To better gauge how collision repair facilities perceive the changes occurring within the industry, INSIGHT has begun a new research series: Trendlines- Survey of Leading Collision Repair Facilities. The results of the first survey, on the perceptions surrounding industry consolidation, appear on page 14 of this issue.
Trendlines surveys the top five percent of repair facilities based upon the number of technicians employed.
Of the facilities participating, 54 percent responded that they believed the trend toward consolidation would increase the level of their business. Those facilities that believed that no effect on their business would occur due to consolidation represented 35 percent. Nine percent believed that consolidation would decrease their business.
Surprisingly, 44 percent of repair facilities believed that consolidation would provide greater leverage to themselves in their negotiations with insurers. Those that disagree, believe the balance of negotiating power would move towards insurers represented 35 percent of respondents. Those that felt that no change would result totaled 26 percent of responses.
All in all, this is a fairly mixed response. But, the vocal opponents of consolidation who often cite increasing insurer control as a reason for their opposition, may find it hard to believe they are outnumbered.
Nearly two-thirds of respondents, 62 percent, indicated that they were planning for a major capital investment of expansion within the next 12 months. Expansion of an existing operation and new equipment investments each accounted for 29 percent. The purchase of a new location accounted for 20 percent and the purchase of a competitor totaled 11 percent of respondents.
Most shops were going to finance their expansion with either debt financing or fund from the businesses profits or cash flow. Private equity investments, such as venture capital, amounted to just 3 percent of respondents.
In next month’s installment, INSIGHT will detail how collision repair facilities of all sizes are preparing for the changes brought about by consolidation and their opinion on how consolidation will progress.
Reprinted from the May 1997 Issue of Collision Repair Industry INSIGHT.
© 1997 Collision Repair Industry INSIGHT. All Rights Reserved
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