Over much of the past year, the industry has been abuzz with rumors surrounding consolidation deals, mega-shop launches, acquisitions, venture capital investment and the death of the mom-and-pop collision repair industry. Needless to say, growth oriented collision repair shop operators are concerned with what effect consolidation will have on their business. Increasingly, INSIGHT has been fielding questions concerning the path consolidation in the collision repair industry will take and how independent shops can respond to assure their future.
While many shop owners are losing sleep over the prospect of consolidation, a large portion of our subscribers see a bright future.
As our Trendlines survey detailed in last month’s issue, many collision repairers are upbeat about their individual prospects in a consolidating marketplace. The big questions remain, however, around the forms consolidation will take and how individual operators must respond to assure the future health of their business.
In this month’s installment of INSIGHT’s examination of collision repair industry consolidation, we will detail the paths that consolidation is likely to take and the primary methods that repair facility operators can implement to profit from the changes occurring within the industry.
The question often asked by many subscribers surrounding consolidation is "How will consolidation affect my business?" The answer to this question is, unfortunately, not as straightforward as one would like. The answer depends, largely, on how consolidation progresses at the local or regional market level. This will likely occur in one or more of the several paths towards consolidation identified by INSIGHT. The paths, or organizational structures that consolidators will follow include:
To date, most of the consolidation activity occurring within the industry has taken place as combinations of existing repair shops. This is true for the simple reason that the vast majority of collision repair businesses are independently owned operations. This activity has transpired in the form of competitive acquisitions and the development of formal relationships between individual entrepreneurs to create shop networks or alliances.
As shop operators have grown both in sales and profits, the capital necessary to expand operations, whether through the increase in profits generated by the business, or access to other capital such as business loans and equity investment, has as a matter of course increased. This creates the opportunity for expansion for those shop operators that know their business- knowledge evidenced by their growth in the first place.
This leads us to the oft-made statement that the largest shops are growing the fastest. The statement is true according to INSIGHT research. Fully 36 percent of Trendlines survey participants, who as a group have a minimum of 15 technicians, reported they were planning physical expansions of their business- either expansion of their existing location, competitive acquisitions, or building new, greenfield locations. (Editor’s Note: See the Trendlines survey results on page 14 of the May, 1997 issue of INSIGHT.)
Adding additional locations makes sense for successful shop operators. This growth method provides many potential benefits including:
These potential benefits, and the lure they may have for insurance companies, hold true for each of the four types of consolidation organizations.
Realizing the potential benefits, however, is the true measurer of successful expansion. To that end, consolidators need to address specific organizational concerns in their business expansion plans.
The overriding challenge facing industry consolidators is to provide the consistent high-level of service associated with large professional collision repair shops, while building on what they believe are the inherent advantages to size mentioned above. To do so will require industrialization and standardization of the collision repair process to a level not seen in the U.S. to date.
In fact, the challenges they face are many. By far the largest factor is that research conducted by INSIGHT shows that shops with over $2 million in sales tend to produce gross profit margins that average 5 percent below the 36 percent achieved by their $1-2 million in sales competitors. This reduction in gross profit can be attributed to lower labor and parts grosses caused by a higher level of insurance company concessions and changes in the typical estimating protocol to match DRP guidelines. Overhead and management costs, however, also tend to increase disproportionately- further reducing net profit margins.
As larger and larger shop operations have grown during the late ‘80s and ‘90s, the benefits of their size and their ability to realize operating efficiencies has been elusive. Large corporate collision repair chains would be faced with an additional layer of management that would further drain profit, unless improvements in productivity and capacity utilization can be found on the shop floor and in the front office.
INSIGHT believes that the organizational concerns of budding consolidators, whether large, multi-mega-shop chains or smaller two or three store operations, can best be grouped into two categories:
At the heart of industrialization lies the determination of new front office and technical procedures coupled with intensive and innovative workflow management. Collision repair facilities have often been compared to job shops, where individual, widely varying tasks, are performed by highly skilled technicians. No comparison could be more valid. But, the challenge presented by skilled technician availability makes it difficult to achieve above average productivity levels working under this scenario.
Large increases in volume will enable forward-thinking consolidators to redefine the division of labor among technicians and create a manufacturing environment in the collision repair facility. This can be especially useful in the refinish shop since the work procedures for refinish vary only slightly from one vehicle to the next. Automobile auctions and vehicle reconditioners have instituted refinish assembly lines in many of their operations at successful levels. However, the key for collision repairers will be the maintenance of high quality levels associated with the traditional repair process.
INSIGHT research in Europe and Asia has already shown examples of limited manufacturing-type environments on the metal shop side of collision repair facilities. Segregation of smaller repair jobs, under 15-20 flat rate hours, into refinish assembly lines is achievable- creating same-day turnaround times and improving facility utilization. (Editor’s Note: INSIGHT will present a feature article on shop design and workflow management for industrialized collision repair facilities in an upcoming issue.)
Facility utilization measures and the determination of best practices for workflow management are necessary tools for all collision repair facilities and will be especially important for consolidators. Every business has unique goals and challenges, and their best practices must takes these details into account to create optimum performance for utilization benchmarks.
Key measures include:
Tracking internal numbers, and comparing results between locations are critical to determining best practices. Competitive analysis, measuring a facility’s benchmark numbers compared to those repairers of similar size, is also critical.
(Editor’s Note: See the March 1993 issue of INSIGHT for a complete description of operating benchmark analysis.)
Those consolidators with a keen focus on utilization and industrialization techniques that improve their benchmark performance will find success due to their performance advantage.
And, lest we forget, these improvements must come without the sacrifice of quality and customer satisfaction. Customer demands, both from vehicle owners and insurers, are increasing. Quality must be built into the system.
Consolidation is an inevitable process within the collision repair industry. However, the ability of independent and dealership repairs to compete against multi-store consolidated operations is possible. Collision repairers who do not wish to grow their facilities into large regional chains, yet who want to grow their business moderately, perhaps passing it on to the next generation can take steps to improve the likelihood they can thrive.
First, repairers should take the concepts regarding industrialization and utilization mentioned above and work them into their planning and growth strategies. The benefits of improved productivity, through changes in the organization of labor, will benefit smaller facilities as well as large consolidators. Smaller volumes, however, will limit the effectiveness of many industrialization techniques. Still, top-tier productivity and turn-around times will be achieved.
Also, a focus on growth to the $2-3 million mark in sales will help independent facilities maintain a cash flow and profit position that allows investment in new repair and information technology. Under $2 million stores will find it harder to compete in urban and suburban markets as consolidation progresses. In rural markets, a sales target of $1.2-2 million is more practical. The smallest markets are likely to see very little competitive pressures from consolidators, but investments in technology will still be necessary.
Finally, focus the growth strategy on gaining volume at the expense of direct competitors. Analyze your local market by repair facility, noting competitors’ referral sources- both insurer and OE dealer, and the size of competitors- based upon number of technicians. Know your enemy! Steal his best customers and hire his best technicians. It’s ruthless, but it works.
In next month’s installment, INSIGHT will address the effects of consolidation on the supplier side of the industry and also the effect on insurance industry relations.
Reprinted from the June 1997 Issue of Collision Repair Industry INSIGHT.
© 1997 Collision Repair Industry INSIGHT. All Rights Reserved
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