July 1998 INSIGHT Feature:

Multi-Shop Operations

Is the Leap to Multi-Shop Operations Your Best Bet for Long-Term Success?
Part 1 - Analyzing Your Current Potential

For many shop owners, the opportunity to expand has never looked so bright. Whether through acquisitions or building "green-field" new locations, a growing number of shop operators are looking to expand their operations by becoming multiple shop operators.

Why are shop owners increasingly taking the route to expansion through multiple locations? For some it’s the prospect of looming competition from full-fledged regional consolidators. Others just have the desire to grow and succeed but their existing facility is at its expansion limit.

In this article, we will examine the experiences of shop operators who have both acquired competitors, in their local market and beyond, and others who have built additional facilities to enlarge the market they service.

How did these shop owners arrive at the conclusion that a second or third facility was in their business’ best interest? To understand the answer to this question, first we must examine the factors that lead shops to pursue expansion.

The Drive- Why Go Multi-Location?

The reasons that shops choose to go the multi-location route have many variations. Primarily, though, the shop operators that go multi-location have improved their existing facility to the limits of performance.

In many cases, further expansion is not a possibility, or isn’t practical. They may be short of physical space for building additions, or additions at the current location are impractical due to the design of the facility.

In many other cases, shop operators, though able to expand, opt to go multi-location for the increased exposure and market area they can service due to the presence of the additional store. In simple terms, though they can expand their existing facility, the market they currently serve wouldn’t support the increased business necessary to make the expansion profitable. By opening a location in a new location, they expand the market they can serve, increasing their potential customer base.

The benefits of multi-location operations include both the increase in production capacity and market coverage mentioned above and also other items. These can include the economy of scale in the purchasing of supplies and in marketing expenses such as advertising and promotion. Additional overhead expenses, such as bookkeeping and administrative functions like payroll, can often be performed in just one office, sharing the expense among several locations.

On the other side of the coin, the issues that operating a multi-location collision repair organization can raise may outweigh the benefits. Questions are raised such as:

Also, any problem areas in your existing operations may find their way into the new facility. The chart at right details many of the common benefits and issues raised by multi-location operations.

Which method is the correct path? The answer lies in the responses to several specific questions regarding the operator’s existing facility. These questions include:

Answering "No" to any of the questions above points toward improvements that can be made in the existing operation before looking toward a second location. The first two questions are crucial. Running below capacity or below productivity benchmarks shows improvement is necessary in the existing facility. These improvements can solve many of the problems associated with meeting increased sales and production goals.

This is not to say, however, that a "No" answer to any of these questions precludes going multi-location. Ownership must balance what they believe to be acceptable targets and limits for the operational performance of their facility. For example, in some markets the state of the pool of labor might preclude second shift operations. Or, though a large backlog might cause long delays for vehicle repair, a shop that manages their backlog to minimize vehicle downtime for the customer will find fewer lost repair work.

Shop operators must also determine the effect of any additional locations on the existing facility. Will the new facility scavenge some of the repair volume that would have come to the existing store? Will the new facility generate excess sales that can be shifted to the existing store? These and other questions help the shop operator balance the needs of their existing facility with the potential opportunity afforded by multi-location operations.

The chart on page 13 details specific questions and operational benchmark analysis shops should conduct to analyze their current operations. The first section of the survey asks specific questions regarding the size, number of employees and other administrative data. The second section details the specific questions outlined above that shops need to ask themselves regarding their operations.

The third and fourth sections detail specific productivity and profitability measures for shops to compare against industry benchmarks. The Benchmark Figures used in this chart are national averages for shops of all sizes. Specific Benchmarks will vary based upon such factors as shop size, the shop labor rate, and location of the facility. These numbers should only be used as a rough outline.

(Editor’s Note: For more information on Benchmarks for specific comparisons to shops of similar size and labor rates, call INSIGHT at: (800)860-2744.)

The final section details the individual shops capacity compared to the benchmark of Sales per Production Employee on a yearly basis. To make a quick determination of your capacity, multiply the number of production employees in the facility by $192,000- the national average for Sales per Production Employee per Year. Compare this number to your present sales rate.

Identifying the Potential

Once the shop operator has determined that acquiring or building a new location is the method they wish to pursue, the next question they must answer is: "Where should the new location be located?"

Identifying the potential market for the new location is the first, most-critical step for the eventual success of the new facility. The geographic situation and demographics of the potential multi-shop operator play a vital role in determining the placement of their new facility.

To best judge the potential of a second location, a shop operator should first conduct a geographic analysis of their current business. Where do your customers live? Where are your referral sources located?

The most popular method for doing so is the simple map and pushpin method. Buy a large scale map of your local community, place it on a bulletin board and, using your database of past repair orders, begin locating customers addresses with pushpins. Different color pushpins can be used to classify customers by type.

For example, insurance referrals from a specific insurer may be blue. Those from another insurer can be red. Use the home address of customers, but also pay attention to their work addresses. Often, customers will pick a repair facility close to work versus their home for convenience. Most shops will notice definite clusters of customers.

With your customers and the resulting clusters located on a map, you can then determine areas for possible expansion. Look for areas with few, or no, pushpins. Examine these areas to determine potential reasons for the lack of customers. Is it strict geographic concern, i.e. your facility is too far away to service them? Or, are there other reasons such as a strong competitor more closely situated to service that area of the map?

If you’re not sure why you are not penetrating a specific area, it may be time to do a little reconnaissance. Take a drive through the neighborhood. Look for the competition. Note the amount of work the competition has in their parking lot. Look for billboards and other advertisements for competitors. Take notes and mark the information you gain on your map. Note the location of competitors and any advertisements they may have in the area.

Also, pay attention for possible acquisition targets or sites for new locations.

With this information, you can now begin to analyze potential acquisition targets and site locations. Look at the areas that are thin in customers and determine why you get little business from those neighborhoods. If it is within what you would consider your trading area, i.e., in other directions on the map you have customers farther away, then determine how best to approach capturing business in that market.

Often, a dose of advertising- whether billboards or direct mail, may be the answer. And, the money spent will certainly be less than what it would cost to build or buy a store.

With the areas inside the trading zone understood, it’s time to look beyond this market towards other areas for expansion. The map clearly shows where customers live and work. Now it is time to ask what markets beyond that area provide attractive expansion opportunities.

To determine that requires an understanding of the demographics of the regions beyond your own. How much do the people in those areas make for a living? What kinds of cars do they drive? These questions can be answered through a healthy bit of research. Contact the local chamber of commerce, visit a local library or search on the internet for demographics of these markets. The U.S. Census Bureau conducts neighborhood level research on most communities in the U.S. This information will include vital statistics such as average family income, the age of the residents and other factors.

Also, check for the availability of lists of registered vehicle owners. Many states sell their motor vehicle registration records to mailing list companies. Often these lists are available by zip code and may include specific make or model information.

Conclusion

With the geographic and demographic analysis of a shop’s current market and potential expansion sites, the process of formulating a plan for expansion can begin. In next month’s issue, we will examine the steps necessary to identify and evaluate potential acquisition targets and also look for potential green-field sites.

Have a comment? Send an E-mail to: rthrall@postoffice.ptd.net

Reprinted from the July 1998 Issue of Collision Repair Industry INSIGHT.

© 1998 Collision Repair Industry INSIGHT. All Rights Reserved

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