In last month’s issue of INSIGHT, our Multi-Shop Feature series focused on the performance of an existing facility and analysis of its customer base to determine if Multi-Shop Operations are your best method of expansion.
The article detailed the steps necessary to do a check on your existing facility’s operational and profit making performance using industry benchmarks and time-based comparisons of your existing facility. The article also presented the importance of performing a detailed customer geographic analysis to understand fully who your customers are and where they come from. As part of that analysis, you should have also performed a quick analysis of your competitors, noting their locations on your local map.
In this issue, we will examine the steps necessary to determine your best route for expansion including: acquiring detailed information about the market you plan to enter, competitors, the types of information to gather and finally, making the first step- deciding on an acquisition candidate or green-field location to build your new store.
In the exercise for last month’s issue, we detailed the development of a pushpin map showing concentrations of customers in your geographic region. Also, we located competitors and potential referral sources.
Examining the concentration of customers, and referral sources defines your current market. Expansion beyond this market is the goal, and for the purpose of this article, it is assumed that this expansion will occur through either acquisition of an existing facility or by building a new store.
Below, we include a sample customer and competitor analysis map. To simplify the explanation, we have only included two basic customer concentrations. The light red areas indicate low customer density. The darker red areas indicate higher customer density. Naturally, the white areas are low-to-no customer densities.
Also, note the position of the facility and competitors as indicated by the legend. The shop is surrounded by a high customer density area that extends several blocks primarily north. The lower density area surrounding this area extends primarily north and east of the shop for several miles.
The best opportunity for expansion appears towards the south of the current facility. Very few of the facility’s current customers are drawn from this area.
(Editor’s Note; For the purpose of this article, it is assumed that increased marketing and advertising activities directed towards the areas south would not be beneficial.)
So, how does our hypothetical shop operation go about determining an expansion strategy?
The steps necessary to develop an acquisition strategy and evaluate potential acquisitions are very similar to those used when developing a marketing plan. To do this, you first need a complete understanding of local market conditions and how they influence your business.
The task of finding potential acquisition candidates or locations for new, greenfield stores, is complex, but made far easier with a firm understanding of your local market. You need to know the sales potential for the new market and external factors that will influence the long-term success of the new operation.
These external factors include:
While many of these factors will certainly feel like common knowledge in your own neighborhood, when you begin to pursue expansion beyond your home base, the method of acquiring local market data will be crucial to the planning and decision making processes.
The most important items for each in these five areas can include the following:
Determining the potential of the new market is crucial, yet difficult to quantify precisely. Taking our example above, you could gather information on the number of registered vehicle owners within a certain radius of the new location.
A common formula, and one that works very well for larger geographic divisions, is to multiply the number of registered vehicles by both repaired accident frequency, the percentage of vehicles that are involved in an accident and are actually repaired, and severity statistics.
The theory is straightforward. If there are 100,000 vehicles in a community, a certain percentage will be involved in an accident each year. Nationally, this number stands at approximately 15 percent. Taking this number, 15,000 vehicles will be involved in a collision. Of these 15,000 vehicles, roughly 7 percent, the national average, or 1050 vehicles will be total losses. The total loss ratio will vary depending on the average vehicle age in the community, and local factors such as traffic - the more traffic, the slower the speeds, the less damage to the vehicle. On the other side of this equation, rural areas, with higher speeds and trees close to the road, will have higher total loss ratios.
In addition to the total loss deduction, a certain percentage of vehicles will not be repaired. Either the damage is not severe enough, or the owner pockets the insurance check. Approximately 26 percent of vehicles involved in a collision will not be repaired on a national basis. For our example, that equates to a further reduction of the potential market of 3900 vehicles. This results in 10,050 potential net repairs for the market.
Once you have the net number of vehicles that will be repaired, you must multiply this repair base by the average dollar cost of the repairs, also known as severity. On a national basis, the average cost of repair currently is between $1900-2000. Again, this number will vary, so use the average cost of your own ROs to calculate the market potential. For our example, 10,050 multiplied by a $1900 average repair equates to a market potential of $19,095,000. The chart at right details the formula outlined above.
Also, compare rates and allowances for the market to your own. Are they higher? Lower? Differences in rates and allowances will naturally affect the bottom line and the calculations above.(Editor’s Note: Also see the Top 50 Metropolitan Market Potential Chart on page 7 of this issue.)
One important aspect to consider, however, is that registered vehicle owner information might not paint an accurate picture of the market, especially on a local, or neighborhood basis. Why?
Areas 2 and 3, the bulk of the new market, are primarily business districts. Employees do not register their vehicles where they work! So, you will need to look deeper to determine the actual vehicle population in the neighborhood. Besides business districts, if you live in a vacation or resort community chances are high that weekend, or seasonal, vehicle populations can double over the local resident base. Consider these factors when determining market potential.
O.K., we have determined where the shop’s current customers come from. We have also prepared an estimate of the local market potential. The next step is to perform a detailed competitor analysis to determine their capacity, their referral relations and to point us toward potential acquisitions or to warn us of strong competitors, or opportunities for green-field expansion.
While performing the analysis of a shop’s customer base, you should also have located existing collision repair facilities on the pushpin map. If this has not been done for the new market, now is the time. Include in your analysis both independent and OE dealer collision repair facilities.
Start a file on each competitor and build a dossier of specific information about the size of their facility, the number of technicians they employ, the insurance and dealer referral sources they maintain and the advertising and marketing efforts they put forth.
Much of this information can be gathered from sources such as friendly insurance appraisers and suppliers. Also, analyze the Yellow Pages for competitor advertisements as well as local newspapers, television, radio and outdoor advertisements.
The chart on page 13 highlights specific information to gather concerning the existing facilities in a market. This intelligence work will pay off with the firm understanding it generates of who the players are, how strong their business is, and how they receive their business. Some of the items listed, such as detailed financial reports, will naturally only be available for stores you are in serious negotiation to acquire.
(Editor’s Note: For a more complete listing of data to gather on the competition, see the Additional Resources listing at the end of this article.)
If you have performed the analysis recommended up to this point in the article, you have a detailed picture of both your existing and your prospective new market. You now have a detailed analysis of your existing customer base, an understanding of prospective customers in the new market and thorough intelligence on your competitors. What’s next?
The final analysis that must follow is directed towards sources of referral work. Naturally, you know your existing referral relationships. And, you have analyzed the referral relationships of your competition. The question that now must be answered is: How will entry into the new market expand referral opportunities?
For example, if you receive referrals from an auto dealer in your current area, will the additional facility complement this relationship? Will the level of your current referrals increase from your existing insurance referral and DRPs? Chances are insurers have a DRP facility in that potential new market. How can you change these relationships?
Again, complete an analysis of referral sources and determine how best to approach these sources concerning your proposed expansion.
In case you haven’t noticed, but I’m sure you have, by following the steps outlined in both last month’s article and the steps outlined above, you’ve created the foundation for a marketing and business plan for your proposed expansion. Four crucial questions remain to be answered:
All four questions above are closely related. Deciding on a potential acquisition candidate depends upon other factors. Is the owner willing to sell? At what price will they sell? Will they remain on staff to manage the facility? Can I afford the price they ask and make a profit? If not, are there alternative businesses to acquire or would building a new store be more effective?
That’s a lot of questions. But, as you move along in the process of expansion, you will find many more questions that need answering.
How do you make contact? To protect their anonymity, many consolidators use business brokers- firms whose sole job is to search for and manage the sale or acquisition of a business. In other cases, especially where there are existing personal relationships, the initial contact may be handled directly. Many repairers simply let it be known through personal contacts at association meetings, with insurance appraisers, or suppliers that they are in the market to acquire a facility in a specific city or neighborhood.
There is no hard and fast rule or preferred method. Choose the method that fits your personality and perceived need for privacy.
In the final two installments of this series on Multi-Shop Operations, INSIGHT will examine in detail the final two questions above concerning the tools and techniques of managing from a distance and methods of pricing and financing acquisitions.
Have a comment? Send an E-mail to: rthrall@postoffice.ptd.net
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