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Letter to the Editor

Consolidating the Industry - Have We Run Our Course?

Most experts see consolidation movement as a longterm process

A year ago, the consolidation effort in the collision repair industry was cookin’. New acquisitions were being announced almost daily. Respectable influxes of capital were seen. Insurance executives were successfully being wooed to top level positions in consolidator firms.

But it was also about this time one year ago that some evidence of problems arose. Minnesota-based CARA Collision and Glass, among the fastest-growing of the consolidators, sold off six recently-acquired shop locations in Indiana. It marked the beginning of a rapid decline, ending in CARA’s bankruptcy filing in mid-2000 when banking officials froze the 13-shop chain’s accounts.

While CARA’s collapse may have been the most visible, dramatic change in the consolidation effort this past year, it was not the only one. Acquisitions slowed to some extent in 2000. And there has been less talk of dramatic gains in market share, and more discussion of "proving the business model," demonstrating - to insurers and investors - that consolidators can actually deliver the improvements they have talked about.

INSIGHT asked the consolidators to reflect back on the past year - and offer a glimpse of what lies ahead in the next.

Representatives of the consoldators are almost unanimous in their assessment that relationships with insurers are changing - but not at anything approaching a rapid pace.

"If I’ve seen any change, it would be positive change, but nothing drastic," said Terry Smith, president of the Canadian-based Boyd Group. "When the consolidation trend was more in its infancy, there was some fear of the unknown. But I believe I’ve seen a greater comfort level with the idea within at least a few individuals within the insurance industry."

"We see a slow movement toward considering single point of contact as a better way to integrate," Erick Bickett of Fix Auto agreed. "At the higher levels, they have a fairly good understanding of the importance of having more control over the claims process with all the trading partners. There seems to be at the higher levels a recognition that if we’re not successful, they won’t be successful. So that’s causing a very slow movement to integrate all the services that are performed in the claims process."

"But at the same time," Bickett said, "you have on the front lines a lot of folks working for insurance companies who feel threatened by those kind of changes. And they are actually the ones really in control in most cases, because they’re the ones out there talking to shops and looking at cars. Middle managers and the guys at the top are hesitant to ignore the feedback that comes from the guys at the front line. So the guys at the front line can really manipulate strategies. Because they’re concerned about their position in the company with an integrated approach to claims management, a lot of good ideas get killed.

"But like a lot of trends that we’ve seen make their way into our industry, the ones that provide the most value will ultimately win," Bickett said. "So there seems to be a continuing effort to improve the process regardless of the small bumps in the road or people fighting change."

Matthew Ohrnstein of Caliber Collision Centers said his company is focusing on customizing programs to meet insurers particular needs in a market.

"We’ve been able to evolve traditional direct repair program relationships to client-specific programs by designing a set of service initiatives for that client in a given market," Ohrnstein said. "We may have one client that is really interested in use of our call center. Another client may be interested in our ability to load level and take some of that responsibility on their behalf. We’re doing some programs with some insurers where they are interested in piloting a potential new vendor relationship or technology, implementing that across 20 stores to help them pilot it."

For their part, consolidators are reticent to discuss any changes in their corporate strategies and plans for the coming year. Bickett said Fix Auto plans "controlled growth," focusing on areas in which they can achieve 20 percent market share.

"This next year will be a growth year for us more so than any year previous," he predicted.

Smith too said Boyd expects "significant growth" in the coming year, but also plans to focus on something that some say CARA struggled with: successful integration of the businesses it acquires.

"I think we have an advantage over most of the other consolidation in that we’re really well capitalized," Smith said. "We have the capital to make acquisitions. We recognize that perhaps our biggest challenge is not the buying of those businesses but effectively bringing them into the fold, so that is a high priority for us."

Bickett said Fix also would be working to take advantage of internet-based methods of electronically linking shops, insurers and suppliers.

"It’s creating tremendous opportunity because insurance companies who have used traditional methods of e-commerce are now opening up, taking another look at it and getting ready to make changes in how they do that," he said. "The proprietary e-commerce solutions that have been in place for some time have had influence and control over who does what, who fixes what. With the change of opening it up to some of these dot-coms, it creates additional opportunities to move business around. We’ll be focusing on that a lot."

Ohrnstein said his company expected to grow in its existing markets as well as enter one or two new markets in the western United States. He said one change in the company’s strategy over the past 18 months has been a shift of some of the responsibility for acquisition decisions to regional rather than corporate management.

"For example, we have a regional manager in Dallas that is servicing four insurance accounts," Ohrnstein said. "They are looking to create capacity in that market to meet client needs. So the regional leadership is identifying those needs, saying, ‘Here’s roughly where we need to be and here’s a few choices.’ And then our corporate develop team becomes a resource and goes into the Dallas market and [gets] that facility into the Caliber system. Three years ago, we’d send out the acquisition people and find a good location and make it. It was really top down. Now we’re growing from the regions out."

Ohrnstein said Caliber also will be making "a significant investment in 2001 in our call center." That call center can be used to link directly with insurer claims call centers, so that with one phone call, a vehicle owner can report a claim and make repair arrangements. It can also address customer needs - towing, rental car, getting their golf clubs out of their car in the shop - 24 hours a day, seven days a week.

None of the consolidators are touting particular successes in reducing labor or other costs.

"We think the primary focus now needs to be in the area of improving customer service, quality of repair and reduction in loss adjustment expense," Rollie Benjamin of ABRA Auto Body & Glass said. "Those area are our focus. With the tight labor market, its not easy to look at reduction in labor costs. We’re all working on more specialization of labor - higher pay for higher skill and lower pay for lower skill - and we’re all improving in that area, but I think the bigger gains right now are in those other areas."

Perhaps the biggest question on the minds of those watching the consolidation process is: How will it impact my business? Again, most consolidators agree that in the next 12-18 months, independent shops are more likely than suppliers or insurers to feel an impact from consolidation - although they offer different takes on what that impact will be.

For his part, Smith sees the potential positives consolidation offers.

"Five years ago, if a [shop] operator had a successful higher-volume market-leading shop, he really had very little in terms of exit options," Smith said. "If he didn’t have family members who wanted to take over the business, there weren’t many buyers. But in the last couple of years, that has changed. There are enhanced exit opportunities. To an extent that will continue, although if we see diminishing [acquisition] activity, as we certainly have this year, then some may argue that the window is closing."

"I think the [single-location] shop owner that doesn’t perform well is going to the most impacted by consolidation," ABRA’s Benjamin said. "There are some advantages to doing business with someone who has geographic density in a market. You can offer a better value proposition. So I think that single shop owner who has a poor or mediocre operation will be challenged. A single operation with an excellent operator, however, I think will be fine."

Bickett agrees that the drive for market share and the advantages offered by larger players will make it challenging for existing shops when a consolidator enters the market.

"I think in the next several years insurers will be affected, but this next year I think it’s still going to be fairly traditional in the way that things get done between the repairer and insurer," he said. "When we get into more significant changes in that business relationship where single point of contact becomes the real accepted way of doing business... All of a sudden you’ll have call centers connected to call centers, and decisions about where the car is going to get fixed being made by the repairer rather than the insurers. Those changes will start to come maybe at the end of next year and they’ll be fueled by consolidators. But I think the repairers will be most affected in the meantime."

Most of the consolidators say they want to attain 10 to 20 percent share in the markets they enter. Particularly hard hit, however, will be shops in markets in which more than one of the consolidators are competing. Three consolidators, for example, have wrapped up an estimated 40 percent of the San Antonio, Texas, market.

But Jon McNeill, chief executive officer of the Massachusetts-based Sterling Collision Centers said shop owners should look at other industries - hospitals, office supplies and hardware - for some indication of the limits of consolidation.

"In most of those markets, the consolidators end up representing somewhere between 15 and 30 percent of the total markets," McNeill said. "It’s hard to find an industry that’s consolidated to a point where you can say 60 percent or 75 percent of the industry is in the hands of the consolidators. This is not the end of the independent shop. It’s definitely a signal of change in how the industry will operate, but it’s not the end of the independent or regional operator."

Caliber’s Ohrnstein agrees. "Three or four years ago when we started, back in 1997, I think there was this expectation in this industry that consolidation would be this huge wave that would take over the industry," he said. "But look at other industries. It can take 20, 30 or 40 years to consolidate just 30 percent of an industry."

What are they looking for?

Although most predict that 2001 will not set a record for shop acquisition, all of the consolidators are expected to expand or enter new markets. What are they looking for as they do?

CARSTAR has announced an ambitious 5-year growth plan calling for the addition of 200 company-owned locations. The company has outlined a set of characteristics for the stores it hopes to acquire that are fairly consistent with those described by other shop consolidators. The company says it looks to acquire shops that have:

• At least $1.5 million in annual revenues - preferably $2 million.
• About 10,000 to 13,000 square feet of space, with the production capacity (or room to expand) to handle in excess of $2 million a year in sales.
• A computerized shop management system, and good accounting practices.
• A well-trained staff, and excellent relationships with customers and insurers.
• A visible, high-traffic location in areas with high household incomes and an abundance of late model vehicles with young drivers.

The layout of the shop may be just as important to consolidators as the overall size, according to Jon McNeill of Sterling Collision Centers. "A lot of the shops in the industry started small and added on, and added on, and then added on to the add-on," McNeill said. "It’s pretty tough to put any kind of production flow through that kind of shop. Done are the days when we will buy a shop that has three different compartments spread across an outdoor area because we can’t make these procedures work in those kind of spaces."

This has led Sterling, perhaps more than other consolidators, to build new shops - not just acquire existing facilities - in the markets on which it is focusing.

"When folks like Staples or Home Depot develop a new business model, they find it’s much more effective to spend their capital to develop new stores to fit their model rather than trying to retrofit existing stores into their model," McNeill said.

Matt Ohrnstein, CEO of Caliber Collision Centers, said his company looks as much for people as facilities when it acquires a business. "We like to start with great operators," he said. "As an enter into a new market, we try to buy leadership as well as the business that that leadership currently operates. Then we work with the team that owned the business, who now comes onto our team, to lay out a strategy, typically a 5-year plan, about how we’re going to build the market, where else we will need stores."   o

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