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Letter to the Editor

The State of the Industry

After surprising twists and turns of 2000, what's in store for the industry in the year ahead?

It has been, in a nutshell, a year of surprises. If you think back to a year ago January 1 - as the year 2000 began and the Y2K "disaster" became yesterday’s news - virtually no one would have predicted many of the headlines that followed in the last 12 months - including a U.S. presidential election coming down to a legal fight over dimpled and pregnant chads.

And there were some surprises within the industry:

• There were signs as the year began that CARA Collision & Glass may be having some problems as it sold off a few stores - but who’d have guessed the company would suddenly lock the doors of its remaining 13 shops and file bankruptcy?
• It was no surprise that other Top 20 insurers would follow State Farm’s lead in temporarily backing away from non-OEM parts - but who’d have guessed a completely new certification body would be established as CAPA’s credibility slid?
• That a slew of dot-coms would rise up hoping to serve as intermediaries between shops and insurers and suppliers was easy to predict - but a new company formed by rivals ADP, CCC Information Services Inc., and The Reynolds and Reynolds Company to develop an electronic parts network ("ChoiceParts.com") came as a surprise to many.

January is traditionally the time INSIGHT reflects back on the news and trends - surprise or otherwise - from the past year, and considers where it all leaves the collision industry now - and what it might mean for 2001 and beyond.

Industry Stats

It’s estimated that the insurance-paid portion of the collision repair market for 2000 will end up at about the $25.6 billion mark - with about 50,000 shops doing most of the work. If those numbers look familiar to you, it's because they’re not all that dissimilar to the figures for the previous year. (Units are up about four percent and severity is up about seven percent.)

Well over 90 percent of medium to larger-size shops now report participating in at least one insurer direct repair program. In a recent TrendLine survey, shops typically rated their satisfaction levels with the major DRPs as ‘good’ to ‘very good’.

The average repair costs per claim continue to rise, but only slightly, holding at just under $2,500; by way of comparison, it was at about $2,235 in 1995 (not including deductibles).

The more dramatic change, however, has come in the mix of that average cost. The percentage of the total costs attributed to parts has risen while the percentage attributed to labor has fallen. Total labor hours (including body, refinish, mechanical and frame labor) has dropped from an average of 42.7 hours in 1997, to 35.3 more recently.

It’s a trend that could very well continue - maybe even accelerate. The reasons? Certainly the availability of more subassemblies (reducing the labor time needed to replace multiple parts), and more vehicles being totaled (leaving light and medium hits that involve more parts replacement than repair).

But the trend is not necessarily a negative one for shop owners. The gross profit percentage on parts replacement may be lower than on repair labor, but by allowing shops to fix more vehicles by replacing rather than repairing parts, the actual gross profit in terms of actual dollars can be equal or better. It’s a matter of taking gross profit dollars to the bank and not worrying as much about the percentages.

Insurer Pressures

Trends in the insurance industry seem to indicate they may exert even more downward pressure on costs. Those trends include:

• A rise in severity, although the causes are debatable.
• Consolidation among insurers. Although the amount of mergers and acquisitions slowed in 1999 and 2000, insurers have been buying each other out at a break-neck pace for much of the previous decade. "We talk about consolidation in the collision repair industry like it’s a big deal," said former Allstate Insurance exec Bill Lawrence, now with Caliber Collision. "It’s happening a lot faster in the insurance community."
• Increasing litigation. The class action lawsuits over non-OEM parts use and diminished value are certainly among the suits most noteworthy to collision repairers. But the nation’s class action attorneys are shifting their sights from the tobacco industry to the insurance industry; the largest rate of growth in class action lawsuits in the past two to three years has been against insurers.
• Changes in distribution methods. Independent agents, captive agents, selling directly through phone centers and websites - watch for a lot of flux in the coming years as insurers scramble to figure out which method - or combination - works best. One study found that 76 percent of insurance executives ranked distribution as the No. 1 issue they face, up from just 37 percent two years ago
• Continued exodus from the damage evaluation business. For those insurers who have not yet established DRPs, third-party administrators are establishing themselves to promise smaller carriers the lower loss adjusting expenses larger carriers gain from established DRPs.

"As I have said many times, the claims office of the future is the collision repair facility," Mike Condon, another former Allstate exec who joined CarStation.com this past year, said. "If I were a shop owner, I would start to think like an insurer regarding claim service: create processes that manage the assignment to its logical conclusion, the estimate; provide tools to schedule more professional and organized customer interactions, including drop off and deliveries; and be prepared to manage service, not just production. That is what the insurers are going to demand as they shift claim service responsibilities to the repairer. Those that prepare for it will be the winners."

Parts Wars

Where the non-OEM parts saga will go in 2001 and beyond is a tough call. Certainly the outcome of State Farm’s pending appeal of the October 1999 verdict will have an impact. Whether CAPA will rebuild its credibility - and sales of the 75¢ seals to non-OEM parts makers - is unclear. (It’s hard to top the irony of Jack Gillis saying to a group of shops last spring as he predicted needing twice as much insurer funding as in the previous year, "That’s not easy. Just try asking insurance companies for money.")

There are also conflicting rumors about which insurers may follow Nationwide’s return to non-OEM parts use under the new Manufacturers Quality and Validation Program (MQVP) created by the newly-established AfterMarket Quality Association (AMQA) - two more acronyms recently added to the mix.

Perhaps more interesting will be watching whether the salvage industry is able to capitalize on the opportunity to increase its market share of the collision repair parts market. As described in more detail in INSIGHT’s two-part series this fall, to do this auto recyclers will need to improve service and work with the other industry segments to overcome some of the negative financial and cycle time impacts that salvage parts pose for repairers.

2001 is also likely to see some shakeout in the parts-acquisition websites that were announced almost weekly during the past 18 months.

Shop Consolidation

INSIGHT looked at this topic in more depth last month, but watch for consolidator growth and acquistions in 2001 to be similar or slightly slower than in the past year. CARA’s demise and the slowing economy are having some impact, focusing consolidators on performance and integration as well as growth. They are also finding higher (and sometimes higher-than-reasonable) price tags on larger independent shops in many markets, particularly if these operators heard consolidators were in town shopping. All of this indicates there may be fewer announcements about shop buy-outs, and more about consolidator progress in industrialization, cycle time reduction, new customer and insurer services, etc.

A Tangled Web

If you’re had trouble distinguishing among all the dot-coms entering the industry to link shops, insurers and suppliers, you’re not alone. It’s still too early to determine which will actually add value and remove costs from the system. How quickly the percentage of web-enabled shops increases will also play a role in their success.

An obvious bias aside, Carstation’s Condon makes a good point when he says, "The dot-coms are going to struggle to bring solutions that truly make the process more efficient as long as they are focused on only one niche or aspect of the business. Focusing on just the estimate process, or the parts process, or the repair process has the potential to create multiple processes for the repairer to deal with - and will probably add cost that might overwhelm any efficiency gains to that process."

The 2001 Outlook

As in the past, weather and the economy will play a role in what kind of year 2001 is for the collision industry. Shop owners should of course remain focused on three areas:

Growth:

If your marketing plan doesn’t include steps to gain market share – based on some analysis of your market - move this to the top of your "To Do" list in 2001.

Customer Service:

About 85 percent of mid-sized shops and larger now track CSI. But tracking it as a marketing tool isn’t enough; it has to become a management tool used to improve customer service.

Cycle time:

Make no doubt about it: Insurers are likely to step up efforts to reduce costs in 2001. But cycle time impacts costs as well as customer satisfaction, so it is likely to continue to be of importance. One California insurer reports a drop in CSI possibly attributable to cycle time efforts resulting in skipped or missed steps. So develop processes to reduce cycle time that don’t result in overlooked details.

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