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Letter to the Editor

Allstate Makes a Sterling Deal

Purchase of 39 collision repair facilities has potentially revolutionary impact on the industry

"We don’t just pay for repairs - we do them."

That could well be the new marketing slogan for Allstate, which has just announced its acquisition of one of the leaders in the auto body repair industry - Sterling Auto Body.

The acquisition of Sterling, which operates a network of 39 collision repair stores in seven states and nine metropolitan areas, marks what could well be an important development in the collision repair industry. In an era of ever-increasing consolidation, Allstate has taken a dramatic leap of faith.

At this point, it is a leap they were more than happy to take.

"This acquisition is part of Allstate’s effort to create a differentiated customer experience coupled with increased efficiencies and delivery of value to the policyholder," said George Ruebenson, Allstate vice president for claims and new chairman of the Sterling board of directors.

"Sterling stores are very different than the typical auto collision repair shop," he said. "On average, they are three times larger and repair four to five times more cars every month. Consistent service and repair quality are the hallmarks of Sterling."

Sterling, for their part, was an eager participant in the transaction.

"We are very excited about this new relationship," said Sterling CEO Jonathan McNeill. "Allstate will be a terrific partner. They share our vision of expanding our model to other markets and are equally committed to customer satisfaction.

"Like Sterling, they understand that it is good business to reduce repair times and improve the facilities’ efficiencies while delivering superior customer service."

In the near term, according to Allstate, the operation of the Sterling stores will change very little. In addition to continuing to serve their current customer base in the near term, the Sterling brand and their leadership team will remain in place and no immediate changes are planned, according to Ruebenson.

The financial terms of the deal have not been disclosed.

Why Allstate Did It

On first glance, the short-term economics of the deal do not necessarily jump out as justification for the deal. However, a closer look at the symmetry of the newly-formed company reveal an impressive potential.

Even if nothing but Allstate claims were repaired at Sterling’s 39 shops, Sterling volume tops out at around $100 million, which is under 4-percent of Allstate’s total estimated volume of roughly $$2.7 billion. In order for the marriage to be fruitful, it is INSIGHT’S belief that Allstate will add close to 300 new facilities in the next three to five years, and that these will primarily be greenfields. Such a move would allow Allstate to develop large, e.g $5+ million, industrialized operations.

A host of other factors no doubt played a part in this deal, not the least of which is the following:

Savings -

Severity in 2000 was significantly up and continues to rise in 2001. This increase was more than could be seen in just parts price increases or labor rate increases. Thus, by controlling both the claims and repair processes, Allstate is looking for savings of perhaps as much as twelve percent.

New Efficiencies -

The deal presents the newly-formed company the opportunity to reduce administrative costs, primarily through lower headcounts. Increased efficiency in the process may enable the shops to be better run, which in turn could result in fewer re-inspections, supplement approvals, etc.

"The greates benefit Allstate and its customers get in this transaction is the improved processes," Ruebenson said. "Together, Allstate and Sterling will eliminate the redundancies that exist in today’s auto collision repair process. Customers will now find themselves the beneficiaries of a coordinated repair process with a dual focus on their requirements.

"For example, Allstate’s inspection and estimating processes help to create efficiencies in the repair process while improving the policyholder’s overall experience."

Experimentation -

The marriage will allow Allstate to test new strategies and tactics in vehicle repairs, i.e. industrialization.

Control -

A several-year study, both by internal Allstate staff and outside consultants, convinced Allstate that there are real savings to be had by controlling the entire process.

Customer Satisfaction -

Allstate apparently believes that overall customer satisfaction can be improved by total control of the claims process, including repair. An overall more efficient system, both at the shop and with the insurer, could potentially build a brand loyalty that would set Allstate apart from competitors.

Inducements -

In test markets, it is reported that Allstate can move 75+ percent of policy holders/claimants into a designated shop by using a combination of inducements, such as extended warranty, free pick-up and delivery, etc.

"The acquisition gives Allstate customers easy access to a leader in the auto collision repair industry," Ruebenson said. "While the choice of repairer is ultimately up to the customer, the process of finding a high quality repairer does n ot have to rest soley on the shoulders of the customer."

Winners and Losers

In addition to the immediate parties to this marriage, the deal will have a significant impact on a number of different sectors within the industry.

As the industry scrambles to take its own toll of this deal, INSIGHT has taken stock of the most likely winners and losers:

Winners

Techs -

There are likely to be a number of technicians pleased with this development.

The deal could well bring better fringe benefits to this lot, based on both Allstate Tech-Cor industrial relations and the fact that Sterling technicians are now working for a major Fortune 500 company. Moreover, it is conceivable that nionization of technicians may come into play as Allstate expands to larger operations. Such a turn could only mean better work conditions for affected techs.

In addition, the deal could well provide techs with broader career paths. As Allstate expands and opens more shops, previously valuable but buried technicians are likely to see a host of new career opportunities come their way.

Finally, given Allstate’s propensity to repair rather than replace, technicians are likely to begin to see more hours, and thus more work.

Consumer -

Unlike many of today’s deals, this is one in which the customer may see some real benefits.

If quality of repair is high and turnaround time is low, as Allstate envisions, customer satisfaction is bound to rise. As customers see perks such as improved pick-up and delivery, or perhaps longer warranties, their experience with Allstate will be a better one.

And with improved customer satisfaction, Allstate will no doubt see a jump in policyholder retention.

Other Insurers -

While no doubt unintended by Allstate, it’s possible that other insurers will see a jump in business from the deal. As shops begin to lose, or even fear losing Allstate’s business, other insurers may receive a sort of "Most Favored Nation" status from those shops. Improved pricing and customer treatement can only mean good things for those insurers.

Other Consolidators -

This acquisition will set a value for consolidators, and could well bring new investors moving into the marketplace.

Independents -

As Allstate moves to expand its network of shops, despite looking to do much of that expansion through greenfields, there will no doubt be some amount of acquistion. Independent, well-run shops will be prime targets for Allstate’s expansion.

Associations -

Forget whining about paint caps and steering, this major change in insurer/shop relationships will motivate independents to join associations in an effort to attempt to roll back insurer ownership of shops. The associations will no doubt rally their members to fight the invading Mongols. Consent decree advocates, DV adherents, and plaintiffs’ lawyers will all have a field day.

Aftermarket Parts Suppliers -

No doubt any complaints on the part of Sterling managers/techs as to aftermarket parts quality will quickly disappear as Allstate moves to expand its usage of aftermarket parts. Keystone and Eagle could be big winners in this deal. It will be interesting, however, to see how such groups as CAPA and MQVP fare.

Paint Suppliers -

Paint suppliers will build loyalty by helping concerned independents "circle the wagons," providing marketing programs and assistance to combat the ‘Mongols." However, as Sterling’s sole supplier, Sherwin-Williams may not enjoy this luxury. Nevertheless, a tenfold increase in volume based on Allstate’s long-term goals is a possibility.

Losers

Independents/Dealer Body Shops -

Any significant cost savings achieved with Sterling and with new industrialized shops will be pushed down onto independents and dealers, further reducing today’s margins.

All Suppliers -

As a major corporation, Allstate has more clout in the buying arena than do independents and consolidators. Equipment, parts, and body shop supplies margins for suppliers may suffer.

A New World

Whatever direction this landmark deal takes the industry, it’s sure to be toward a new world for the industry. Whether that new world is a "brave" one, or simply another one mired in inefficiencies and bureaucracies is yet to be seen.

But one thing is clear, if it hadn’t been already: The age of consolidation is upon us.   o

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