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Letter to the Editor

Preparing for the R Word

Tough economic times require a back-to-basics approach

It's a word no one in the business world likes to hear. The "R" word, as one INSIGHT subscriber says he refers to it. But an increasing number of economic indicators seem to be pointing in one direction: recession.

Even if the tragic events of September 11 had not occurred, the nation's economy was sputtering, and analysts were not so much discussing whether a recession was imminent but rather how severe and lengthy it may be.

The optimists - and there are many of them - are still calling for some type of rebound next year, perhaps even in the first half of next year. But it seems a time to prepare your business to weather an economic storm, whether or not you believe it will be a long or short one.

Ask two or three seasoned business owners or consultants about "recession-proofing" a business, and it quickly becomes clear that it involves nothing more than a return to basics: Cut costs where appropriate, and boost sales through effective marketing. But the other message that also comes through: Tough times are some of the best in which to capture increased market share.

Cutting costs

While it does not work in the economy's favor, one obvious way for a business to maintain profit levels during slow downs is to reduce costs. INSIGHT asked a number of subscribers for their ideas on ways to cut costs. The suggestions ranged from those that will knock just a few dollars off a shop's weekly overhead, to those that could save a shop hundreds if not thousands of dollars a year.

"I like to think about the fact that every $50 I can save some way is another $50 I can spend on marketing or put toward the annual bonus I use to keep the good employees I don't want to lose," one shop owner said.

Here are some of the ideas we heard:

• If you're buying ad time on a radio station, ask them to throw in some 'remnant space' - ad slots that the station hasn't been able to sell. It's often at non-peak listening times, but it's free.
• Raise your business insurance deductibles and put the difference into a savings account in case you need it. Your premiums will drop, and you'll earn the interest on the money you've set aside "just in case."
• Eliminate the dental or vision portions of your employee health insurance program and instead offer to reimburse employees for one regular dental or vision check-up per year.
• Replace incandescent light bulbs in your office with fluorescent. You can knock as much as $25 off your annual electric bill for every bulb you replace.
• Lower your thermostat one degree and cut your heating bill by as much as 20 percent. If your thermostat is programmable, make sure the heat or air conditioning is set to run only during business hours (except during periods of extreme temperatures).
• Get some "generic" postcards created for your business. You can use them in marketing, as "thank you" cards to referral sources, even as reminders to customers about their appointments with your shop. You'll save 13 cents in postage - plus the cost of the envelope - every time you use one instead of a letter.
• The fall of many of the 'dot.coms' has created a glut of barely used office furniture. Some furniture resellers in the Seattle area reportedly have had so much inventory at times they've placed it in parking lots, free for the taking. So if you're in the market for office furniture, contact some used furniture outlets.
• Give cost-of-living adjustments, but avoid locking yourself into higher labor costs by using bonuses rather than standardized, periodic merit raises to reward employees.
• Always check your invoices to make sure you're getting the discounts you've negotiated with suppliers.
• Get a membership to a local buying club superstore. Depending on the quantity you use, you may find you can buy some shop supplies - wash mitts, chamois, windshield washer fluid, motor oil, etc. - cheaper there than through automotive jobbers.
• Ask your employees for cost-cutting ideas - and maybe even offer an incentive plan that gives them a share of the savings for any suggestion that saves the shop money.

Marketing effectively

Although cutting costs helps one side of the profit equation, it's also critical to get work in the door during tough economic times. Pounding the pavement calling on insurance agents to encourage referrals is still effective in some markets with some carriers, but centralized phone centers taking "first notice of loss" calls are taking over some of the duties once performed exclusively by local agents.

Roger Wright, a former insurance executive now with CARSTAR, believes that this change makes reaching farther up into the insurer hierarchy more crucial for a large chain or even the single-location operator. And your message to insurers must also change.

"Three years ago, it was all about customer service, CSI, retention, treating that customer right," Wright said. "Today, it's once again all about loss cost and severity."

The reason, he said, is that insurer combined ratios have climbed to 114.

"For every dollar they take in, they're spending $1.14," Wright said. "They used to operate at a 109 or 107 [loss ratio] and offset that with investment income and they were fat and happy. But they aren't anymore. If you look at your own current investment portfolio, it's not looking too good. So insurers are cutting their costs, going to customer care centers and cutting agents' commissions, having them do less. I understand why they've done that from a cost standpoint, but it changes how we have to get to that customer.

"The one win I get when I talk to insurers is when I talk dollars," Wright said. "If I can translate any of the functions I'm doing on the collision repair side into a dollar value, and extrapolate that out over a year or two years, then I have their interest. In my case, I can extrapolate that out to over 200 repair shops, but you can do it with one shop because it's real dollars to them."

Don't just talk cycle time, for example, Wright suggests. Demonstrate what the improved cycle time you offer means to them financially.

"I did some numbers for a company that does 10,000 losses a week," Wright said. "I think it's 37 percent of the volume that is loss-of-use. If you save four days at $25 a day, it's $100. You extrapolate that out for 52 weeks, it's $18.2 million of savings in cycle times. And there's probably six insurers doing 10,000 claims a week. That's huge money savings for cycle time.

"Offer that piece of value to the insurance company that says it makes sense for you to partner with me," Wright suggests.

The tricky part in this new era of marketing to insurers, many shop owners say, is striking a balance of building local relationships while also reaching those high enough up to appreciate the type of information you're presenting.

"You just can't get a local guy to understand this, to see the big picture and these numbers clearly enough," one southern California shop owner said.

"But the local guy can still influence whether you get on [a direct repair program]," Wright points out. "If you're upsetting him, if you haven't built that relationship, you can forget about it. But beyond that, you have to get to somebody else to show them those numbers and make them understand."

Capturing market share

How effectively single- and multi-shop operators are able to do that in comparison with multi-state consolidators may result in shifts - perhaps significant shifts - in market share during the economic downturn. While there have been those suggesting that consolidation may slow somewhat as investment capital becomes scarcer, others foresee a bit of acquisition frenzy.

"In good times, it's tougher to find good acquisition targets that are willing to sell at a reasonable price," said one regional operator (who asked not to be identified) with nine shops in two states. "As times get tougher, and as it becomes harder to market just on a local level rather than a regional level, I think more people are going to be looking to get out of this industry. We think we should be able to pick up some [market] share much more reasonably in the next 12-18 months than we have in the last 3-4 years."

For operations of any size, however, downturns can offer opportunities to attract business that competitors are either too cash-strapped or too hesitant to spend the marketing dollars to attract.

"I've been rat-holing money the last three years, just figuring the bottom was going to drop out of the economy," one east coast shop owner said. "I'm hoping that money is going to help me through this tough time, maybe doing more advertising than my main competitors in this area can afford to do. That way when things turn around, I'll have kept enough work in here to attract the best employees in the area and be ready to keep growing."

Learn from others

While some see an economic downturn as an opportunity to grab market share from competitors, others see it as a time to build - or rebuild - ties with other shop owners.

"It's that old saying, 'Misery loves company,'" one shop owner said. "The country has kind of come together after September 11. While each of us has our own business interests to consider, I'd like to see the industry come together and not get too cut-throat because of a lousy economy."

"I'm hoping that some of the people who have been in business longer than I have will share some of what they've learned with me," another shop owner, whose 10 years of business ownership have coincided with primarily prosperous times in the U.S., agreed. "While I'd like to see the economy booming as much as the next guy, I'd also like to see more of the camaraderie and interaction among shop owners on a local level that seems to have disappeared in the 1990s. Getting that started is part of what I'm doing to 'recession-proof' my business."   o

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