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January 2002 Issue of INSIGHT
The State of the Industry
Where are we now and what lies ahead in 2002?
It's difficult, as the new year begins, to reflect back on the one just ended and not find one's thoughts focusing on the events of September 11. The day-to-day struggles, victories, challenges and changes in our businesses and industry seem small and insignificant in comparison to the magnitude of the events of that day and its aftermath.
But perhaps the overwhelming nature of this fall's news makes it more important than ever to reflect back on the industry news and trends of the past 12 months as we prepare - as it has often been said we must - to move forward.
We at INSIGHT, therefore, chose to continue our January tradition of preparing a "state of the industry" report, considering where the industry has been and currently stands - and what it all might mean for 2002 and beyond.
We begin with some industry statistics. On the positive side, the total U.S. collision repair market hit the $27.5 billion mark, up about six percent from the preceding year. The decline in the number of shops seems to have leveled off somewhat, holding steady at about 53,000. (Of those, fewer than 10,000 have annual sales of $600,000 or more, only 19,000 are computerized, and about 80 percent of larger shops participate in one or more insurer DRP.)
Perhaps even more promising for repairers are longer-term trends showing the number of vehicles in operation in the U.S. growing to 213 million (up from 140 million in 1980); the annual percentage of those vehicles involved in an accident rising to 17 percent (up from 15 percent in 1995 though still down from 20 percent in 1980 and 18 percent in 1990); and the total number of vehicles repaired returning to the 18-19 million mark (up from a low of 12-14 million in 1995).
Less positive trends
More than ten percent of damaged vehicles is being declared a total loss, more than double the percentage of 1980 and up significantly even from the 5.5 percent total loss percentage in 1990. One major insurer reports that 15 percent of APD (auto physical damage) claims are now totaled. And the percentage of damaged vehicles not being repaired is also rising, from 20 percent in 1980, to 24 percent in 1990 to about 28 percent currently.
As recently as 1996, claims handled through DRPs amounted to only about eight percent of all insurance-paid repair work. Within two years, that figure had more than doubled to 20 percent and is expected to be over 30 percent for 2001.
Labor rate averages nationwide, meanwhile, hover around $38 for metal or paint labor, and $45 for frame labor.
More insurer involvement
Statistics aside, certainly the most dramatic news within the industry in 2001 was Allstate's acquisition of Sterling Collision Centers, which took nearly everyone by surprise last spring.
Second only to the Allstate-Sterling deal in terms of creating conversation within the industry was Progressive's Concierge test program, in which consumers have no contact with a shop, turning their vehicle over to Progressive to have it repaired.
More recently came the announcement that an affiliate of the Automobile Club of Southern California, which provides auto insurance to members of AAA-California and AAA-Texas, made a $30 million minority investment in the California-based consolidator Caliber Collision Centers.
What do these moves by insurers mean for the future?
Rising severity and decreasing investment income are combining to force insurers to look for new ways to cut costs - particularly loss adjusting costs. Certainly the Allstate and Progressive actions also point to the insurers' desire to control the claims experience for their policyholders, offering something, as Allstate's Chuck Paul has said, unique and more consistent than other insurers.
As insurance publication editor Brian Sullivan said at NACE, "Insurers are waking up and saying, 'We only have one chance to make our customers happy and it's in a shop that we don't own, don't control, and have no say over, and we're getting blamed when the bathrooms are dirty. This is transforming the way they are looking at your business. You think they're trying to stick it to you. I'm saying they're trying to control you because they're so scared of the downside of a bad repair experience."
So will other insurers follow Allstate's lead in acquiring shops? It seems doubtful, in large part because only a few companies have the resources and market share to even have a chance of making it work. It also will depend on Allstate's success; while Sterling shops won't likely see much non-Allstate work, early indications are that Allstate insureds don't seem to mind having work done at an Allstate-owned shop. But investments like the Auto Club's in Caliber seem more likely than direct acquisitions for insurers who feel a need to ensure access to repair capacity in key markets.
The Progressive program may be more troubling, and while the convenience of the program may appeal to consumers, it gives the insurer no one else to point to when things go wrong.
Encryption victory achieved
Given that only about one-third of shops are computerized, the industry's victory this past year against "encryption" may be little understood but should not be overlooked.
As 2001 began, at least two of the estimating system providers were considering "encrypting" their data, which in essence would limit a shop's ability to exchange information electronically with various insurers except through the estimating system provider's existing network. But much like the industry pushed back ADP's paint study overhaul in 1989, the industry was able to turn the encryption threat away - with ADP, for example, just last month announcing its acquisition of one of the companies offering an "open systems" solution.
What does all this mean for shops? It should mean more options. The days when a shop is required to use a particular estimating system in order to communicate electronically through a particular insurer's DRP finally may be coming to an end - or at least the technical restrictions that required such limitations are fading. This ranks among the best news for the industry from the past year.
It also portends an increasing use of the Internet and electronic commerce in the coming year and beyond. There's no shortage of companies offering parts ordering and data exchange services via the Internet. The key to their success will be offering a process that is easier, more seamless and less costly and time-consuming. Whether that will happen in 2002 is questionable, but the Internet will no doubt play an increasingly large daily role for shops moving forward.
Other key trends
Here's a run-down of other industry trends we're seeing:
Increased OEM involvement:
Insurers aren't the only ones looking to move into the collision repair market. The OEMs - GM and Toyota most aggressively - have launched efforts in the past year to encourage their dealers to open collision repair facilities - or improve the performance of their existing body shops. Ford is currently implementing a new dealer body shop program in two test markets.
As with the Allstate-Sterling partnership, it's too early to know if the OEMs will be able to walk the walk, but it could be another potential source of competition for independents.
More paint manufacturer involvement:
PPG also hopes to help its shop customers market their services to insurers and consumers through its new CertifiedFirst network. There are rumblings of other paint manufacturers also getting involved in insurer-shop relationships on behalf of their shop customers - another trend in Europe that may be making its way to the U.S.
Consolidators’ focus shifting to productivity improvements and industrialization:
The shop consolidation effort has seemingly slowed in the past year, with several consolidators continuing to regularly announce acquisitions while others languish. But growth in numbers and market is not the only battle consolidators must win. The race is also on to reduce overhead, improve standardization (integration), and perhaps most importantly, show significant gains in production.
Look for the "industrialization" of the industry - whether it be through large factory-like operations in a market or a hub-and-spoke approach - to continue, particularly by consolidators, with higher parts-to-labor ratios, and "assembly line" type production models with lower-tech but more highly specialized labor.
Cautiously increased use of non-OEM parts:
Insurers' gradual return to non-OEM parts looks like it will continue in 2002, now with two certifying organizations (CAPA and the newer Manufacturers Quality and Validation Program) vying to add value to the mix. Discussions about "service level agreements" may make parts certification less of an issue.
Suppliers of all parts - OEM, non-OEM or salvage - may find themselves having to put their money where their mouths are by agreeing to pay penalties if incorrect or unusable parts they provide impede production.
Remarkably, shop licensing may be resurrected. This issue, sure to divide any room of shop owners, appears to be gaining a foothold of support within one national industry association. The score for state licensing laws was 1-1 in 2001.
The Alliance of Automotive Service Providers - Garden State was thrilled with the new shop licensing law it helped enact in New Jersey last year, while Michigan saw a watering down of its shop licensing program, with the elimination of the requirement for the state to inspect body shops "not less than every 4 years."
Diminished Value an issue again:
Both Allstate and State Farm are facing separate class action lawsuits in Illinois that will spread to at least 33 other states.
Both class action suits contend that the vehicle insurer is required to pay for the difference in what a car was worth before an accident and what it is worth after repair.
There are many difficult-to-answer questions surrounding diminished value. Insurers’ attorneys will argue that returning a vehicle to pre-accident condition is the insurance companies’ contractual agreement. The concept of diminished value comes into play only at a future point of resale of the vehicle, where the question becomes: Does the fact that a vehicle was involved in an accident automatically make its sale price less than a vehicle that was never in an accident, regardless of the quality of repair?
Diminished value will surely be a big topic in 2002 for the industry.
Insurer use of centralized call centers:
And a final key 2001 trend likely to continue into 2002 and beyond is the move by many insurers to use centralized call centers to take first notice of loss calls and refer vehicle-owners to shops. As insurance agents get taken out of this loop, it will likely mean dramatic changes in shop marketing plans.
A game plan for 2002
As in the past, weather and the economy will play a role in what kind of year 2002 will be for the collision industry. In the front office, shop owners will want to continue efforts to improve the customer experience (and to document resulting CSI); prepare for increased use of electronic commerce; and develop or improve insurer relationships on a local if not regional or national basis.
On the production floor, improving cycle time with systems that don't result in overlooked details will become more and more critical. The trend toward industrialization is likely to expand. For shop owners, this will require a move to adopt it or a plan to compete against it.
Financial and economic forecasts for 2002 are cautiously optimistic, with the word "recession" openly used now, and a slow but steady recovery generally expected throughout the new year.
Shop owners are well advised to keep one careful eye on the bottom line, and the other eye open to expect the unexpected. In business, in any year, this is your full-time job. o
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©2002 Collision Repair Industry INSIGHT