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Letter to the Editor

State of the Industry: 2004

Some positive signs for a smaller Market: Survivors survive when they're smart and prepared for whatever changes come along.

The U.S. economy historically heats up in an election year, and there's certainly no shortage of those involved in the collision industry hoping that history repeats itself in 2004.

The year that just ended may have been better than 2002 for some but was far from a banner year. Accident frequency was down about 5 percent. Claims resulting in repairs were down about 7 percent. One INSIGHT survey found the average RO down about $150 from two years ago, the average backlog of work at shops is at the lowest level since 1997, and more than half of shops reported the same or lower sales than they had in 2002. The percentage of collision-damaged vehicles being declared total losses is hovering between 16 and 18 percent, up from 10 percent just three or four years ago.

Vendors, too, are feeling the impact, with parts sales down an estimated 4 to 5 percent, and paint manufacturers reporting paint gallonage sales down between 3 and 5 percent.

The good news is that there are positive signs for the future. There are fewer shops chasing after work; the number stands at just under 50,000 nationwide, a drop of about 3,000 from a year ago, as some mostly small- to mid-size shops that had been barely making it in an economy that has been bumpy since late 2001 were shaken loose.

Just as consumer confidence has shown some rebound, which bodes well for the economy as a whole, shop owner confidence is showing some strength. Yes, almost one in three expects 2004 sales volume to remain at 2003 levels, but only two percent anticipates a decline and 68 percent forecasts a jump in 2004.

Another hopeful sign: INSIGHT surveys find that 38 percent of shops are planning a major capital investment or expansion within the next year. While down from the late 1990s when half of shops had such plans, it is a jump from last year when only one in four had capital expenditure plans, so there is certainly some growing optimism.

Courts will play a role in 2004

Where the industry stands a year from now will certainly be affected by several court rulings. Class action lawsuits against insurers regarding use of non-OEM parts have continued in 2003, but the "mother of all lawsuits," the Avery case against State Farm, is still pending before the Illinois Supreme Court. A ruling was widely anticipated this past fall. The outcome, whatever it is, is likely to impact how shops, insurers and consumers arrive at their decisions regarding what type of parts are used during repairs.

In Texas, the U.S. District Court has ruled on the motion for a preliminary injunction as requested by the plaintiffs in Allstate Insurance Co. and Sterling Collision Centers Inc. v. Greg Abbott, Attorney General of Texas. (See story inside this issue.) But there is still a long way to go in this case, which challenges the state's ability to place substantial limits on insurer ownership of collision repair facilities.

As with the Avery case, a ruling in either direction will impact the industry. The push in other states to duplicate the Texas law will face a setback if Allstate and Sterling prevail. If the new law is upheld, it will likely put a crimp not only in Sterling's plans but those of other shop consolidator operations with - or hoping for - insurer investment. That, in turn, will impact those vying to compete against consolidators, whose reach is growing. One INSIGHT survey found that 40 percent of shops now feel consolidation is leading to a decrease in their business, a jump from just 23 percent a year earlier and just 16 percent back in 1999.

Personnel changes may have impact

The courts won't be the only source of change within the industry in 2004. While some within the industry have portrayed recent changes in the top management of Sterling as an exodus of collision repair professionals and an influx of insurer management, Bobby Thompson doesn't see it that way.

Thompson, a long-time shop owner before helping found Sterling, stood at the Collision Industry Conference (CIC) in Orlando, Fla., last month and said he is still very much involved with the collision repair chain, a subsidiary of Allstate. He said that although Sterling CEO and co-founder Jon McNeil, for example, has left the company, it was not collision repair experience but rather business and financial expertise McNeil had brought to Sterling.

Whatever the backgrounds of Sterling's exiting or new management team, there's no debate that high-level changes have been made, and what that will mean for the company is likely to become more evident in the coming year.

Similarly, the industry may also experience changes as John Kent retires in 2004. Though his name might not mean much to the average shop owner, as the senior claims consultant for State Farm Insurance, Kent has certainly shaped the interaction that shops and the nation's largest insurer have had for a number of years. That is one reason he was recently inducted into the collision industry "Hall of Eagles," an honor bestowed on fewer than 100 people in the past dozen years.

Many point to what they see as the positive changes Kent has helped oversee at State Farm, including the Service First program and what some characterize as the best claims policies within the industry.

"To put it simply, State Farm is letting the experts - collision repair professionals - do what they do best: assess damage and repair the vehicle," Don Keenan, the past chairman of the Society Collision Repair Specialists (SCRS), said in a statement from the association praising State Farm last August. "They respect our experience and expertise. As a result, we're freed up to do the best possible job."

But some pessimists believe Kent's legacy may be short-lived. The outcome of the Avery case, how the "Select Service" program fares, and whether State Farm's claims costs remain higher than most may determine whether any significant changes lie ahead for the country's largest auto insurer.

Other key trends

Here's a run-down of some of the other industry trends we are seeing:

• The interaction between shops, insurers and non-OEM parts makers, evaluators and distributors may undergo some changes in the coming years. CIC is launching an independent audit of the programs that evaluate or certify non-OEM parts to see if the programs actually perform as advertised. And the contingent of U.S. repairers who visited Taiwan this past fall seems intent on making sure parts manufacturers hear what shops need directly from shops, not just from insurers, distributors and parts evaluators.
• The number and size of shop networks continues to grow, but it seems likely that not all are going to be providing the value some early-joiners envisioned. Look for shops to become more particular about whom they partner with - which may result in some networks losing some steam. Others may be buoyed as smaller insurers look to partner with them.
• Automobile manufacturers have shown a renewed interest in assisting their dealers’ and selected independents’ collision repair facilities in terms of expanded training, certification of shops, and marketing assistance at both the national and local level. The major car manufacturers, including Toyota, Ford, and GM, have all launched significant programs in 2003. The OE dealer share of the Collision Repair Market is estimated at 23 percent and growing, with dealers opening new repair facilities in contrast to past years when many dealers left the business.
• Self-auditing is eclipsing "cycle time" as the buzzword of choice among top repairers. Several of the larger shop operations have launched inspection programs during and following repairs to ensure their insurer partners that the job is being done right and as billed. And the number and quality of software programs designed to audit repair estimates is increasing as vendors see the opportunity to sell such programs not just to insurers but also to repairers who, again, are looking to offer self-auditing as a benefit to insurers.
• A "Town Hall" event on automated claims processing during NACE last month to a large extent was monopolized by discussion of the role of used parts within the electronic claims process. That may be because some insurers are viewing salvage parts as a better alternative - say, than non-OEM parts - to reduce costs. Again, some of the other trends and court decisions discussed earlier in this article may impact this trend in 2004.

The game plan

In many ways, succeeding amidst these trends will just require "more of the same" for collision repairers: more efforts to improve efficiency and reduce costs, more efforts to maintain and audit repair quality, more efforts to build the right team (or teams) of employees, more efforts to ensure paperwork accurately reflects the job performed.

But perhaps more than in past years, it will also require staying closer in tune to shifts in the marketplace. Some of these shifts may be subtler than in the past, which can leave those not closely monitoring the industry out of touch and a step or two behind. And while many of the changes in the past have been driven by insurers, some now are being led by networks or consolidators or other larger players in the collision industry looking to gain a competitive advantage.

This makes it even more crucial in 2004 for those in the industry to "get out of the shop," both figuratively - by staying on top of industry moves through repairer and insurer publications - and literally, by attending state and national industry gatherings, "20 group" meetings, and on-going technical and management training.   o

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