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Letter to the Editor

State of the Industry

Quickening Pace of Change Brings Challenges and Opportunities for an Industry at a Crossroads...

In 1998, collision repair facility consolidators gathered steam as numerous multi-regional consolidators grew their businesses through acquisitions. In June, the announcement that Ford Motor Company had invested in an independent consolidator focused attention and increased the visibility of consolidators- furthering their legitimacy and the view that large-scale, multi-regional consolidators will play an important role in the future of the industry. 

That fact, coupled with a slight increase in the market for collision repairs attributable primarily to repair costs, has created a higher level of competition in many metropolitan markets throughout the U.S.- a trend that will continue through 1999. 

The materials and equipment suppliers to the industry also experienced dramatic changes. On the paint supplier side, in early spring word came that the Standox-Sherwin joint venture would be dissolved. This fall the announcement came that Herberts, the parent of both Standox and Spies-Hecker, would be sold, first reported in August to buyout firm Kohlberg, Kravis and Roberts, then, when that deal fell through, to DuPont. Further changes in the paint supplier landscape appear to be a given as the level of competition for shop business increases. Paint suppliers, faced with a flat or declining materials market, can only grow their business by converting competitor’s customers to their brands. Or, as in the case of the DuPont acquisition of Herberts, by acquiring their competitors. 

What do these dramatic changes mean to the typical INSIGHT shop subscriber? Certainly, competition will continue to increase. Why? 

First, the market for collision repairs is growing only very slightly due primarily to increases in the cost of repairs. Claims frequency, the percentage of insured vehicles that result in claims, is declining. Also, shop populations are declining. Together, these facts will force collision repairers that wish to increase their business to grow at the expense of their competition. Whether through acquisition or increased marketing and relationship building, you or your competition must change to meet these facts head-on. 

To start our yearly review, let us first examine the size of the U.S. collision repair market. 

Market Size

In the second quarter of 1998, collision claims frequency was also reported down 1.8 percent versus 1997. 

Given this decline, many have anticipated a decline in the overall market for collision repairs in 1998. But, this is not the case! 

Slight increases in the number of vehicles in operation, coupled with an increase in severity, the cost of claims, has resulted in a 1.6 percent increase in the size of the collision repair market in the first six months of 1998 versus a year ago. Though final insurance statistics are not available, INSIGHT’s current estimate of the size of the collision repair market for 1998 in the U.S. totals $24.8 billion, taking the 1.6 percent increase into account. Discounting the highly variable first quarter, where severity often spikes in tandem with the severity of winter weather conditions, continuing rises in the cost of claims can be attributed to increases in shop labor rates and materials reimbursements- increases that have finally caught up and in many cases surpassed the level of inflation after years of little or no increase. 

It is also important to note that this continues the trend begun last year where the industry has grown above the 1994 peak level of $23.9 billion, the last year of the major auto manufacturer paint delamination warranty programs. (Editor’s Note: See the chart below.)

Shop Population

The number of facilities performing collision repairs in the U.S. continues the decline that began after 1992. The Historic Shop Population chart on page 13 shows the number of collision repair facilities derived from Yellow Page data from 1984 through 1998. The number of shops listed in the Yellow Pages has declined from a high of 71,000 in 1992 to 63,500 in 1995, and the best estimate is that it has fallen to 54,000 in 1998. This decline of over 15 percent in four years represents a trend that we expect to see continue in the foreseeable future. 

Please note that the Yellow Page numbers should be used only as a comparison to show the relative increase and decline in the shop population as a whole- the number of real businesses is significantly lower. The reason for displaying the Yellow Page charts is the consistency of the data - all the way back to 1984. 

The 1998 Shop Population chart on page 14 details INSIGHT’s current research on the true number of collision repair businesses in the U.S. by the size of their sales dollars. As the chart illustrates, the vast majority of businesses fall under $600,000 in sales per year. The total number of repair facilities for 1998 is 49,150 businesses in the U.S. 

1999 Game Plan

Prepare a Plan for Growth- 

Consolidation’s effect took hold in many metropolitan markets across the U.S. Long predicted, signs of a decline in the number of collision repair facilities are beginning to show in data collected by INSIGHT over the past two years.

Traditionally, shop populations have increased during times of increased business. This was not the case in 1998. Professionally managed facilities are achieving growth rates above the rate of increase in the overall collision repair market by attracting work that would have gone to their competitors. Prepare a plan focusing on both the sales and marketing requirements to secure work from competitors and also focus on the requirements of the production facility to meet turn-around goals and maintenance of customer satisfaction.

• Front Office 

In-Depth Market Analysis-

To prepare your facility to compete against potential consolidators, or existing repair businesses in your local market, an in-depth analysis of the market should be performed. This analysis should include estimates of the dollar size of your trading area, an analysis of competitors and details on current and potential referral sources.

CSI Tracking-

Customer satisfaction is of primary importance. If you do not currently track customer satisfaction, this is a primary item to begin in the new year.

Financial Analysis and Benchmarking-

Understanding a shop’s operating and financial performance is a key factor in preparing the growth game plan. Where are we now? and What is achievable? are the two key questions answered through financial analysis and benchmarking exercises.

Electronic Data Interchange (EDI)-

Being able to prepare a computerized estimate is only one portion of the computerization taking place in collision repair shops across the U.S. EDI is becoming a large part of many collision repair facilities’ business. This trend increased dramatically through 1998 and will continue to do so in the new year as insurers take advantage of new product offerings from ADP, CCC, and Mitchell that use CIECA standardized transactions, allowing improved claims assignment, estimate, repair order and electronic funds transfer transactions between shop and insurer.

Build a Non-Traditional Referral Base-

The importance of referrals from insurers, as a part of a DRP relationship, or direct from agents and claims staff is of obvious importance. Many repair facilities still miss the boat on non-traditional business sources of referrals. These can include towing companies, tire and wheel alignment shops, mechanical repair facilities and OE dealer relationships. Look towards your facility’s supplier base first for potential referral sources.

Prepare to Compete or Concede-

We stated it last year and must say it again: Now is the time to make a decision about the long-term future of your business. How will you handle the possible entrance of a consolidator in your market? There are two basic options, concede defeat and sell your facility, or prepare your business for the increased level of competition for the collision repair claims dollar that is the inevitable result of consolidation. INSIGHT research indicates that the majority of our subscribers feel comfortable with their ability to compete against new entrants, or against their current competitors who may sell to a consolidator.

However, closer attention must be paid to protecting current referral business and finding new sources before the competition arrives in force. Increasing your business now will prepare you for whatever route you decide to take by either making your business more attractive to a consolidator, or by making the prospect of competing against you less attractive.

• Production Floor
Production Management-
We pushed production management last year, and continue to suggest sound production management techniques to achieve maximum productivity. 
Implement Industrialized Production Methods-
Where possible and practical, the use of new production techniques geared towards the high-volume repair center should be investigated. As repair centers gain in size, the ability to predict and control the flow of work through each facility becomes more practical.
Analyze Employee Training Base-
Increased pressure to control the rise of collision repair claims cost will place higher importance on technician and management productivity. To determine training needs INSIGHT suggests that repairers first analyze productivity statistics by employee. Low performing technicians are primary candidates for increased training.
Also, I-CAR Gold Class status is still the baseline for participation in many insurance company referral programs. Gold Class status will continue in this role for the foreseeable future.

Conclusion

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