“Poof!” Go Parts Profits?
Is State Farm direct-purchasing parts?
By Jason Stahl
9/1/2007
I heard a rumor recently from some concerned body shop owners, once at the body shop down the road from my office here in Akron, Ohio, and again at the recent Collision Industry Conference (CIC) in Orlando.
The rumor is that State Farm is direct-purchasing parts for some of its Select Service shops. The shops I was told are involved are located in Cincinnati, Ohio and Los Angeles.
According to one shop owner, the shops in Los Angeles were allowed to bill for 15 percent of the parts purchase by adding a line item to their estimates. That only makes sense that the shop still makes something on the deal because it still has to: dispose of an old part; dispose of packaging; store new parts while waiting for the vehicle to get into the shop; handle parts that come in wrong; etc. But still, most shops average 28.5 percent gross profit on parts (BodyShop Business 2007 Industry Profile). So, if the L.A. situation is true, State Farm is taking 13.5 percent of the shop’s gross profit away. As if shops today have any more profits to give back. And let’s not forget that parts (41.6 percent) are only second to labor (49.7 percent) as a percentage of sales.
If State Farm is doing this, the reason is obvious: It’s to reduce costs. It saves money by reducing the shop’s markup on parts and also earns discounts on the parts purchases by leveraging its purchasing power.
State Farm spokesperson Dick Luedke said he had no knowledge of his company exploring this new cost-saving measure but did say this: “We continue to look at all aspects of the collision repair process. As State Farm identifies opportunities for improvement, we will seek and consider input from the repair industry. Repair facilities will be contacted by local management as changes to our programs are developed.”
It’s clear that insurance companies are going to continue looking for ways to cut costs despite achieving record profits last year. I say that because I’ve received several calls from collision repairers who seem to think the insurance companies make enough money and should cut shops some slack. Well, that’ll never happen. Why? Because insurance companies are following the rule of the corporate world: Keep shooting for the stars. Even when you have a slam-bang year, you’ve got to beat it the next. So they’ll never stop trying to put the squeeze on.
If State Farm is indeed direct-purchasing parts and has some success with it, other insurance companies will most likely follow its lead. As bad as things have been lately, some shops are looking at that possibility as the final nail in the coffin.
“I’d be done,” said one shop owner at CIC who’s heavily involved in DRPs.
“If that happens, I’ll close my business, period,” said another. “If insurers want to buy parts themselves, they can put them on themselves. We don’t need to be geniuses to figure this out.”
A non-DRP shop owner said he had a solution: “I’d just raise my door rate 40 percent and charge an administration fee for checking parts and procuring them.”
It’s clear shops would need to do something because most simply won’t be able to give back 10 percent or more gross profit on parts without making up for it somewhere else.
It may come down to shops simply resisting such a maneuver by the insurance companies, but those beholden to them due to their involvement in DRPs may instead, when asked to jump, have to reply, “How high?” Of course, it is a free country, and going along with this new initiative will most likely set a standard for the rest of the industry. “We only pay 15 percent above the cost of parts” may be the new phrase that gets shop owners grinding their teeth.
Insurance companies need to realize that shops will still be responsible for the parts procurement process, and the reason they can afford to do it is because they currently make a reasonable profit from it. Those profits allow shops to train their employees and do other things necessary to keep up with the times.
The best thing shops can do now is make sure they’re operating as efficiently and cost-effectively as possible. Even so, it may come down to them taking a stand and fighting for their right to make a reasonable and fair profit.
Jason Stahl, Editor
E-mail comments to jstahl@babcox.com