CARSTAR Execs Predict Continued Tough Times in 2011 - BodyShop Business
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CARSTAR Execs Predict Continued Tough Times in 2011

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Jason Stahl has 28 years of experience as an editor, and has been editor of BodyShop Business for the past 16 years. He currently is a gold pin member of the Collision Industry Conference. Jason, who hails from Cleveland, Ohio, earned a bachelor of arts degree in English from John Carroll University and started his career in journalism at a weekly newspaper, doing everything from delivering newspapers to selling advertising space to writing articles.

The collision repair industry is not out of the woods
yet, according to CARSTAR executives who recently talked to the press about
their expectations for 2011. Still, they’re maintaining a sense of optimism due
to market conditions they feel will play right into their hand.

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Those market conditions make up what CARSTAR CEO Dick
Cross called the "perfect storm" the collision repair industry has
been enduring. The perfect storm, Cross said, consists of three things: a
changing insurer business strategy, the recession and increasingly
sophisticated vehicle design/construction.

Insurer Strategy

Concerning insurers, Cross said in 2010 it became more
clear that insurers intend to concentrate their policyholders’ business with
the best-performing shops.

"A lot of people would argue that has been going on
for a long period of time, but it became very clear in 2010 with the revelation
of some important informational capabilities that insurers have developed,
which we think are going to support them in making this happen," Cross
said.

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Dan Young, senior vice president of insurance for
CARSTAR, added that insurers will be focusing more strongly in 2011 on
performance and self-management.

"How you perform is how you’re going to punch your
ticket in 2011," Young said. "CARSTAR has demonstrated over a number
of years that we can produce predictable, repeatable outcomes, and that’s what
has helped us grow our insurer revenue a lot. But if we’re going to continue to
grow that revenue, our message to our stores will be, ‘You have to
perform.’"

Young added that insurers will place stronger emphasis on
wanting the shops they work with to take care of the customer.

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"The top insurers spent $1.2 billion on TV ads last
year," he said. "It’s a market that’s very competitive, and so we
have to take care of their customers."

Recession

The second element of what Cross termed the perfect storm
is the prolonged recession, which he feels will lead to a permanent downsizing
in the industry in addition to the cyclical downsizing that occurs.

"The severity and length of this downturn layered on
top of this gathering flow of insurer claims to fewer, larger and better-run
stores has started collapsing the air hose on many smaller, less
well-capitalized and less professional stores that are finding more and more
each day that they don’t have the resources to keep up with what’s going on
around them," said Cross. "We think the attrition that started in
2009 and continued through 2010 is going to keep going through 2011 and maybe
to 2012."

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Changing Technology

The third element of the perfect storm, Cross said, is
rapidly changing vehicle design and construction, which he feels is further
darkening the outlook for some stores, particularly those that are hanging on
by a thread right now, hoping that things will go back to the way they used to
be.

All of these elements, Cross feels, bode well for CARSTAR
and its model of doing business.

"We offer solid independent owners a support system
and the resources to compete in what we see as an emerging and new world of
collision repair," he said. "Our model is somewhat unique in the
industry in that it allows repairers to continue to own and manage their own
businesses. Already, we’re seeing lots of proof in our franchisees that that
concept works."

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Performance

Dan Bailey, COO of CARSTAR, re-emphasized that the stores
that are performing at the highest level will get the majority of the work
available. Part of this performance is tracking metrics, and Bailey said every
CARSTAR store will have the same management system and live real data available
every day geared toward the operational and financial performance of the
stores.

Other new CARSTAR initiatives slated for 2011 include:

• Stronger effort to get more stores to participate in 20
Groups.

• Building programs specifically for its multiple-store
operators, of which 30 percent of its franchisees are classified.

• Implementation of a new development model built by The
iFranchise Group to grow the number of franchisees.

• More effective monitoring of store performance through
metrics and KPIs.

A Shrinking Industry

CARSTAR believes total industry revenues are down 30 to
35 percent since summer 2008. Cross said CARSTAR store sales are down 8 percent
in that same period. CARSTAR also believes the industry lost 10 percent of its
stores in 2010, or 4,000 to 5,000 shops.

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"We do not see that pace abating in 2011,"
Cross said. "Frankly, costs will continue to rise and insurers will be
directing cars to better-performing stores, and that will spell continued
tough times for independents that don’t have the capital to keep up with the
changes going on."

Trends

There are a variety of reasons why the repair pool has
been shrinking, but Cross offered his take on "less miles driven."

"We think those are concentrated on the people who
are most accident prone – the kids who can’t spend $4 a gallon to joyride and
the elderly," he said.

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Cross said CARSTAR has also seen a greater impact from
vehicle accident avoidance technology.

"They’re converting what used to be an accident into
a near miss, and we think that’s accelerating. And now this technology is
extending from high-end vehicles through the mid-range and lower-priced
cars."

Cross also remarked on the trend of an increasing number
of high-end wrecks going offshore.

Insurer Friction

A common theme among shops in 2010 was increased fighting
with insurers to get paid properly. CARSTAR has not been immune to that trend.
Bailey remarked that "the less claims there are, the more time [insurers]
have to manage the numbers and do more reinspections."

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"We have markets where there has been tension,"
said Bailey. "Stores are experiencing increases in the cost of doing
business but can’t get increases in labor or material rates, which of course
makes it harder to make a profit. That’s the just the way it is today, and it’s
all part of supply and demand. As long as you can get it done down the street
for less price, that’s still going to happen."

Bailey said CARSTAR is working hard with its stores on
sharpening their negotiation skills to reduce any potential friction between
them and insurers.

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Aftermarket Parts

Last year, CARSTAR mentioned its frustration over a lack
of a recall system in the collision repair industry regarding poor quality or
malfunctioning parts. This year, instead of "fighting this issue through
the press," CARSTAR decided to meet with LKQ to gain a better
understanding of the situation.

"I think it was a case of ‘we didn’t know what we
didn’t know,’" said Bailey. "We understand things better now – that
there are good aftermarket parts and bad aftermarket parts. And we now know how
to track the good ones. I personally was greatly concerned about the
trackability and traceability of safety-related parts, but now [LKQ] has that
in place. It had been in place for insurers for quite some time but not for
repairers."

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In addition to being educated on parts, CARSTAR was able
to start a pilot program with LKQ to track these parts in its stores in case it ever needs to conduct a recall.

Time for a Transition

Last year, Cross called the business environment the best
opportunity CARSTAR has ever seen, and he still believes that to be the case in
2011. But again, the emphasis will be on performance.

"When we started in 1989, we created the concept of
the benefit of affiliation – social, training, purchasing, etc. In 2005, we
declared a watershed and transitioned from a franchise of affiliation into a
franchise of value. In 2011, we’ll make another transition from a franchise of
value to a franchise of superior performance." 

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