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Examining the State of the Industry

Too many shops, not enough work, not enough profit, too much insurer involvement and not enough business expertise on the part of shop owners are all contributing to the sorry state that is the collision repair industry.

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When repairers are discussing the state
of the collision repair industry, I’m always reminded of something a Massachusetts shop owner said:
“You get what you tolerate.”

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A successful multi-shop owner, he went on to explain that if you’re not happy with how you’re being treated by insurers that, “perhaps the insurance people are just doing to you what you’ve demonstrated that you’ll put up with.”

His point? If you let insurers (or anyone, for that matter) walk all over you, they will — and gladly.

His theory supports what I’ve been thinking for years: The collision repair industry is suffering from “victim-itis.” Many shop owners believe that insurers control the rates, control the repair process, control their businesses and control the industry in general. They believe they’re being victimized — and that the insurance industry doesn’t let them make a decent profit.

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Doesn’t let them?

Sure, these shop owners may be victims, but only of their own distorted thinking. The insurance industry doesn’t owe the collision industry a living. Insurers are in business to make money (and they do), and so are you. If you aren’t making money, then you only have yourself to blame.

Click here for the state-by-state breakdown of the collision market

Many repairers have been suffering from this victim-itis for some time now, and they’ve been able to get away with it simply because there was enough work to sustain the marketplace — and to sustain most of the shops in the marketplace.

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But that’s all changing. Like so many industries before it, the collision repair industry is evolving — for better or for worse and whether you want it to or not. Consider the following facts: 

  • Fewer crash reports are being filed with police.
  • Fewer claims are being filed with insurers.
  • More consumers are “cashing out” instead of getting their damaged vehicles repaired.
  • More collision-damaged vehicles are being totaled.
  • More stability-control/crash-avoidance systems are being installed in vehicles, and crash-avoidance systems are now in development that could someday, literally, prevent cars from even hitting one another.

And none of the above even takes into account all the crap that goes on once a shop finally does get to bid on a job.

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One word sums up the current state of this industry: sorry. Too many shops, not enough work, not enough profit, too much insurer involvement and not enough business expertise on the part of shop owners are all contributing to the sorry state that is the collision repair industry.

Just the Facts
The facts are this: According to the National Highway Traffic Safety Administration (NHTSA), more cars are on the road today than ever before, yet fewer auto accidents are being reported to police — about half a million less than in 2002. But NHTSA doesn’t believe the actual number of fender benders has decreased — just fewer people are reporting them.

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Click here to see how your third quarter 2006 gross sales compared to third quarter 2005

In addition, drivers are also reporting fewer crashes to their insurance companies — a four-year, 15% drop — which means less work for body shops and record profits for auto insurers like State Farm and Allstate. (Allstate’s net income rose 13% in the first six months of this year.) Nobody knows precisely why less auto claims are being filed with insurers, but it’s likely due, at least in part, to fear of retribution: Consumers fear a raise in their premiums or even being dropped by their insurer if they do file a claim.

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Click here to see third quarter 2006 gross sales compared to 2005 – by DRP affiliation

But these statistics are just a piece of a much bigger picture: Just under 7 million crashes are reported to police annually but 27.5 million accidents occur annually, according to the government’s estimate of total crashes.

These 27.5 million accidents, however, still don’t represent the actual “repair pool” because several factors play a role in decreasing the number of repair jobs out there — the first factor being total losses.

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At a recent Collision Industry Conference (CIC) meeting, Lee Peterson, training/marketing manager for Chief Automotive Technologies, said the percentage of collision-damaged vehicles being totaled has risen from about 4% in 1980 to 18 to 21% today. And he predicted it could hit 30% within two to three years. Statistics compiled by the information providers also show that 18 to 20% of all estimates are designated as total losses, indicating that total losses continue to increase at a rate of 3 to 5% per year. And, according to one of the information providers, because estimators tend to under-designate totals, the “true total loss frequency” is likely closer to 23%.

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For our State-by-State Breakdown of the Collision Market, we’ve designated total losses at 20%, meaning that of those 27.5 million annual accidents, 5.5 million are total losses — decreasing the available “repair pool” to 22 million.

The next factor that plays a role in decreasing the repair pool is “cashing out” — vehicle owners taking the insurance check but not getting the vehicle repaired. Because that money is theirs, they can legally do whatever they want with it. They can have all of the vehicle repaired, some of the vehicle repaired or none of the vehicle repaired.
Word is, “cash-outs” are increasing. But trying to determine the “true” cash-out figure is like trying to get your arms around a samurai.

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State Farm, Allstate, GEICO and Progressive all told BSB that they don’t track this figure (and one insurer employee admitted that even if they did, they probably wouldn’t tell us). Their lack of information on this topic was suspicious, to say the least, especially since at least one of these insurance companies counts on cash-outs:

“Progressive’s whole business model is based on the cash-out, which is why they lowball estimates so bad,” says a Connecticut shop manager. “They know their customers are very likely to never get their vehicles repaired, so if they write lowball estimates up front, they save billions every year. Progressive’s business model has heavily subsidized the big screen television market and Carnival Cruise lines, since a large part of their claim dollars ends up in the pockets of these and similar industries.”

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Click here to see how your third quarter 2006 net earnings compared to third quarter 2005

Regardless, without the insurance industry’s help, this cash-out figure remains elusive. Some speculate the percentage to be as high as 40-55% in some markets with some insurers. But if we consider all insurers and all U.S. markets, the figure is likely closer to 10-20%.

For our research, we’ve designated 15% of wrecks as cash-outs (15% of 27.5 million total annual accidents = 4.125 million. Subtract 4.125 million, along with the 5.5 million total losses from 27.5 million), shrinking the total annual “repair pool” to just under 18 million.

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Current Industry Atmosphere
And those are just the facts. We haven’t even taken into account the collision repair market’s current atmosphere — which continues to become more and more cutthroat. Many shops are desperate for work, and desperation often goes hand in hand with bad decisions. There are shops in the market willing to do anything to get jobs, even if what they’re agreeing to is short-sighted and detrimental to the long-term health of the industry.

Because we don’t have the time or space to discuss all of the issues affecting the industry, we’re going to briefly take a look at a few of the most serious problems:

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Over-capacity market Most of the industry’s current issues are symptoms of this one underlying problem: too many shops and not enough work. At IBIS 2005 in Switzerland, a presenter indicated that the number of shops in North America is forecast to be reduced 40% by 2010 — that four out of 10 collision centers will be gone by 2010. (To compound this prediction, during hallway conversations at NACE 2005, a North American insurance representative indicated that due to this overcapacity, he believes labor rates are poised to decrease over the next four years.)

People have been predicting the consolidation of this industry for years now. While some predictions are more extreme than others, the fact is: When it’s all over, there will be fewer shops.

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Click here to see third quarter 2006 net earnings compared to 2005 – by DRP affiliation

Until then, this over-capacity market — too much supply (shops) and not enough demand (repair jobs) — presents lots of opportunity for abuse by insurers, since shops are desperate for work. There’s tremendous pressure to gain volume through discounting in an environment where facilities are below capacity, and this discounting pressure will continue until facilities begin producing work for a price below what it costs them to generate that work. This “losing money on each job” will continue until all cash resources and financing avenues are exhausted and the capacity imbalance is equalized — when the affected facilities go out of business.

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“If we can get a supply and demand correction, pricing will be fair and shops will be able to make a good bottom line. But we need enough supply to fill our shops. Right now, there are too many stores,” says a Kansas multiple-shop owner, adding that he believes State Farm’s new DRP agreement “will accelerate getting that correction done.”

Steering According to State Farm’s spokesman, Dick Luedke, State Farm is currently sending 65% of their auto claims to shops in their network. Insurer steering of work has reached epidemic proportions, and it’s made possible by the fact that there’s always a shop out there willing to cut insurers a deal, thus creating incentive for insurers to steer.

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Because this “deal making” isn’t going to go away anytime soon (as long as there’s an over-capacity market), shops need to understand state laws as they relate to steering, the insurance contract, the difference between first- and third-party claims and so on.

This will not only help you recognize what insurers can and can’t do, but it will make it possible for you to do some steering of your own. You, too, can have a “preferred” list — of insurance companies — and try to steer vehicle owners to the insurers you feel settle claims more fairly.

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It’s also important to mention here that shops have gotten lazy since the advent of DRPs, making them even more susceptible to — and reliant on — insurer steering. Too many sign on and simply wait for insurers to send them work. They no longer market their business to the community, making themselves completely dependent on insurer whims. Shop owners need to become salesmen again.

Click here for estimated business for 2006 compared to 2005

Lack of balance in customer base/too much reliance on DRPs for work Because many shops rely solely on DRPs, they’re at the mercy of insurers. And these “super DRPs,” such as Progressive’s Concierge program and GEICO’s RX program, are only going to make the situation worse.

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Insurers with such programs shut down all the other DRP shops in a market and direct all the work into one shop. These shops then become almost exclusive with the insurer because most of them don’t have the ability to quickly increase capacity to handle the new volume and retain their other DRPs.

These insurers can then squeeze you even harder because you can’t say no — they’re 90 to 100% of your work, so you can’t afford to lose them.

Shops need balance in their customer base or they’re at risk of catastrophic losses. Yet shops will specialize — and are specializing — in one insurer’s work.

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This situation reminds me of something a Florida repairer once said: “The relationship of the insurer/vehicle owner and the repair shop is like a bacon-and-egg breakfast. The chicken is involved, but the pig is committed. So before you walk over to the trough, make sure you know why they’re fattening you up.”

Repairers not pricing their own work/lack of unity/afraid to say “no” There are no laws anywhere that give labor guides or insurance adjusters authority over prices. Yet many repairers don’t see it that way. A Montana shop owner once said that he was certain he’d be charged with fraud if he overrode the labor database on one of his estimates. He thought he was breaking the law if he priced his own work.

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It’s the job of insurance adjusters to give up as little money as possible. In the process, they often distort how the labor guides are supposed to work — or they’re so uninformed that they don’t know how the guides are supposed to work (and they have a vested interest in remaining “uninformed”). It’s your job to charge what you need to do the job right and to make a fair profit, regardless of what the “guides” say.

After all, the labor guides are just that — guides.

And it doesn’t matter what the adjuster says other shops are willing to accept (especially since adjusters have been known to lie about what other shops are working for to get you to accept a lower rate, thus setting a precedent that hurts the entire local market).

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Says one Pennsylvania repairer: “As long as shop owners believe the labor guides and third-party payers are holding them back, they’ll miss the obvious: It is they who have done themselves in. Shop owners have forgotten how to say ‘no.’

“Making matters worse, insurers see to it that body shop owners cannibalize one another. If one digs in and says no to a low bid by an insurer, there’s always another shop owner willing to dive at that low ball.”

Shop owners’ lack of business expertise Many shop owners make financial decisions without a thorough understanding of how that decision will affect their business from a profitability and cash flow perspective. So in an area where few businesses apply a sophisticated cost/benefit analysis to financial decisions, many shops say “yes” to bad business deals because they don’t fully understand what that decision will ultimately cost.

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This year was particularly tough on shops without solid business skills. Fed up with repairers giving discounts to other, smaller insurers, State Farm overhauled its Service First program — now called Select Service. The new agreement requires participating repairers to give State Farm the lowest rate for every labor or parts discount category, free storage, free total loss handling, etc., etc.

“If you choose to give no discounts whatsoever, that’s perfectly fine with us,” says George Avery, one of the architects of State Farm’s new agreement. “But if your business model includes some discounts, then we want to be part of it.”

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But instead of seeing this as an opportunity — an opportunity, for example, to raise rates with other insurers and to use the new State Farm agreement as the reason — most shop owners simply agreed to the contract and discounted their prices to State Farm, even though many of them were barely getting by before, when State Farm work was profitable.

Says a California shop owner: “We need to become numbers crunchers — better business people with profit-driven guidelines.” For example, when an insurance company asks you to participate in a labor rate survey, “put your current non-discounted rate on the survey,” he says. “Don’t think that by showing a discounted rate you’ll somehow get more work. It will only establish the guidelines you’re allowed to charge on the cars you do get — and force other shops in the area to work at a lower rate too.

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“We continue to do whatever the insurance companies want, and it has come back to bite us — all because we were willing to agree to anything for more cars. A contract needs to be beneficial to both parties. Our current DRPs aren’t. They’re one-sided, in favor of the insurance industry — and we only have ourselves to blame.”

Says a Kansas multiple shop owner: “The shops that understand their numbers, supply and demand, efficiency and economies of scale, will prevail. Better, faster, cheaper is what both the insurance industry and consumers are demanding. Shops need to figure out how to deliver this.”

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Changing customer expectations/ outdated business model/lack of standard operating procedures (SOPs) “We’ve got to be able to deliver a more consistent quality product in a dependable, timely fashion. Today, as an industry, we aren’t very predictable. Process change will drive that,” says an Ohio multiple-shop owner, referring to shops needing to implement SOPs and to how the current process most owners use to operate their shops is outdated — it’s not built to deliver low cost, it’s not built to deliver speed, it’s not built to deliver predictability. Yet that’s what today’s customers want.

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“Most shops believe the answer to their problem lies in growth,” says a “lean” shop owner in the Midwest. “It’s the, ‘If we could just fix one more car per week we could make some money’ scenario. The problem is that doing more (for them) raises their operating costs equally, if not greater. If they had a good business process, they’d be making money at current revenue levels. My concern is that these guys will make deals to get the additional volume from insurers, which will only delay the inevitable — their going out of business.

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“The only way for all existing shops to remain is for them to control costs so that they can make a profit at current revenues — with the understanding that current revenues will decrease. There are just going to be fewer wrecks to fix.”

Although only a small percentage of collision repair shops in this country have implemented “lean” manufacturing principles, the ones that have contend that it’s possible to deliver everything a customer wants — quality, service and speed, at a lower cost — and to greatly increase your profits.

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“Individual efficiencies don’t matter one bit,” says a Pennsylvania “lean” shop owner. “It’s the overall process — the process efficiency — that we need to focus on, how the pieces work together. If I can improve the relationship between all the steps, then the whole thing should flow more smoothly. And the faster it flows, with the same overhead cost, the more cash it generates. That’s where the real profit lies.

“If it’s a faster process, then your cycle time is also greatly reduced. But it can only go faster if there are less mistakes — if things are done right the first time — which means quality improves too.”

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Whether you buy into “lean” or not, the fact remains: You can’t do what you’ve always done and still be successful when everything else around you has changed.

Click here to see what percentage of shops are looking to hire technicians

Insurers bureaucratic policies/ structure The focus for most insurers isn’t policyholder satisfaction. It’s shareholder satisfaction. Stock value is paramount. Senior level management move quickly through the organization (six-month to one-year terms in a position), so decisions are often based on moving metrics quickly, with no long view of performance.

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Says a shop owner with multiple DRPs in place: “Goofy programs are put in place to achieve a short-term movement in some silly number that someone has justified. And shops are forced to do these silly things that have, in most cases, no value to the customer — but do increase operational expense.”

Shops could manage these requirements effectively if they stayed around, but the problem is that they always disappear and a new program is developed. Says an East Coast shop owner: “Rarely in these organizations are the customers more than an afterthought, i.e. Progressive and Allstate. Allstate was so bothered by their policyholders that they fired all their agents a few years ago and made them independent from the company. In their opinion, if they didn’t have all these pesky customers to deal with, they could get something done.

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“What’s worse, these guys never get the right measurements. You have to be careful in putting measurements out there for people to hit. You get what you measure. For example, the im-portant measurement for an insurer is the average cost of claims (severity), but they can’t talk about it because they can’t, by law, set the price of repairs. So they use measurements they call ‘severity drivers,’ things like the percentage of alternative parts used on repairs or the total average number of paint hours per repair.

“The truth is that you can hit all these targets and still have a higher severity. Adversely, you can have lower severity (a good thing for the insurer and vehicle owner) and poor performance against the measurements. This ultimately can get you thrown off the program. You wind up getting shit from one hand of the insurer and praise from the other. Nothing good can ever happen.

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“We need to get the right measurements on the table. Insurers spend so much money inspecting shops’ work (reinspectors have reinspectors, have reinspectors …) that if they could just get the right measurements out there and trust the shops, we could put 100% OEM parts on cars and insurers could increase their profits.”

Do you feel you have the ability to charge regular rate increases? Are insurance companies trying to lower or control rates? Click here for the answers.

Lack of quality standards/poor-quality repairs “Our industry claims to have standards but no one is held to them,” says a California shop owner.

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Since the advent of the automobile, this has been a problem for the industry. Back-alley shops that do cheap repairs and crap work have given this industry a black eye that it still sports today. Then came DRPs, which only made the situation worse. Shop owners (who lack business skills) often sign onto programs that limit their shop’s ability to produce proper repairs. So now we’ve got back-alley shops and profit-depraved mainstream shops performing crap repairs.

Crap repairs are easier to spot. It’s quality repairs that prove elusive.

“The problem with trying to define ‘quality’ in our day-to-day dealings is that even if there is a precise definition, it’s open to interpretation by almost all who participate in the repair process — the vehicle owner, the estimator, the insurance adjuster, the body technicians, etc,” says a Georgia shop owner. “The ‘quality’ issue is even further complicated by ‘locally acceptable quality.’ This misconception is that the level of repair quality in a particular geographical region is dictated by what the ‘acceptable’ quality level is in that area.”

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How deficient is overall body shop repair quality in the United States? Post-repair inspectors (PRIs) report seeing proper repairs about once out of every 100 inspections. “Shops’ practice of putting out slothful repairs is commonplace regardless of geography,” says an Ohio PRI, adding that because post-repair assignments often come from attorneys who are working bodily injury claims and because DV usually isn’t considered on vehicles with minor damage, PRIs are often inspecting heavy hits. “There’s no question that heavy hits are harder to repair,” he says. “Regardless, quality isn’t graded on a curve.”

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Lack of people development/poor starting wages/tool costs Most shops are losing the war on attracting, training and retaining technicians. The easy way out is to hire experienced techs from somewhere else, which is what most do, rather than taking the steps necessary to participate in the long-term solution to this challenge.

“When you hire an already-employed technician from in or around your hometown, you’re ‘raiding,’ plain and simple,” says a Missouri shop owner. “It’s counterproductive.
“The prominence of raiding tells me that most shops don’t have a clue as to how to bring new help into the industry. It’s becoming clear that, at some point, shops are going to have to start growing their own. Stealing from other shops isn’t going to fill the shortage.”

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While complaining that they can’t find good technicians, many shop owners are turning away entry-level candidates because they only want to hire experienced techs.

“Shops need to start working closely with area vocational/technical schools and community colleges, and they need to do so year-round, not just when they need new employees,” says a Virginia shop owner, adding that shops also need to establish a mentoring/apprenticeship program in-house that will help them “grow” these entry-level techs into experienced journeymen.

The industry also needs to stop letting tool costs and entry-level pay be a deterrent to recruiting and retaining new people. Shops hire an entry-level person and expect him to buy tools at the low starting wages they pay him. Let’s see, food and shelter, or tools? Most are going to take food and shelter — and go work at the fast-food joint down the street instead, for the same wage.

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Even with decent entry-level pay, the tool investments needed are huge. Although most shops — and techs — aren’t yet open to the idea, some of the more progressive shops have begun supplying tools to their techs. “Our facilities are fully tooled — specific tools at point-of-use in specific areas of the shop,” says an Ohio multiple-shop owner. “We don’t need multiple tool sets within the shop, and techs don’t need to spend all that money on redundant sets of tools, especially entry-level people. This is a major culture change from the subcontractor mentality that exists in shops today.”

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Collision avoidance systems/throw-away cars Five years ago, the focus was on collision safety (side airbags, etc.). Today, the focus is on collision avoidance (sensors in bumpers that detect impact in parking, braking systems that automatically slow your vehicle when sensing rapidly reduced distance between you and the car in front of you, sensors that detect brain beta wave functions that sound alarms if you begin to fall asleep).

“I used to believe that there would always be wrecked cars, but that may not be the case,” says one veteran shop owner. “There are vehicles now being built that are impossible to wreck. Vehicle systems can be designed to never let cars hit each other or anything else.

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“Also, what about Chinese vehicle imports? Can these guys build cars so cheaply that you just throw them away when wrecked? They’re talking about new cars for 8 grand. At what price are they totaled? Think about other things that used to be major purchases (TVs, refrigerators, etc.). Do you have these things fixed today, or do you just go buy a new one?”

YOU Control Your Destiny
It’s been a tough year, and it doesn’t look like it’s going to get any easier in the near future. That’s why the decisions you make right now are so important.

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Regardless of your shop’s size, success will come to those of you who learn how to work on your business rather than in your business. To do this requires a change of mindset. It means accepting that, as a shop owner, you don’t “fix cars” for a living. You run a collision repair business — which involves fixing cars, but it also involves a whole lot more.

Getting a handle on that “whole lot more” is what’s going to separate those of you who succeed from those of you who fail.

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Writer Georgina K. Carson is editor of BodyShop Business. After researching and reporting on the state of the industry, she’s very tired and in need of a drink. If you see her at NACE, please offer her one.

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