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Getting Their Hands Dirty, Charlie Barone, BodyShop Business, July 2001
When the "Good Hands" insurance company acquired consolidator Sterling Auto Body, the industry’s eyebrows went up and the speculation began: Can insurers run body shops? What will become of Allstate’s non-Sterling DRP shops? What will this do to the industry itself?
In what was clearly the mother of all body shop deals, the No. 2 auto insurer in the United States purchased body shop consolidator Sterling Auto Body, which operates 39 company-owned body shops in the Atlanta, Chicago, Cleveland, Detroit, Philadelphia, Jacksonville and Pittsburgh markets.
The insurance company, however, didn’t make the acquisition, per se. Rather, the body shops are now owned by a subsidiary of the property and casualty carrier, Allstate Non-Insurance Holdings. The company reportedly filed application with the Federal Trade Commission and got a green light from regulators on the deal.
The news hit like the attack on Pearl Harbor, both in terms of its surprise and impact, with industry reactions to the deal ranging from amusement to outrage to cynicism. The deal also reportedly came as a shock to other auto insurers. State Farm quickly announced it was severing its DRP relationship with Sterling – and other auto insurers soon followed.
For others, however, the Sterling purchase was hardly worth discussion, or even speculation as to its hidden meanings. Society of Collision Repair Specialist Chairman Don Keenan’s official response was, "It’s not SCRS’ position to make a comment on every event that happens in the industry or what business decisions every company makes. SCRS will deal with realities, not hypothetical situations."
Clearly, however, there are some not-so-hypothetical changes in store for hundreds of shop owners.
First, there will be a pronounced realignment in the collision repair market along company lines, in which Allstate customers hone in on Sterling shops. Due to Allstate’s plans to prioritize their own customers in the Sterling shops, non-Allstate customers once destined for Sterling will, in turn, be shifted to non-Sterling shops in those areas. Why? Because other auto insurers won’t want to see their policyholders take a back seat to Allstate customers.
Though the realignment is a given, the question remains of how claims will be settled on Allstate policyholder and claimants’ cars in the Sterling-controlled markets (assuming some end up in independent and dealer body shops). Will the Sterling price structure be forced on everyone because it’s used as a model of efficiency and customer service?
It looks that way.
"Certainly where Sterling is competitive in their market, customers are going to pay less," says Allstate spokesman Michael Trevino. "If Sterling can deliver a high quality product for less, then that’s going to put pressure on other providers to do the same thing. It’s a function of the marketplace [that] whomever is paying the bills isn’t going to want to pay more than they have to. To the extent that Sterling can increase competition and make the industry better, then that’s a good thing. If they drive other shops out of the marketplace that can’t compete, then that’s probably good for the industry as well. I think everybody wins in that kind of situation."
But winning, as any shop owner in the shadow of a Sterling shop might say, is a matter of perspective.
What It Is
We live in an age of mergers and acquisitions, the most notable of which involved Standard Oil descendants Exxon and Mobil. Some analysts have pointed to the reunion as a harbinger of a feeding frenzy in the energy market. More to the point, it exemplifies attitudes in Washington, where the political climate makes it seem as though anything will get by the Feds.
We’re also in the age of body shop litigation. In the last five years, it seems lawyers have discovered the body shop business and are spawning lawsuits like salmon. While there’s nothing new about shop owners filing suits against insurance companies, some are taking classes on the legal implications of doing business and have aligned themselves with hard-line groups like Consent Decree.com and the Coalition for Collision Repair Excellence (CCRE). Both organizations have staked out considerable consumer high ground and have established ties to the major firms involved in suing insurance companies. For the Consent Decree group in particular – whose members had a prior line of communications with the Department of Justice’s Antitrust division regarding violations of a certain court order dating to 1963 – the Allstate/Sterling deal had a distinct in-your-face feel.
Though many say that calling the Allstate/Sterling marriage incestuous is an understatement, does the purchase and operation of a body shop chain by an insurer actually violate any laws? Are laws bound to be broken in the process of operating the shops, based on the business model we’ve come to understand? Allstate says no. And certainly, you have to expect that Allstate – in bringing all its resources to bear in this purchase – has done the due diligence. In fact, you’d have to assume this was covered to the extent that the board was reasonably comfortable that there’d be no unmanageable surprises (in either the state capitals or federal courthouses).
"What the insurer is reportedly doing sounds as though it isn’t necessary illegal," says Richard Steuer of Kaye Sholler, LLP, an antitrust lawyer from New York. "Except for monopolization, most antitrust violations require a multiplicity of actors, and it sounds as though this insurer is making these acquisitions and operating body shops on its own. If there were evidence of a group boycott, it might be a different story."
In terms of a monopoly, the Allstate acquisition does little or nothing to reduce the number of competitors in the collision repair market, so it passes an anti-competitive litmus test in that sense. In fact, the company wants to be known as the hardest competitor in the market (the one to beat, so to speak). But from the standpoint of someone facing competition from Allstate itself, the Sterling pricing has a potential to be downright predatory. What would it matter to Allstate if they lost a few dollars on every job? Would it not be a function of internal accounting? Allstate, however, assures us they’re in this for a profit, just like in any other business.
The major concern from independents is they won’t even have the opportunity to compete for the job, much less bid on the repair work. And without question, Allstate will do its level best to get policyholders and claimants into Sterling shops, which raises concerns regarding the means of accomplishing this feat. While company spokespersons say their claims departments will be mindful of existing state laws and regulations regarding steering, such assurance (particularly from Allstate) faces real skepticism from body shop owners who wonder about ever seeing their "good hands" customers again.
Concerns about steering aside, you have every reason to expect the insurer will take much more legal, but nonetheless effective, measures in terms of saturating the markets with direct mail, billboards, radio and TV advertising. The message will undoubtedly be: Sterling is Allstate.
But Allstate’s Trevino adds "this won’t be another HMO for cars." In fact, he says that customer choice will be respected, even to the extent of the selection of parts used in the repair work. If a customer so chooses, he can opt for OEM parts just by asking – at which point Allstate is prepared to be helpful.
George Ruebenson, Allstate vice president for claims and new chairman of the Sterling board of directors, underscored their kind of customer service in a press release: "This acquisition is part of Allstate’s effort to create a differentiated customer experience coupled with increased efficiencies and delivery of value to the policyholder. While the choice of repairer is ultimately up to the customer, the process of finding a high quality repairer does not have to rest solely on the shoulders of the customer."
In an interview with the "Wall Street Journal" last fall, Steven Groot, president of Allstate International, was quoted on the same topic. Groot said, "I think the business, particularly the personal lines insurance business, is going to continue to respond to and be more focused on the customer. … What customers tell us is that when they’re making a decision about protecting the most important assets in their lives, they want a person involved in helping them make that decision."
And help they will.
Advance 10 Spaces
The purpose of antitrust laws is to protect consumers from inflationary pricing, which is the goal of a monopoly. As competition decreases, a buyers’ market becomes a seller’s market, and under most circumstances, fewer choices for consumers means higher prices. This axiom, however, is turned on its ear when one of the largest payers in a market becomes a seller. That being understood, the effects of the Allstate acquisition have neither the potential to drive up collision repair prices or to escalate insurance premiums. Presumably, there will be a net savings for consumers, as the cost of repairs will inevitably go down (and not just for Allstate customers. This arrangement may also drive down prevailing repair costs in those markets served by an Allstate body shop. This isn’t only true for Allstate customers, but for all insured drivers.) Can this be a good set of circumstances for consumers? Perhaps – assuming those consumers don’t own a body shop.
The same kinds of market shifts are already underway in other businesses in which Allstate finds itself the payer. In another strategic move, Home Depot was recently selected as the vendor of choice by Allstate for building materials. In this case, the insurer didn’t acquire the building supply retailer, but instead struck an agreement allowing Allstate insurance adjusters to access Home Depot’s 977 U.S. stores to provide repair materials and installation at what the insurer terms "reasonable prices."
While the customer is under no obligation to buy from Home Depot, the Home Depot price structure will serve to delineate the market for building materials. Initially, the Home Depot deal will only apply to flooring replacement, with the company providing the materials and installation. But this type of strategic alliance could lead to it becoming a kind of Dow Jones average for lumber, PVC pipe and grass seed.
Much in the same way, Sterling prices could have a way of limiting the market.
Because the Sterling organization is nowhere near the size of Home Depot, the strategy in the collision repair business isn’t as all-consuming as that in the building supplies game. But this is subject to change, since Allstate has intentions to maintain an aggressive acquisition plan in addition to its greenfielding of new company-owned facilities in selected markets. The point is that Sterling could, in fact, be a Home Depot in the future. And when that happens, competing body shops will be subject to the so-called "reasonable prices." Assuming they’re still around, that is.
Writer Charlie Barone has been working in and around the body shop industry for the last 27 years, having owned and managed several collision shops. He’s an ASE Master Certified tech, a licensed damage appraiser and has been writing technical, management and opinion pieces since 1993. Barone can be reached via e-mail at [email protected].
Are You Up To the Challenge?
Although Three C Auto Body owner Bob Juniper of Columbus, Ohio, doesn’t currently compete with Sterling shops, he says he’s up for the challenge. "If Allstate came into my market, I would enjoy that. It would keep me motivated," he says, advising those in the industry more prone to nail biting to remain calm. "For all the shops that are worried about this Allstate/Sterling development, my advice to them is to focus on your own business. Don’t worry about what everyone else is doing."
Though Juniper’s approach to the market may seem basic, it works. Juniper concentrates on marketing his business and doesn’t rely on the state department of insurance, legislators, lawyers, DRPs, dealers … nobody. Through direct marketing, he’s educated consumers in his markets about their rights regarding collision repair and what to expect from their insurance companies. He makes the public want to come to his shop. In fact, many can’t wait to have an accident just so they can go to Three C. Juniper is prepared for the intense competition from Allstate because he has the public on his side. Do you?
The Many Reactions to Allstate’s Action
Three C Auto Body owner Bob Juniper, known for his direct marketing to consumers: "I loved it and I laughed about it. Allstate will find a way to screw it up."
"If you can’t change what’s taken place, you need the strength to deal with it, embrace it and make the best of it," says Florida shop owner Barrett Smith. "Proper education of the unwary, trusting consumer is where the difference will be made."
"There’s something not right about that." – an observer not in the collision industry on insurers owning body shops.
Chicago body shop attorney Patrick McGuire: "All the work [Allstate] thinks is out there really isn’t if shops and consumers know their rights. Secondly, the liability that goes with owning and operating a body shop is a lot more problematic than [Allstate] may have initially thought. If they have quality problems coming out of those shops, that’s going to be a real issue for any insurance company that owns a shop where those cars are."
Val Fichera, owner of DiNardo’s Auto Body in Philadelphia, an operation steeped in DRP agreements: "This acquisition will define how shops will be required to change their business model. Insurance carriers will reduce the number of DRP shops in each market, forcing lower severity per claim for increased volume. Now shops will have to decide and limit the amount of DRP volume and which companies they choose to do business with. If a shop continues to grow from increased volume from any one carrier, it’ll be forced to increase debt for expansion and may be left holding the bag if it loses its contract thorough another acquisition of this type."
Dallas body shop owner Roy Smalley: "I’ve just about reached the opinion that if antitrust laws aren’t enforced, then they haven’t been broken. [This is] sort of a reverse logic but appropriate given the interest shown by those charged with ensuring fair dealings and competition at both the state and federal level."
"Allstate and other insurers advantage in all this is that they can funnel billions of dollars into these consolidators to keep them afloat, while showing a low door rate. It’ll all be a big facade – kind of like an immense, impressive storefront on the front of a small building in an old Western movie. What you see isn’t reality." – Washington shop owner Dick Strom.
"The days of small, family run, independent body shops are numbered," says Dennis Howard of the Insurance Consumer Advocate Network (ICAN), who sees the deal as less of a danger to independent shops as it is a threat to body shops currently involved with Allstate. "If those shops are heavily leveraged and rely on DRP income to survive, they will be in serious trouble. Independent shops without DRP relationships are better prepared."