independently of recessions and bear markets? Some industry leaders would say yes, they do.
The reality is that body shop sales tend to follow meteorological trends rather than economic indicators. Hail storms and the shellacking of ice that some cities get in the winter do more to drive markets for body work than does the Dow. And when you consider the fact that third-party payers make up the bulk of the dollars the industry takes in every year, an unemployed car owner can pay for the repair of the rear-end damage his car sustained with an insurance check. Then again, there’s a distinct chance that he’ll continue driving it and pocket the settlement instead, diverting the cash to more essential needs like rent, groceries and health care.
Clearly, the laws of supply and demand also have some effect on the value of repairs, as determined by prevailing market rates and billing practices for repair work. For example, if most of the collision repair technicians in a city went to the same picnic and developed a fatal form of food poisoning after eating the egg salad, the survivors would literally be able to write their own tickets until more workers migrated to fill the openings. And whomever they worked for would be in a similar position, i.e. higher prices for jobs going out the door. In this respect, the body shop business is like others – or at least logic would tell us so.
Third-party payers, however, have an undeniable effect on the market. That is, supply and demand fluctuations don’t manifest themselves immediately in terms of claims settlements. And even if the fatal egg salad scenario played out in Seattle, what are the chances the rates paid by insurance companies to the surviving shops would increase significantly? Would the repair providers simply stay open later for the same pre-picnic rates? You’d hope not. But given the cart-before-the-horse arrangements in play in most claims markets today, there’s a distinct possibility that the latter just might happen. That old circular logic comes into play: We don’t charge because they don’t pay because we don’t charge …
But market pricing goes beyond third-party payers. The fact is, many dynamics affect market prices. The most powerful dynamic, however, is what repairers are ultimately willing to sell their services for.
Measuring the Market (As Best We Can)
We have to resist the temptation to measure market variables only in terms of door rates. If all things were constant, labor rates would be the defining factor in autobody markets. But judgment times and aggressive use (or ignorance) of P-page logic are major determinants of bottom-line costs. For example, a shop in New Orleans might only charge $28 an hour for body labor but 30 percent more by right of incidental charges for the same repair that a shop with a $42-an-hour door rate would demand. So, in that sense, labor rates alone don’t constitute market conditions.
So how do we know where the most money is? Basically we don’t. But the insurers do by measuring severity, comparing a Camry with a front-end hit in Cincinnati to one in Columbus. While the Columbus car might have pushed its bumper up the rear of a Cadillac, causing more in the way of inner structural damage, the severity is based on bottom-line costs. (Managers of DRP operations are well-acquainted with the claims offices’ fixation on severity.) As ridiculous as it may seem for insurers to hold a body shop accountable for the severity of the collisions their policyholders cause, it’s the measure by which shops are managed.
And severity is useful in determining market conditions. Using collision estimating databases and actual loss data, an insurance underwriter can analyze the bottom-line costs for specific operations on specific vehicles in specific markets. Unfortunately, while freely available within the insurance industry, severity data isn’t readily accessible to collision repair shops seeking market information.
Besides, you’d think a bumper- cover replacement is a bumper-cover replacement, whether you’re in Sparta, Miss., or in Greenwich, Conn. We’re talking about essentially the same process and parts. As such, what makes the market price for that job fluctuate from city to city? If, say, replacing the front-bumper cover of a Toyota Camry is a $760 job in Tulsa, why is it a $1,200 job in Newark?
If the list prices for parts are uniform across the nation, then the only variable is the labor and materials used to install them, which, interestingly, can vary as much as 100 percent. What’s being reported by insurers and their self-serving surveys aside, how can you get good market information concerning collision repair? It seems that even the industry pundits can’t answer that.
“Normal market forces don’t apply,” says Doug Kelly – president and COO of Fix Auto, a collision repair consolidator with 98 stores in nine states – about how the collision repair market is exempt from normal market forces that make and break other industries. “Consumers have free choice where they take their vehicle. And the repairer is free to charge what he wants. The consumer can choose the most expensive place [for] repair, and the insurer is obligated to support that decision and have it repaired. The insurance company ultimately arbitrates the deal.
“It’s not a normal buyer/seller arrangement.”
But even a man in Kelly’s lofty position is at a loss – as are most – as to what drives this market to its stratospheric highs and what creates its doldrums.
“Everybody operates under different assumptions and different rules,” says Kelly. “…Why in Boston, for example, does a shop charge $32 [per] labor hour and in San Francisco charge $65? If you can figure that one out, let me know.”
Leading Economic Indicators
The general auto repair market does tend to follow economic trends. Sales of custom wheels and gum-ball tires soar when people have lots of disposable income. And the remanufactured alternators and water pumps fly off the shelves when people don’t, and aren’t, buying new cars. But the body shop business traditionally doesn’t respond as directly to the same trends. It does, however, react in terms of how the economy treats its technicians.
In other businesses, we can see up ticks in the market based on the cost of hiring professionals and practitioners. Markets in health care services, for example, can be measured by gauging the salaries nurses command. Once the target of budget-slashing hospital administrators, nurses were losing their jobs in many cities 10 years ago. But all things being cyclical, the employment market for a registered nurse is once again very high.
Though the collision repair industry is unlike health care in terms of its relationship with the insurance industry – indemnity coverage has all but been abandoned for the HMO policies – some parallels can be drawn in terms of the cost of sale’s effect on rates. The variable in San Francisco (some might attribute this to smarter shop owners) is labor costs. The San Francisco to Los Angeles labor-cost fault line is the clearest example of how wages and salaries do more than anything else to determine markets in the collision repair industry. While labor unions have penetrated the autobody field to some extent in other U.S. cities, the unions in the Bay to L.A. area have a firm grip on dealer shops, which creates a rising tide for the rest of the region.
What’s significant here is that payers clearly have no control over the labor costs. And as those costs led to higher door rates in the Northern end of the state, the insurance reimbursement to their policyholders followed suit. The largely non-union shops in Southern California, on the other hand, serve to suppress labor costs and drive down body shop charges, which is why L.A. labor rates have been traditionally less than their Bay- area counterparts doing the identical work.
It’s also worth mentioning that the oft-lamented tech shortage in the collision repair industry seems to be enigmatic. With reports of smaller shops being slow, technician lay offs and stagnant wages in some markets, the collision repair technician shortage clearly is not a big issue in every market. It would appear that the tech shortage is mostly the curse of successful shops, which seem to be in a constant state of hiring. These operations can have work out the wazoo, but at times, no one to do the work.
The variables in the labor market are also reflective of the options available to qualified technicians. For example, if high-tech industries are drawing the younger talent away from body shops, the existing (and aging) workforce is able to demand more. But this is only true in regions where the accident rates and population levels aren’t declining.
The anomalies in worker trends may also be an indication of a realignment of business along insurance lines. As the DRP business model prevails in most major markets, work flow can’t possibly avoid the channels carved in the streams of commerce. Yet in terms of market conditions and pricing, DRP shops have less to do with actual market rates than would claims settled in independent body shops. Free market conditions clearly don’t apply in the DRP. In fact, a New Jersey regulation that tied labor rates in claims settlements to those charged by DRPs was struck down last year on that basis.
DRPs are, to some extent, subsidized by insurers and, at the same time, force-fed price structures. What’s more, allegations by independent shop owners tell us that DRP pricing is so unreasonably low that no competent, free-standing shop could deliver services and goods profitably at that rate. These claims, while based on some anecdotal evidence, are more supposition than a hard-and-fast rule. They are, nonetheless, eerily similar to the charges made by the domestic steel industry in their railing against foreign countries for dumping subsidized steel products in the North American market. It’s competition of the most unfair kind and clearly not a basis for a market analysis.
Other economic factors also determine a good – or poor – collision repair market. “What you look for is shops per insured vehicles,” says Bob Richards of Collision Services. “A city with 2,000 customers for each shop is a bad place to go into this business. One with 6,500 potential customers per shop is at the other end of the scale.
“The East Coast corridor is out of dirt,” says Richards, referring to the shortage of real estate from Boston to Washington, DC. “And you have to wonder about the Cleveland and Chicago markets” due to the saturation in those cities. Even the most casual observer would see that new operations in those markets would struggle to prosper.
“Population growth thrives in communities that focus on the quality-of-life issues – traffic and crime,” he says. “In that sense, Charleston and Columbia, South Carolina, are the Atlantas of the future.”
In attempting to key into hot collision repair markets, you might follow the activities of the collision consolidators, whose market research and savvy is the product of due diligence. Then again, corporate moves aren’t always indicative of well-thought-out planning. Case in point: Ford’s exuberance for the body shop business was hailed by some in the industry, yet brought quizzical stares from others, as if to say, “Do they know something about this industry we don’t?”
Apparently not. Ford’s love affair with body shops didn’t last. When the hard times hit, Ford didn’t waste any time announcing its divestiture of the Collision Team America body shop chain. The bloom was off the rose, and it was time to get out. Still trying to cope with a slipping market share and a $5.45 billion loss last year, Ford Motor Company sold CTA.
Price Control: Who Really Has It?
An analysis of markets for collision repair would be remiss if the insurance influence in the market weren’t given its due. In fact, there are those in the business who would say the market for collision repair is entirely controlled by the insurance industry. In an article that ran in BodyShop Business several months ago, the insurers’ influence was described by a shop owner as “control.” The term appeared 11 times in the story. Not only is this symbolic of the insurance companies’ dominance in the market, but also in the hearts and minds of its participants. It’s not unusual to hear a shop owner say that he can’t charge a fair price.
But what control do insurers really have over pricing? Naturally, limiting funds is the ultimate form of control. Parents can control their kid’s habits by controlling how much money the child has to spend.
Yet the fact remains that insurance settlements actually buy collision repair in every market in the United States. And, ultimately, the price controls in the form of insurance settlement checks are only as valid as their acceptance by the collision repair market.
So who controls prices, really? Payers or providers? (Remember the egg salad in Seattle?)
In terms of sizing up the market in your own backyard, it pays to belong to a local trade association where discussions flow. Remember, it’s not illegal to conduct surveys, do research or otherwise study market conditions in an effort to price your goods and services. What is against federal antitrust laws is to collude with your competitors to fix prices, something completely different than discussion. The obvious pitfall is that some insurers may not see the fine line between market research and collusion, and will assume the worst.
In most senses, the market does belong to those who provide the product. It doesn’t take a Nobel laureate like John Nash to tell you that without providers, no amount of insurance money would buy the most basic body shop service. So in spite of the insurance industry’s best endeavors to harness the repair market, the final say in market price ultimately belongs to the shops.
That final say, however, is dependent on a shop’s willingness to say no to unreasonable, low-ball offers. And that willingness is directly proportionate to the monetary desires of the local body shops.
Many shop owners will tell you that they simply can’t say no to payers – fearing that, if they do, the insurance company will steer the work elsewhere, add them to a list of uncooperative shops or use other heavy-handed and illegal tactics, or just arbitrarily refuse to pay the claim.
What those shops operating under these aforesaid threats may fail to understand is the power they have in saying no and forcing the payer to get the car repaired at their shop. Once that happens, an entire chain of circumstances unfolds in which the insurance company’s risks multiply. Learning to leverage that risk gives the provider of collision repair work the power to reclaim the market and vest the ability to determine prices with those who held it all along – the body shops!
In the final analysis, the market is almost self-regulating. In their tending of the grazing areas, the insurers have a clever way of keeping the cows hungry. But they know just how dependent on those cows they and their policyholders are. The ironic part is that most of the cows haven’t a clue.
Writer Charlie Barone has been working in and around the body shop business for the last 27 years, having owned and managed several collision repair shops. He’s an ASE Master Certified technician, 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]
Uh, Oh … Better Get (My Car Repaired At) MAACO?
In essence, all insurance proceeds belong to your customers, the destiny of which is their sole discretion. A vehicle owner isn’t obligated to have his car repaired by right of the insurance check. He can have part of the car fixed or none of it fixed. This also means the customer can take that money and go to a body shop where he might bargain for a lesser job.
And the undisputed king of the not-so-perfect job is MAACO.
MAACO’s franchised shops have traditionally been outside the insurance/collision repair industry orbit, dependent on consumer discretionary spending. Though MAACO has always taken insurance settlement checks, they never specialized in collision-repair claims.
That approach, however, is subject to change, according to Tony Martino, owner and founder of MAACO. Martino’s rolling out a new ad campaign in selected markets designed to lure the bread and butter of body shops – late-model cars with light hits – into his franchises. And the advertising stresses the fact that these MAACO centers have the capability to turn out commercially acceptable-quality collision repair.
But do the MAACO centers have the ability to meet the expectations of collision customers? “You’re not going to be able to MAACO-ize that car,” says Martino, in reference to the overall enamel job his company built its reputation on. While that paint job was clearly an excellent value, it fell short of the standards consumers expect these days. What you may not know, however, is that most MAACO centers today also have at least one premium urethane paint line similar to that used in most U.S. collision repair shops.
And when I mentioned to Martino that one industry writer/wisecracker once gave him the award for the most cars not sanded and buffed, he proudly accepted the distinction.
“We’re getting away from cutting and rubbing a car. That’s a very expensive procedure,” he says, referring me to their Clean, Flat and Shiny program, which is something of a departure from the old company standard. Toward that end, they’ve installed top-of-the-line downdraft booths and have trained personnel in their centers to produce that level of quality. “We want to paint a car and have it virtually dust free, good gloss and good depth of image,” he says.
They also want to do the entire job cheaper.
When you take the $1,500 hit that makes up the bread and butter of the average collision repair center and analyze the costs, the margins demand that the customer pay every cent of the bill. Discounts aren’t even discussed. Nevertheless, if you take that same job and insurance check to MAACO, the customer will be paying less than $1,000 dollars, according to Martino, adding that, “They’ll be guaranteed that they’ll be satisfied with the job.”
Though the details of this new strategy weren’t made clear to me during this interview, I imagine that MAACO will bargain for the best price (highest) from the insurance adjuster – assuming one comes into the MAACO center – and then discount the price. They’ll be walking some fine lines here in terms of legal issues. But keep in mind that the strategy is focused on driveable cars, which, in all likelihood, will have been appraised at a drive-in claims office or somewhere else prior to the MAACO appointment.
Martino’s confidence in his centers’ ability is a product of the store managers being trained to sell the jobs up front, explaining where the savings come from and showing them what to expect. Essentially, all the payment for R&I and buffing labor goes to the customer, and everything gets masked up for painting. The cars will be delivered the way they come out of the booth. The balance of the savings is presumed to be the result of their efficiency, lower labor costs and willingness to accept lower profit margins.
Though all the details may not yet be clear, Martino himself has a clear vision for what MAACO is and for the type of collision customers he’s going after.
“I like to think of MAACO as a middle-line company. We don’t do the greatest custom work in the world, but we’re not a real schlock paint outfit, either,” says Martino. “I like to think of us as right in the middle – the Sears-and-Roebuck image, where we service the people who are driving the Fords and the Chevys. Middle America.”
So what does MAACO’s new strategy mean to the collision repair market as a whole? In the last 10 years, the collision repair industry has learned to deal with market conditions precipitated largely by insurance companies and their information- provider partners. But MAACO’s purely provider-based assault on the market isn’t something for which body shops and their industry groups are necessarily prepared. State regulations generally speak to claims settlements and unfair practices by adjusters and their companies. However, the collision repair market being an unregulated one and subject only to competition, no one can tell a business how to price its products.
The only possible snag in MAACO’s plan could be allegations of insurance fraud for passing these discounts along to customers. But understanding that a corporation of this size did the due diligence, you have to assume they’re well-prepared to defend any such charges. After all, policyholders are due the full cost of being indemnified for their losses. What happens after that obligation is met is their business. And MAACO’s.