News: Consolidator Report
More than 100 shop owners gathered in Palm Springs, Calif., to glimpse the future of collision repair and position themselves for success.
than 100 top collision repair shop owners were educated on business
strategies and industry trends at the Sherwin-Williams A-Plus Vision
Conference Dec. 6-7 in Palm Springs, Calif.
What Is Success?
Elainna Sachire of Square One Systems kicked things off by asking, “What is success?”
“It’s what you do with your ability, and how you use your talent,” she
said. “And when you clearly define it at the beginning, all parties are
more likely to work toward the same goal.”
Sachire also outlined the three “Ps” of success:
State of the Capital Markets
Rex Green of BB&T Capital Markets was up next, offering a glimpse
into the investment in the growth of multi-shop operators
(MSOs) over the last five years. BB&T was the adviser for four of
the last six deals that involved 20 or more collision facility
locations: Service King, The Boyd Group (Gerber Collision & Glass),
True2Form and CARSTAR.
Green characterized the collision industry as a “star perfomer” over the
last few years, opening the eyes of Wall Street and large equity
groups. A couple reasons for that, he said, was an increase in miles
driven and new cars sold.
“To have a firm like Carlyle invest in collision is very rare and interesting,” said Green.
Green called the broader automotive aftermarket an “absolute winner”
from an investor standpoint over the last 10 years, although he admitted
it has been a “little tired” over the last six to nine months.
The second wave of consolidation in the collision industry, Green said,
is being driven by industry dynamics and investor appetite. He said the
difference between this wave and the first wave, which occurred in the
late 1990s, is that insurance companies are now fully engaged, and their
own strategic objectives are now in sync with the benefits of
“It’s the same idea today as it was then: to drive more volume and drive
down cost. But insurers didn’t play that game back then the way they
are now,” said Green. “Insurers are now focused on cost more. Fifteen
years ago, it was just on a PowerPoint presentation. Now it’s here for
real. I don’t see that changing. When you outsource something, I don’t
think it’s easy to reverse it.”
Green continued, “Consolidation will be different now. Now there is
discipline. We have to show investors the performance of an acquired
shop. A dozen years has added a great deal of maturity to this
Direct-repair programs (DRPs) continue to increase their influence, and
their growth favors MSOs, Green said. He cited the statistic that, on
average, large MSOs have 7.9 DRPs per store.
Not all is rosy with collision, however, Green admitted. Claim volume is
decreasing, cars are getting safer, severity is increasing and body
shop sales decreased in 2012.
“We would like a little more growth,” said Green, “but [collision] is a
consolidating industry. The insurance industry will dictate just how
much and how quickly the industry will consolidate.”
On the topic of cars getting safer, Green said advanced collision
avoidance technology won’t affect claim volume for years. “But it will
affect conversations with investors because we’re hearing about it a
lot,” he admitted.
Buy vs. Build
Green also delved into the acquisition process.
“A single shop is rarely valued on its earnings but rather against the
costs to a buyer of building an alternative location in that market,”
Green said another cost that could make building an alternative location
unattractive to an MSO is building goodwill, which he defined as the
propensity for customers to come back. This includes insurance
relationships and programs.
“As insurers enter into more and more large-scale DRPs, the goodwill of
independents and small MSOs is disappearing,” said Green.
On a positive note, those shops looking to sell right now are getting top dollar.
“There’s lots of money out there that needs to be invested, which means
prices are high,” said Green. “If [private equity companies] don’t
invest it, they lose it. That’s why money is being invested in
Green sees three options for the small, single-store independents:
• Sell sooner or at an otherwise advantageous time
• Grow and sell later
• Change your business model to offset the lack of insurance-pay customers
“Keep in mind, the last guy standing is not necessarily the most valuable,” he said.
What will the future bring? Green says the logic for having national
collision providers is strong because national brands add customer
awareness on top of DRP positioning, which drives revenue. Plus, scale allows:
• Superior systems
• Superior purchasing
• Spending on consumer marketing
• Better customer experience and satisfaction
• Insurer benefit from national presence as costs go down and KPIs go up
“Consumers have proven that they assign value to national brands and the consistent service they imply,” Green said.
In 10 years, Green predicts that two to four national chains will share
25 to 50 percent of the market, 20- to 50-unit chains will spring up in
different regions, and there will be only 10,000 to 15,000 independents
left. Large MSOs will expand in all regions, and independents and small
MSOs will work harder for less revenue. Green predicted MSOs will soon
pop up in Washington, D.C., and Virginia; they want to penetrate the
Northeast, but he said they don’t know how to do that yet.
Matt Ohrnstein of Symphony Advisors gave attendees a view of the current
collision industry competitive landscape, telling the crowd of mostly
single-store owners, “You have a horse in the race. You may be a little
behind, but there’s no reason you can’t be in the race.”
He listed the many factors working against body shops today:
• Aging vehicles
• Higher fuel prices
• Higher insurance deductibles
• Increasingly sophisticated vehicle technology
• Cashouts and unreported claims
• Higher equipment and training costs
He also listed insurers’ concerns:
• Earnings pressure
• Increasing competition
• Performance-based environment
• Desire to “own” the customer
• Downsizing/rightsizing DRPs
• Securing long-term quality
• Repair capacity
Regarding State Farm’s controversial PartsTrader parts procurement
program, Ohrnstein had a distinctly different take than some collision
repairers who are against it.
“State Farm has 20 percent market share. It’s not smart to walk away from them,” he said.
Speaking generally about insurers, he said, “They don’t want to put you
out of business – they need you.” He added, “If insurers want you to do
something, do it. Because if you don’t, five guys down the street will.”
Ohrnstein said that insurers, just like body shops, are driven by
economics. Shops that have a lot of cars coming in are using price to
get those cars.
“All things being equal, MSOs lead with price – reduced labor rate,
parts price, dollars going back to the carrier if their cycle time
exceeds their promise, etc.” said Ohrnstein. “If you get an extra
carrier that brings 20 cars to your shop and your gross margin drops
from 44 percent to 40 percent, think of what drops to the bottom line.
Ninety-five percent of shops will elect not to take this hit because
they think they’ll make less money, but I would argue that getting more
cars through without increasing your fixed costs is better.”
As Ohrnstein sees it, collision repair facilities need the following things to survive and thrive today:
What is the competition doing? Ohrnstein hit on several things:
• Focusing on select preferred relationships
• Developing self-managed relationships
• Giving significant discounts for volume
• Concentrating geographically in single and multi-markets
• Integrating systems and processes
• Leveling supply chain to support performance
• Implementing lean processes
• Developing SOPs
• Leveraging technology
• Embracing alternative parts usage
Honda ProFirst Program
Gary Ledoux of American Honda Motor Company informed the group of the automaker’s new ProFirst body shop recognition program.
“Honda vehicles are becoming more sophisticated,” said Ledoux. “We’ve
partnered with I-CAR to promote the proper repair of vehicles.”
Criteria for the ProFirst program are:
• Use of CollisionLink at least four times per month
• Achieving I-CAR Gold Class status
• Someone at the shop has to complete the Honda Acura I-CAR class
Those shops that meet all the criteria will receive a handsome display
plaque, and both dealer-owned and independent shops are eligible. Also,
there is no cost to participate in the program.
Ledoux also said that Honda vehicle owners would be receiving a letter
educating them on the program, and there was also going to be a social
media campaign along with service reminder mailings. Brochures will also
be available to shops and dealers to hand out.
According to Ledoux, within the first seven weeks of launching the
program, more than 600 shops registered and more than 100 qualified.
State of the Industry
Raymond Chew of CCC Information Services offered some interesting
statistics that gave everyone a view of how the industry fared in 2012.
Some of the stats he cited were:
• Percentage of shops reporting lower sales vs. same period last year increased – the mild winter hurt
• 40 percent of claims involved vehicles aged 7 years or older – the highest in 15 years
• $2,586 = average severity in the first half of 2012
• The 18-34 age group holds a 13 percent share of the new auto
registration market; people aged 50 and older hold a 62 percent share
• 40 percent of insurance carriers will soon adopt predictive analytics
The day’s events were capped off with a roundtable discussion involving
lean guru Steve Feltovich, and Sherwin-Williams managers of business
consulting services Lee Rush and Dave Dewalt. All told, these experts
touted 91 years of experience in collision repair.
The experts answered pre-submitted questions from the audience. One
question was, “How can you reduce cycle time as a non-DRP shop?”
“I only focus on things I can change,” said Rush. “Is your blueprint 100
percent accurate? Eliminating supplements is very difficult.”
Asked what the best cycle time was that they had ever seen, Dewalt said
he had once seen 8.9 days non-drivable at Sterling. As far as best touch
time, the trio said the best they had ever seen was 5 hours per day.