Consolidators will buy consolidators within 12 months," says Randy McPherson of CARA Collision and Glass, who is, himself, an industry consolidator.

McPherson’s statement is provocative, but true. Consolidation is the natural progression of business, and it goes on all around us. In the last three years, my local bank was bought by Norwest, and now it’s becoming Wells Fargo. The corner mom-and-pop stores are now 7-Elevens and Circle Ks, and the State Street Theatre is now owned by United Artists. Thompson Lacquer bought many independent jobbers, became Thompson PBE and is now owned by FinishMaster.

Such growth is natural.

Eighty years ago, someone opened a body shop to repair damaged vehicles. It was a great idea and, 60 years later, there were still 80,000 copies in existence. But 80,000 shops is a million stalls, and that’s over-capacity — making the body shop industry a prime candidate for consolidation.

Economies of Scale
Only the fit survive, and the fittest are those who have a better idea. It may be an idea that enhances productivity, provides faster cycle times, attracts more customers or fosters better relationships with insurance companies. But the idea must somehow set the shop apart from its competitors and make it distinctive. The shops with better ideas are run more efficiently and are then able to expand and multiply.

Insurance companies strive for efficiencies, also. They want to do business with the more efficient shops, so they align themselves in DRP relationships in an attempt to lower costs through more trust, fewer inspections and smoother relationships. Cycle times improve, repairs are more consistent and costs go down.

But insurance companies know there are still more efficiencies to be gained, especially through economies of scale.

Economies of scale are realized through larger shops and more shops being operated in a consistent and predictable manner. Because insurance companies are conservative, they like predictability. And that’s what consolidators are offering. Consolidators are currently promising their insurance partners consistent repairs and consistent administration practices while improving cycle times and costs.

Are the consolidators there yet? Are they delivering on their promises?

"Consolidators haven’t reached the volume of growth they need," says John Kent of State Farm.

Rod Enlow of USAA, commenting on recently acquired shops, says, "Changing the name of a shop doesn’t change much and, so far, little has changed in terms of operations."

The People Challenge
Why are consolidator promises slow in being realized? Because the collision repair business is a people business, that’s why.

"The humanistic side of business is the challenge," says Hunt Ramsbottom of M2 Collision Centers. "Training, human resources and employee-based endeavors are important, but the most important thing is having people believe in your new mission. It’s creating a new culture, and that takes time."

Growth is no problem, says Ramsbottom. Acquiring shops is relatively easy, but instilling a new culture is of paramount importance, and it’s naive to think it can be done quickly.

To remind himself it can’t be, Ramsbottom keeps in mind how one employee of a newly acquired shop described himself and his fellow employees: "We’re unwilling draftees." And each unwilling draftee has to be won over to the new M2 mission, believe in a larger goal and become part of the new culture. "The new culture must be accepted and be in place before the new model, the M2 operating system, can be implemented," Ramsbottom says. "In our experience, it takes anywhere from four to 12 months for this to happen."

Bill Lawrence, now of the Caliber Group and formerly of Allstate, agrees. "Culture is critical. Common values, a consistent approach to the repair business and similar operations in each store are necessary.

"While standardization is important, we allow some bandwidth on operating standards and procedures. This business is still about people. We want an enterprise-wide culture, but we’re not dogmatic about it. We allow for some flexibility.

"When we acquire a shop, we want no disruptive change. We strive to retain the customers, the owner, the employees and the same name, and we don’t want to upset our insurance partners. Change at the store level can be very upsetting to the local insurance personnel. We strive to leave the same valuable working relationships in place."

Ted Hill of Advanced Systems Group isn’t at all surprised the people side of business is slowing down consolidators. "Small businesses are a function of the owner," he says. "The owner is an entrepreneur, the heartbeat of the business and, oftentimes, the mentor to his staff. When a consolidator group comes in, it creates an extra layer of management, and the owner/entrepreneur/mentor is seldom there. The business suffers, and some stores sales may go down."

Hill says the acquired stores that are doing the best are the ones that had absentee owners before the acquisition. The management team was empowered and running the business on its own anyway, so such a staff loses little productivity with a change in ownership.

Hill also speaks of another approach to solving the people issue when there’s an ownership change. He knows one successful multiple-location operator who feels it’s best to dismiss the non-technician staff whenever he purchases a new shop. In his experience, the staff leaves anyway, so why not preempt the situation immediately by installing management and staff who already know his operating system? He also installs his management-system software. Sure, disruption may occur and sales may drop for a while, but the owner has insurance and other relationships that quickly halt the drop. Soon, the shop is grossing and netting more than ever.

This approach, however, seems isolated and isn’t being adopted by large consolidators.

CARA, instead, overcomes the ownership disruption by retaining the operator of the store as part of the purchase. He becomes a stockholder in CARA and, according to McPherson, CARA builds a market around this good owner/operator. "It’s a struggle to find good operators," says McPherson. "Once we find them, like Joe Hoffman in Indiana, we build a market around them. Joe had six locations. He’s now responsible for 14."

ABRA Auto Body & Glass’ 11 years of franchising and consolidation experience has also given this rapidly growing consolidator in-house expertise at integrating newly acquired shops. Says ABRA’s Rollie Benjamin: "Every consolidator needs a staff who has experience with integration because every business has its own culture. There’s always a period of adjustment. With more than a decade of experience, we know how to shorten the adjustment period and smoothly integrate the new shop into the ABRA family."

Michael Condon of Allstate also cites the people factor for some disruption and a slow implementation of operation changes at many acquired shops. "This is a relationship business," he says. "If a consolidator changes personnel, such as the manager or a savvy estimator at the shop, it can definitely hurt Allstate. They may be doing a significant amount of work for us, and our relationship is such that we know and trust one another. We work well together, and our transactions are smooth and seamless. Now, that relationship may be gone, and we have to start over."

Enlow of USAA agrees, saying that local relationships are critical. That’s where the repairs are done, and changes in personnel can slow cycle times, lower shop revenue and increase claims cost. Enlow also worries about the passion leaving the business.

"I feel a passion for the industry, and I worry about the body shop owners leaving who are likewise passionate about the industry," says Enlow. "They built their businesses from their hearts. They know and care. Money or people cannot replace them. We need them to stay in the industry."

Enlow is encouraged, however, that most consolidators are striving to retain their good people and, thereby, their good local relationships.

Sometimes, though, the people factor has nothing to do with relationships. Disruption can occur simply by the consolidator changing the frequency of pay from every week to twice a month. One former owner of a very large shop says he watched productivity drop at least 10 percent when the consolidator he sold to changed the pay schedule with no discussion with anyone at the shop. Subsequently, the former shop owner is actively advising on future changes.

In addition, the selling process itself may cause an operations slow down at a recently acquired shop. According to Bob Thompson of Sterling Auto Body Centers, "there’s a huge draining of energy as the purchase moves forward. It can slow operations by 10 percent."

The consolidators and their venture-capital partners may be cool and calculating with their spreadsheets and proposals, but this is anything but an unemotional time for the body shop owner. He’s stressed, and his focus moves from running the shop to selling his business — a business he probably built from the ground up. He may have driven the bulldozer that moved the dirt to lay the foundation for his shop.

The owner is passionate about his business and he cares deeply about its future. Now he’s faced with no longer being the sole proprietor. He’ll no longer be the owner, the boss, the benefactor of his family and his employees, and he’ll no longer have the freedom and the power he was accustomed to.

Technology Challenges
Besides the people and relationship factor, why would consolidators be slow to realize their promises?

"Ultimately, consolidation without an information-technology (IT) solution is doomed," says Jeff Tatus, president of AMJ Logistics. As an IT consultant to the collision industry, Tatus says that with insurance companies forcing more and more administration on shops owners, the shops, especially the consolidators, need a comprehensive software solution. Software is needed that links all the stores and their suppliers and partners together. And right now, Tatus says, most of the solutions are fragmented.

One IT solution that’s not fragmented is the proprietary software that Sterling Auto Body Centers owns. CarQuarters bought the Sterling shops as much for the software they’d developed as for the owners’ expertise and their facilities. (CarQuarters is now called Sterling Auto Body Centers.) ABRA is also installing an enterprise-wide IT system.

None of the consolidation groups, however, has yet implemented an IT solution throughout their stores. Even those who have one, like Sterling and ABRA, are finding that implementation takes time. Those shops that have switched from one software management system to another, regardless of their size and volume, know how time-consuming and disruptive the changeover can be. It takes several months, sometimes even a year, to adapt.

An example in our industry is FinishMaster, a company that distributes paint, body and equipment supplies. One of the operational struggles for FinishMaster and its recent acquisition of Thompson PBE is a system-wide IT solution. FinishMaster has stated that it’s planning to consolidate and upgrade its corporate and store computer systems over the next two years. The upgrade will cost an estimated $3.5 million.

As expensive as an IT solution may be, it’s hard to imagine overhead costs dropping significantly or operations being greatly improved for any consolidator group until a corporate and store-wide management system and IT solution are installed. Until then, each shop must operate essentially as an island.

Consolidators have also been slow to adopt a standard operating model. Yet implementing such a model will be a crucial factor in realizing the efficiencies possible through consolidation.

The Future of Consolidation
>Will a consolidator buy another consolidator in the next 12 months? Yes, according to all the participants in this article.

Will it happen because consolidator operations goals aren’t being reached? Perhaps, but it will mainly happen because one group will simply want to double in size, and it has the financial means and the business acumen to do so.

But, according to this article’s sources, consolidation isn’t something to fear. "The professional business management that consolidators are bringing to the industry is good for all of us, consolidators, independent shops and insurance companies alike," says Bruce Kanoza of Progressive Insurance. "The lives of claims will be shortened."

"Consolidation will take time, but consumers will benefit from the innovations of the consolidators," says Kent of State Farm.

Enlow adds that "some of the out-of-the-box ideas that consolidators have are too radical to be implemented quickly, but when they are implemented, they’ll bring tremendous efficiencies to the industry."

Plus, they can be copied by all.

Not only is consolidation bringing professional business management and operating efficiencies to the industry, it’s bringing an exit strategy to shop owners who want to cash out and move on or retire. These owners have worked hard, built their businesses and can now receive more money than would’ve ever been possible without consolidators bidding up the market. It’s a wonderful opportunity to receive a reward for a lifetime of hard work.

But, realizing the efficiencies from consolidation will be a slow process and will take hard work and commitment from the new owners. The winners will be those who understand the body shop business and build true relationships with suppliers who can help provide effective solutions rather than just competitive prices. Suppliers need to be a source of innovation, ideas and expertise.

Consolidation, despite what you may think right now, will be good for the collision repair business, for insurance companies and for consumers. And, even though you can’t look in a trade journal without seeing yet another blurb about yet another consolidator acquiring yet another independent, the participants in this article (consolidators and insurance companies alike) agree that when consolidation is finished, no more than 30 percent of the market will belong to consolidators. Body shops, whether dealership or independent, will still serve 70 percent or more of the collision repair market.

"A shop that provides a good product for a good price," says Enlow, "will always have a role in an insurance company’s book of business."

Writer John Bosin, a 25-year veteran of the auto body repair industry, is U.S. industry relations manager and business development manager for ICI Autocolor. He’s been active in the Collision Industry Conference for eight years and has been involved with other organizations including the Society of Collision Repair Specialists, I-CAR, the I-CAR Education Foundation, the Automotive Management Institute and the Collision Technician Apprenticeship Program.