Wer're Not in Kansas Anymore - BodyShop Business
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Wer’re Not in Kansas Anymore

The industry’s direction is being driven by consolidators, replicators, franchises and insurer-owned shops — everyone but the single-shop operator.

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So if you want to compete against these formidable foes, you need to start thinking more like them.

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Looking back at the last few years, you’ll have to agree that the business side of this industry has changed. The relationships of insurers to repairers has changed; the competition among vendors, suppliers and other business partners has intensified; and, of course, the speed at which everything occurs has increased. Everything around us — and all aspects of our lives — face these changes, so we shouldn’t expect anything different for our businesses.

But exactly what changes will the future bring to shop owners across the United States?

No one can be exactly sure, but let me take this opportunity to provide some insight from my perspective as to what’s currently happening, what I believe will happen and how it all may affect you and your business.

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Tomorrow’s Business Types
A few years ago, there were only two types of business entities in our industry — independent shops and dealer shops. Now there are six basic categories:

  1. Consolidators.
  2. Replicators.
  3. Franchises/independent.
  4. Franchises/dealer.
  5. Insurer operated.
  6. Single-facility owners.

Let’s define each category.

1. Consolidator — A business entity that has a centralized management and financial-control organization separate from the local facilities, is usually financed by venture capital and generally spans greater regional and national boundaries.

2. Replicator — A business entity that’s operated by a single owner or partnership and generally has an integrated management organization within or in conjunction to their local facilities. They also usually stay within a close geographical area to maintain operational control.

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3. Franchise/Independent — A business entity providing a structure that can be utilized to create uniformity and implementation of consistent operational practices. This structure, however, is often elective to the owners of the facilities, who pay a franchise fee to be part of the group.

4. Franchise/Dealer — A business entity that’s supported by the original equipment manufacturers. This association often allows elective compliance to OEM programs in many areas of operation.

5. Insurer Operated — A business entity that’s supported by an insurance company or subsidiary of an insurance company.

6. Single-Facility Owners — Owned and operated by a single owner or partnership limited to one facility.

The future direction of our industry will most likely be driven by many of the initiatives of five of the six business types listed. (Can you guess which five?)

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The Big Will Get Bigger
There’s a steady trend for shops that have made the commitment to grow to continue to get larger. I believe this trend will continue and not only affect your future business decisions but make the industry even more competitive in years to come.

The chart on page 46 represents insurance claims in 1997 by shop size. I’ve seen an exponential increase in the growth of shops with larger volumes in the last three to four years. My colleagues and I have tracked and assisted a number of such shops that have doubled their annual sales within the last three years. We’ve assisted them in implementing systems to handle the greater demand by customers, insurers and other business partners.

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How are these shops growing? Is the number of accidents on the rise? Is the average repair ticket increasing at an uncontrollable rate? The answer is obviously no.

Shops are getting larger because they’re taking work from the competition. They’re in this position because they’ve built the infrastructure and the facility to handle the demands of the customer. They also look at the business model much differently than a smaller shop does. This has allowed them to grow, while others find it difficult to even compete.

The pressure will continue for our industry to provide the highest value and service possible while maintaining overall claims costs. And this will be a competitive edge for those who can deliver it. Unfortunately, it’ll be very difficult to provide on a smaller volume scale. Even at sales levels of $2 to $3 million, it may be very difficult. At higher volumes, the ability to balance value-added services to bottom line profit can become a reality.

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If you look at the United Kingdom and its evolution through this process, you’ll see some interesting trends that took place from 1991 to 2000. In 1991, the United Kingdom had approximately 12,000 repair facilities. Today, the number hovers slightly below 6,000. What happened? The larger shops got larger and the smaller shops weren’t able to compete, so they either closed or were consolidated.

Though the United States is geographically much larger than the United Kingdom and the population is spread out in not only major markets, but in towns and cities far away from the top 100 major markets, the same evolution is probable. I believe businesses in major markets will be directly affected first, then those businesses in markets close to them (within 50 miles).

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Whether you realize it or not, this change has already started. Already we have shops with specialized facilities dedicated to specific job types. They "load level" their facilities by transporting vehicles up to 50 miles and have operating facilities dedicated to heavy or light repairs. This trend will certainly continue since it makes perfect business sense when managing production levels and reducing cycle time.

These changes will certainly be conducive in market areas of the country where business is based on providing the best customer service and value — but not in markets where playing games with cost shifting, borderline fraudulent practices, payoffs or other illegal business operating practices exist as a common daily part of business. Areas of the country where these practices continue will have hundreds of smaller shops competing against each other, and the consumer will often have experiences that "60 Minutes" and other media outlets will exploit, darkening our industry’s image.


Who Will Your Competitors Be?
The trend, as I see it, is that most of the business categories mentioned before will continue to grow in numbers. However, the number of single-facility owners will decline. Though I also believe the number of consolidators and franchise choices will decline, the numbers within their organizations and their sales dollars will increase very quickly. There are currently a few consolidators that must consider their own consolidation very soon to avoid a fate similar to that of CARA, which closed its doors last year. As for franchise/dealers, I don’t see them growing in numbers as much as they’ll grow in volume.

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How will all this growth and decline come about?

For many dealer principles, the "body shop" is still their unfavored department. This is a shame and a mistake. (For more on this subject, visit www.bodyshopbusiness.com to read the article, "What’s the Deal with Dealer Body Shops?" that appeared in the Sept. 1999 issue of BSB.) However, while some dealer groups will continue to consolidate their total operation, others will invest in collision repair facilities to "own" their customers. Along with the OEMs developing networking programs targeted to insurers, dealer groups will become a much more formidable competitor in many markets.

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In addition, the trend for dealers to offer auto insurance to buyers/leasees of their vehicles will also introduce new options from which their networks will benefit. If given an option, which one do you think consumers would choose:

  • Take the vehicle back to the dealership for repairs, and, when they turn their leased vehicle back in, incur no possible costs as a result of the repairs performed.
  • Take the leased vehicle to the shop of their choice for any repairs, but be subject to inspection upon its return and be responsible for any diminished value.

To combat this, independent shops will also offer insurance with the same value offering. Yes, shops will own insurance companies. This concept is already in place and growing in Australia, and I’m certain the idea will soon be here.

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As for franchise/independents, they’ll continue to grow. They’ll provide the networking needed against consolidation, dealership and other single-facility owner competition. Shop owners who don’t want to sell their businesses will find the franchise model a workable alternative. Like True Value Hardware and many others offered in other industries, franchising will be able to provide the necessary support in training, best practices and marketing to remain competitive.

Replicators will also continue to grow, but many will begin selling to consolidators to gain a return on their investment and cash out. The replicator has learned the answer to one of the key questions of business: Why own a business? It’s not to have a place to work — it’s to create value for the business so, at some point, you can sell it and realize your dreams or goals.

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The key strategy of replicators, which will strive in secondary markets, is that they can own their market. If they’re successful, all other business categories have a difficult time competing. They then become an ideal acquisition target as well. This makes their effort have a long-term value (to sell) if desired.

The recent introduction of insurer-owned facilities by Allstate and Sterling isn’t a first. This has been tried in the past by other insurers and in many other countries. Today, however, it’s much different because the shops weren’t "greenfields," but part of an already successful network, Sterling. (Greenfielding is when you build a new location from scratch.)

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I’ve read reader comments about how insurers don’t know how to run a facility and how such ventures won’t work. Do we really know how to run a facility? What was your profit last year? How much of your personal expenses are buried in the company’s expenses? What’s the value of your business and assets in real dollars?

In a vast majority of cases, collision business owners don’t know the answers to such questions. Insurers, on the other hand, will know. They’ll also know cycle time by job category, customer CSI, profit levels by job categories, shop throughput averages by business cycles, etc.

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Will other insurers get into the mix? It may happen with a few others, but most will work with repairer networks and groups that can provide the value they’re looking for. The competitive nature of our industry at this time and in the near future allows insurers to look for the best opportunities.

Other insurer ideas will continue where repairers are just a part of the supply chain, not as a retail facility but as a production facility. This is being done in many other countries such as Japan, Thailand and Australia. Such is the case of the Nationwide Program, Concierge. The shop picks up and delivers the vehicle to the claims office — all contact with the customer is handled by the insurer.

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Why would you — as a shop owner — consider this? First, your administrative and retail costs can be reduced significantly. Of course, you’d have to accept that a large percentage of your business is devoted to this model so you can recognize this cost savings on your end. Otherwise, you’d still have the same office staff and office expenses, unless they’re already at capacity. Then you’d be performing more volume with the same costs. You’d then need to determine if the savings you’re gaining are worth the cost reductions requested by the insurer.

The future for the single-facility owner isn’t very promising unless one or more of the following exists:

  • The facility is in a secondary market and currently the market owner;
  • The shop performs a niche service such as specializing in higher-end vehicles, etc.;
  • The shop is in a market (normally small) where no one is a market leader and doesn’t want to become one.

In other circumstances, single-facility owners will have a difficult time competing with others that have the volume to distribute value-adding costs within their business model.

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And the future will bring many different attempts at offering value-added services. The most obvious will be in rental/loaner cars, pick-up and delivery, call centers, claims processing, guaranteed cycle times and extended hours, to name a few.

The list will continue to grow and the proposed value-adding items will be built on the receipt of sufficient volume to offset the costs. None of this works without volume. I’ve heard many small shop owners say, "They must be cheating somewhere." (Even some uneducated insurers have said this.) This simply isn’t the case when the volume allows for it.

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Can small-volume shops afford to offer these items? Probably not, unless they add to the cost of the jobs. And this would put them in a non-competitive position. Some of the services may be possible, but definitely not all of them.

Process Changes Lead to Different Workforce
There’s been very little change to the method or process used to repair vehicles since the first body shop opened, although there have been product, vehicle and equipment changes. The process will, however, most likely change and evolve to a more industrialized method of repair. (For more on this subject, visit www.bodyshopbusiness.com and search past issues using the key word "industrialization." Articles have appeared in the November 1999, January 2000 and January 2001 issues of BSB.)

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This will open doors for many more to enter our industry, especially from different job pools. Most of the job tasks on a collision-damaged vehicle today can be performed by people with other than high-tech journeymen skill level. And this provides opportunities to tap currently untapped work pools, such as females who’ve already entered into a career and found that there aren’t opportunities to grow or to receive job satisfaction. I see the future of our industry relying on the entry of a new workforce.

Last year alone, 24,000 technicians left our industry, and the vocational system only provided 5,300 graduates. The writing on the wall is very clear (and has been for a long time): We must change the system in which we repair vehicles, or soon there won’t be enough human resources to fix them. Those who change will gain a competitive advantage.

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Does all this change mean there will be no place for the highly skilled technician? Absolutely not. In fact, it’ll probably lead to the best opportunities they’ve had in years — better pay, benefits and advancement.

I believe the "best of the best" technicians will become leaders and mentors in repair facilities. They’ll manage and mentor teams of technicians, be problem solvers and coach the teams. This process will produce tremendous volumes of work at a much more consistent higher quality level. (If you’re one who defies change and wants to be an island within yourself, these future changes aren’t appealing. But I believe they’ll happen nonetheless.)

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All this reorganization will require the shop to invest in training for current technicians to become mentors, team leaders and coaches. The main reason such process changes failed in the past is because the proper training and expectations weren’t provided to the technicians. (For more information on making such changes in your shop, check out www.MentorsAtWork.com.)

As this change occurs, training will become much more accepted and available. This will certainly improve our industry and move it forward. Our industry needs training pieces in many areas, both technical and non-technical. New organizations will surface to supply this need.

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Process Improvement: Stay Ahead of the Competition
The process changes will begin to provide new measurements of efficiency and quality. Documented best practices will be implemented by organizations on a very consistent basis, and these processes will be certifiable through international standards such as ISO 9001:2000.

I believe this process improvement model will identify shops that are efficient and can provide consistent results. And this will place them in a more competitive position to networks and insurers, as well as make them more profitable.

This, too, becomes a marketable solution that demonstrates they perform as documented. We’ve found very often that what’s supposed to be happening and what was thought to be happening aren’t what’s actually happening. Through certification through international standards such as ISO 9001:2000, the processes are validated.

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This certification then carries much greater weight than most current programs, which just check to see if the waiting rooms and bathrooms are clean and minimal equipment and training are present (whether the equipment or training are being used makes no difference). How much more marketable is it to be able to prove you can and do what you’ve documented?

It’s Happening Now
I didn’t look into a crystal ball to offer this rendition nor did I just awake from a dream. Most, if not all, of these changes are happening now. Maybe not on the large scale I’ve presented in some areas, but they’re happening nonetheless — I’ve seen them.

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Unfortunately, you may be in a position where you get to see very little outside your market area or even your shop’s property line. If this is the case, much of what I’ve written here may seem to you as fancy (though you may be thinking of another, not-as-nice word). My hope, in this case, is that you prove me wrong by demonstrating other options not explored in this article. Unfortunately, what I believe you’ll find once you get outside your box is that these changes are, in fact, happening.

It’s not to late to change your business though. You have choices as to how — or if — you proceed into the future. But take my word, the future will be different — it has to be.

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Contributing Editor Tony Passwater is president of AEII, a consulting, training and system-development company. He’s been in the industry for more than 27 years; has been a collision repair facility owner, vocational educator and I-CAR international Instructor; and has taught seminars across North America, Korea and China. He can be contacted at (317) 290-0611, ext. 101, or at [email protected] Visit his Web site at www.aeii.net for more information.

Changes in the Supply Chain and Technology
For a few years now, parts ordering and claims processing systems have been going through transformations. In the very near future, parts will be processed through the Internet as with many supply orders. Claims will be processed through alternative sources, and payments will be made electronically to the shop in days.

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There’s no doubt technology usage will increase, but the systems must be improved as well. Many will fail to provide the solutions and drop out of the industry. Our industry, however, must become more computer literate and willing to use new technology. The leaders will certainly see the advantages, grasp it and reap the benefits.

A few years ago, there were only two types of business entities in our industry — independent shops and dealer shops. Now there are six basic categories:

  1. Consolidators.
  2. Replicators.
  3. Franchises/independent.
  4. Franchises/dealer.
  5. Insurer operated.
  6. Single-facility owners.

Guess which five will drive the direction of the industry?

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