Most dealership owners consider their businesses sales organizations and service a necessary evil. Though this attitude is the greatest saving factor for independents, it’s slowly changing to a cradle-to-grave strategy — pitting independents against a competitor like none before

Have you been paying attention to how many dealerships have elected to close their collision repair facilities or to lease out their space to an independent owner in the last 10 years?

Ever wonder why? Believe me, it’s not because they don’t hold all the cards to dominate the competition or because they can’t make a profit in their body shops. Dealerships with collision repair facilities are sleeping giants — giants that might just awaken as consolidation makes enough noise across the country.

Still, many obstacles must be overcome for this to happen, most of which revolve around the dealer principal (owner) and the company controllers. In many cases, the dealership owner is from a "new-car sales" background and understands sales but hates service, including the body shop. This lack of understanding of the service business keeps him from making the necessary changes that would allow him to dominate the independent competition and to "own the customers for life" in all aspects of their automotive needs.

How would you like to have the opportunity to sell the product you’re going to service or repair? How would you ensure customers come back to you for service or repairs? I’m sure you can think of hundreds of approaches, but do you see any of them used regularly by dealerships today? Why? Because many dealership owners don’t consider their dealerships service organizations (parts, mechanical and body) with the added benefit of selling the product (new and used). Instead, they think of their businesses only as sales organizations in which service is a necessary evil.

This is the attitude of many dealership owners today — and it’s the greatest saving factor for independents. But this attitude is slowly beginning to change.

With One Eye Open
While most of the sleeping giants continue to slumber, a few have awakened enough to put one drowsy eye on the future. Although they’re not yet seeing the picture clearly, they are seeing part of it.

For example, many large dealer groups and individual dealership owners have realized the service end of their businesses can be very profitable and have consolidated their body shops to be available for all their lines — with much success.

Other things they’ve realized:
• The same advantages that consolidators have can be leveraged for their organizations. Dealerships, too, can take advantage of economies of scale — the more they buy, the better discounts they get. Also, many overhead functions can be placed on a lesser number of people, reducing expenses (there doesn’t have to be a separate accountant for each facility, etc.); advertising budgets can be pooled to improve marketing; in theory, interchangeable processes and procedures will allow for employees to be transferred within to handle high staff needs (vacations, sick time, etc.); and more volume affords the ability to provide better benefits, advancements, etc.

• To lessen traffic and congestion, they can place their repair facility away from the sales property. Poor placement is a very big problem for many dealer body shops — making it a zoo to get to. Also, there’s rarely any signage to direct customers to the body shop, cars are parked everywhere, no parking spaces are available and damages happen just by leaving your car there for a few days.

• For dealerships to reach their potential earnings, they need "top notch" managers. (The stereotypical dealership body shop manager is focused on status quo and lacks the aggressive spirit of an independent owner.)

• They have to employ technicians of the highest caliber and provide the equipment and benefits necessary to produce a quality product and to keep their techs happy. And the dealerships doing these things are a real threat to the independent segment of the industry considering the present shortage of qualified technicians.

Challenges Facing the Giants
While many dealership owners and groups have made some progress, they still have a way to go. Let’s take a look at challenges they haven’t yet overcome or the opportunities they haven’t yet taken advantage of:

• They need an updated accounting method. An almost impossible challenge facing today’s dealership managers is how dealerships account for the profit and losses of their services. I know a number of dealership body shop managers who hate the monthly meeting because they always get "beat up." Their numbers never make the positive side (or just slightly), and every other department is doing just fine.

Why is this happening? Can’t a busy body shop make money in a dealership environment?

The accounting method you use is supposed to be designed to address the business model’s needs. Unfortunately, the accounting method used for most dealerships (even still recommended by the manufacturer) is 15 years ancient for today’s business model. For this reason, the body shop always looks bad.

How can this happen? Remember, most dealership owners aren’t accounting majors, and they have controllers who handle the accounting. The owners simply want department summary reports, not a transaction history report. The controllers, on the other hand, are the "bean counters," but their references are based on the system that’s in place — the manufacturer’s suggested system. And this ancient system generally gives little or no credit to the body shop for parts or mechanical sales. Yes, I said none! How would you like to try to make ends meet in today’s business model without any profit on parts or mechanical dollars? It would be almost impossible.

To understand when the business model changed and the accounting didn’t, let’s take a trip back to the ’70s.

In the 1970s, labor was a significant percentage of the overall repair bill — estimated up to 75 percent — and parts, materials and mechanical charges were minor. Our industry was in the "service" business and sold labor as its major commodity.

At that time, the most mechanical labor needed on the majority of collision-related jobs was to replace a fan blade, fan clutch or the occasional water pump (that you could get to without dismantling the entire engine. You could even open the hood and see ground!)

Today, however, we’re generally selling a little more than 50 percent parts and materials vs. labor — plus, mechanical-related work is generally needed on the majority of front-end collisions. It’s also estimated that in the near future, the ratio will increase to 75 percent parts and materials vs. labor.

The business model has changed, but the accountability hasn’t. Today’s dealership body shops produce a great number of sales for the parts and service departments without any credit or rebate to show for it. In some cases, they become the other department’s best customer, but generally receive the worst service. And until the accounting systems account for this, it will be very difficult for anyone to be successful — hence controllers will always view the body shop at a loss.

• Better incentives are needed. Although accounting charges excessive "rent" for space provided and percentages of the dealership personnel who remotely "assist" the body shop (and anything else that can be charged to the department on paper), the body shop manager’s incentive program is generally based on gross labor dollars or net profit.

Neither of these work today — since they’re based on the wrong model — so they don’t serve as incentives. And since there’s no incentive to sell parts and no way to sell that much labor, it becomes a no-win situation for everyone involved — encouraging dealership body shop managers to develop a "status quo" attitude.

• They normally aren’t aggressively pursuing customers for life. One of the greatest advantages dealerships have over independents is the fact that they sell the product that will need service and repairs. But since very little is done to "protect" their territory, a crack has formed in their armor, leaving a weak spot for aggressive independents to attack.

If all dealerships would take the position on service that Saturn has, they would reap great benefits. It’s been proven that the loyalty associated with the "Saturn family" transfers way beyond the sale. If new/used-car sales personnel were educated about the service and repair departments, their relationship with the customer could greatly influence the decision-making process when the customer needs service or repairs. But how often is this done? Not often.

The body shop is normally the building way in the back with little or no signage, office or parking, and the sales people avoid it at all costs unless they have a sale pending on a "rush" repair.

But if this attitude were to change, independents would have a difficult time competing.

• They aren’t marketing the body shop or harnessing the power of their current advertising. The dealership’s body shop sometimes gets a tag at the bottom of an ad for new/used-car sales, but only as an "after thought."

As the Giants Slumber …
The solutions to awaken dealership body shops are there, but seldom capitalized on. The primary focus, generally, is still on sales, and as long as this continues and the big picture gets ignored, the giants will continue to sleep.

Recently, the consolidation of the dealer industry has awoken a few, which now see the potential but haven’t gotten the total equation correct yet. Why? They haven’t gotten the right outside help. They also still have some internal problems. Internal systems are generally very scarce within each department, and their ability to work together has always been a challenge. For this reason, the potential is never reached, and it never will be until all departments become involved (and very often no one wants to commit to this type of change).

So most of the giants snore on …

What does all this mean to you, the owner of an independent shop? It means that competing will require you to build relationships with the community, insurers and, ultimately, the customer. And it means doing these things now. Consolidators aren’t waiting for the sleeping giants to awaken. They’re aware that dealerships could come on strong — so some consolidators are working deals to partner with dealerships, while other consolidators have already negotiated agreements with dealers to buy their businesses so they don’t get into the market at all.

Independents also need to prepare for these new business models and for the possibility of the giants awakening — and it would be wise to get some outside help to do it. Unfortunately, as long the giants sleep, many independents don’t feel threatened and don’t realize they should take action today.

Why? Because if they wait — and if the giants do awaken tomorrow — it may be too late.

Contributing editor Tony Passwater is president of AEII, a consulting, training and system development company. He has 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.)