Why DRPs Are Unprofitable For UK Bodyshops
Nearly 80% of all collision repair work carried out by bodyshops in the UK is paid for directly by insurance companies, but this work has become relatively unprofitable for UK bodyshops, especially for those bodyshops which are part of an insurer’s approved repair or direct repair programme. In the 1980s, UK bodyshop profitability averaged around 15% of sales turnover, but today, UK bodyshops are doing well if they achieve profit levels of between 3% and 5% of sales turnover.
The decline in bodyshop profitability in the UK has occurred as bodyshops have accepted repair contracts from insurers which have demanded discounted labour rates together with discounts on replacement parts, paints and materials from bodyshops, in return for the supply of collision repair work. Although insurer repair contracts make no guarantees over the volume of work that will be supplied, bodyshops have agreed to repair contracts that have eroded their profitability. This is reflected in hourly labour charge-out rates that currently average £22 per hour for body repair work, compared with £30 per hour for mechanical repair and service work.
Bodyshops argue that insurance companies are abusing their monopoly over the supply of collision repair work, to force bodyshops to accept unprofitable repair contracts. Insurers argue that it is market forces and particularly an excess of repair capacity that enables them to secure capacity at marginal levels of bodyshop profitability. Research carried out by MFBI, an independent automotive research and analysis partnership, into the UK collision repair market, shows that although there is an average repair capacity surplus throughout the year of nearly 10% in the UK, a capacity shortfall of 13% occurs during five months of the year.
MFBI’s data shows that the UK normally experiences a surge in collision repair demand during the winter months between November and March. During this five-month period, more than 60% of repair demand for the whole year tends to occur which results in a shortage of repair capacity during this period of just under 15%. For the rest of year, UK bodyshops experience a surplus of repair capacity as repair demand falls away during the slack summer months. This surplus capacity rises to more than 300% of repair demand in August when repair demand is at its lowest.
MFBI says that insurance companies know this and tend to renew contracts or negotiate ever more preferential contract terms when demand falls away during the summer months. Most businesses that experience seasonal fluctuations in demand, tend to maximise profitability during periods of high demand which can then sustain them during periods of low demand throughout the rest of the year. For example, a goods retailer which has strong demand for its products over the Christmas buying period will mark-up prices while demand is high, and then resort to cut-price sales during the quieter months to help clear surplus stock.
UK bodyshops fail to maximise profitability in this way. MFBI says that UK bodyshops fail to maximise the value of their labour, parts and paint sales during the winter period when repair demand exceeds repair capacity. As a result, they make insufficient profit during the peak winter demand period to sustain profitability during the slack summer months. Many insurer repair contracts provide only marginal levels of profitability per repair for UK bodyshops. Consequently, as demand falls away in the summer months, some bodyshops in the UK will offer their services to insurers at break-even or subsistence levels of profitability in a desperate attempt to obtain more work to make up the profit shortfall, or just to recover high overhead costs.
All this does is encourage insurance companies to offer even less profitable repair contracts to bodyshops during the slack summer months when bodyshops are desperate for more work. MFBI says that insurance companies therefore exploit periods of low seasonal demand to secure future repair capacity in the peak winter demand period at low cost. This means that UK bodyshops effectively pre-sell their premium winter repair capacity to insurance companies at low levels of profitability, and are then forced to maintain and absorb high fixed and semi-variable operating costs during periods of low demand over the rest of the year.
MFBI shows that insurance companies have been able to exploit high bodyshop operating costs to negotiate volume related repair discounts. Insurers have ensured that bodyshop operating costs remain high by forcing their approved bodyshops to comply with strict environmental legislation and to operate fleets of courtesy cars as a pre-requisite for carrying out insurance work, all in the name of customer service and high quality standards. This effectively makes bodyshops reliant on repair volume to absorb high overhead costs, which in turn encourages bodyshops to pre-sell their repair capacity by signing repair contracts with insurers at discounted labour rates, even though the contracts do not specify or guarantee the quantity of work that bodyshops will receive.
The irony is that those bodyshops which have not signed contracts and which are not part of an insurer’s approved repair or direct repair programme, often obtain more profitable work from insurers at higher hourly labour rates during the peak winter demand period, than the insurers’ approved bodyshops which have signed contracts. This has given rise to bodyshops charging higher retail labour rates for collision repair work to insurance companies with whom they have no contractual agreements. Insurers can therefore obtain the bulk of their collision repairs at comparatively low cost, while paying higher costs on only a relatively small proportion of repairs.
To redress low bodyshop profitability, insurer-approved bodyshops would need to refrain from negotiating repair contracts with insurers until the winter months when demand rises and insurers have difficulty in placing repairs with their approved bodyshops. Otherwise, UK bodyshops need alternative sources of revenue during the summer months, to absorb overheads and maintain profitability. Franchised dealer bodyshops are better placed than independent bodyshops to achieve this, because franchised dealers have opportunities to generate revenue from internal sources such as used car preparation and warranty work. The UK Car Body Repair Market 2001, published by MFBI, £395. www.mfbi.org
The UK Car Body Repair Market
Price – £395
For further information, please contact:
Robert Macnab, Partner, MFBI
Tel: 0044 1825 713035
Email: [email protected]