Consolidation, vehicle mix and complexity shape future landscape
Anaheim, Calif.—The collision repair market is constantly changing. If you missed NACE 2016, here are a few takeaways from its seminars.
Aging vehicles, fewer cars impact repair mix
The country’s vehicle fleet is at a record average age of 11.5 years old, with owners holding onto their vehicles longer and the average ownership at eight years, said Greg Horn, vice president of industry relations for Mitchell International, who spoke on industry trends. That doesn’t bode well for repairers, but Horn said that trend should reverse soon, as new-car sales exceeded 17 million last year.
And although conventional wisdom has held that owners don’t want their vehicles repaired when they suffer extensive damage, Horn said J.D. Power customer satisfaction results show that, on a 1,000-point scale, claimants with a heavy (more than $6,500) repair score their satisfaction 42 points higher than those who are paid for a total loss.
“The survey says the exact opposite. People are way underwater on these vehicles,” Horn said.
With trucks, SUVs, and crossovers now outselling passenger cars (commanding about a 56 percent market share), there are more vehicles on the road with a higher bumper height. That means fewer headlights are damaged and there are fewer “dive underrides” in rearend hits, Horn said, while parts sales have shifted away from OEM and recycled to include more aftermarket parts sales.
Improve shop performance from report data
Ray Chew, national account manager for CCC Information Services, paired up with Mike Anderson, owner of Collision Advice, to discuss how collision repairers can use data to measure and improve their key performance indicators (KPIs).
As found using CCC ONE’s dashboard, KPIs can be used to see how a DRP shop compares to the top 25 percent among its competitors for metrics such as its repair vs. replace operations, Chew said. It’s the No. 1 measurement State Farm uses to score its DRP shops, Anderson added.
As advanced materials such as ultra high-strength steel require more replacement instead of repairs, repairing bumper covers is an attractive avenue of increasing not only a shop’s DRP score but its profit, and reducing its cycle time, Chew said, particularly since 90 percent of all collision repairs include damage to a bumper cover.
“As someone who ran a bumper company for 10 years, I can tell you the greatest equipment I’ve seen in my life is from Polyvance,” Chew said. “With nitrogen welding, the repairs those things can do on bumpers and headlamps are noteworthy.”
Anderson said shops that strive for a gross sales mix of 30 percent body labor, frame labor, and mechanical labor; 20 percent paint labor; 10 percent paint and materials; and about 36 to 38 percent parts, with the balance miscellaneous, achieve 48 percent gross profit. Shops that sell more parts are at about 43 or 44 percent gross profit. It may sound like a small percentage, but a shop with $3 million in sales can realize $120,000 in additional bottom-line profit.
Consolidators will continue exponential growth
In a parody of a motivational poster, a slide in management consultant and strategist Brad Mewes’ presentation showed a fish swallowing a smaller one. “Acquisition: The discovery that you’re no longer a big fish in a small pond, or even a small fish in a big pond, but a small fish in a big fish,” it read.
Although humorous, it illustrated the wave of consolidation affecting the U.S. collision repair industry in recent years.
The largest four repairer consolidators in the country, ABRA, Boyd/Gerber, Caliber, and Service King, are each doing more than $1 billion in sales per year, with some close to $2 billion, he said. And they have more than tripled in size from 2011-2015.
“They are growing at a compounded annual growth rate of 30 percent,” Mewes said. “Service King has increased sixfold over that timeline.”
And Mewes said he figures there will be a “consolidation of consolidators” in the next 18 months, if not sooner.
Private equity funding is driving that consolidation, Mewes said, whose managers focus on structuring deals instead of on operations. Their MO is to buy a company, hold onto it for three or four years and sell it at a large profit.
Growth through acquisitions, he added, is cheaper, faster, and lower risk than growing organically. And with their increased buying power, economies of scale, and national reach, it can be difficult to compete against them.
Perhaps ominously for independent collision repairers, Mewes pointed to a prediction made by Rex Green of investment banking firm Jefferies LLC in May 2015. “Within 10 years, two thirds of the revenues of the industry will be captured by the four consolidators (or their successors if they merge). Eventually, they will do virtually all of the carrier-paid repairs.”