The Future of Consolidation
If you, like most shop owners, have paid attention to the state of consolidation and are concerned with the Big 4 and its market share (and if you haven’t paid attention, now’s the time to start), Vincent Romans, founder and managing partner of the Romans Group, has a message for you:
“History can repeat itself. We can see this from other industries such as the drug store and hardware store industries. When private equity consolidates, collision repair businesses only have a certain future—grow and thrive, grow and sell, or maintain and lose revenue and risk decreasing business value or even failure.”
That sentiment might keep you up at night. But it doesn’t have to. That’s exactly why your small MSO needs to find a way to better position itself.
The Romans Group’s most recent report of the collision marketplace, which takes a look at some of the industry's top trends, states that consolidation continues to be a trend, but has slowed since 2012. The report also states that the top four MSO consolidators today—Caliber, Service King, ABRA and The Boyd Group (owner of Gerber Collision & Glass)—represent 14 percent of the industry’s marketplace (information is for 2016), which represents the largest market share of the MSOs.
So, what exactly does this mean for the future of MSOs? Is joining forces with the Big 4 the only way to go? Or is there still room for small MSOs to compete? In five, 10 years, what will the landscape of collision repair look like?
In order to survive in the competitive marketplace that is the collision repair industry, it’s time to start making a plan for the future.
The Future Forecast
The Romans Group says that the Big 4 will consolidate at a larger rate than other segments of the market. Will that lead to the death of smaller and midsize MSOs? Romans doesn’t think so.
“The industry is growing and is large enough today that there is a long runway where there remains potential for success for many smaller single independent repairers, single and MLO franchise businesses and various size MSOs,” Romans says.
However, the road will not be easy.
“It will be challenging as the Big 4 continue to grow their footprint and their diversified service offerings with their single point of contact, large and growing network of locations across a growing number of states and their ability to negotiate customized service and pricing programs with insurers, OEMs and suppliers,” he says.
Michael Macaluso, president, CARSTAR North America, says that in the next 10 years, he believes that larger players will consolidate with larger players—not just collision shops, but in the industry in general. This could have a major impact on the collision industry as a whole.
Romans says that future success depends on so many variables that it needs to be looked at on a case-by-case basis.
“When analyzing and deciding the future success of any one collision repair segment, one size does not fit all,” Romans says.
The marketplace of the MSO, the degree of competition, how the business is run and personal interest of the owner all play a role in determining the best course for an MSO’s future.
Romans says that MSO owners need to determine what their strategic competencies are, set a competitive direction and formulate a plan that will leverage them.
So, how do you know what route is best? Romans says that it is in all businesses’ best interest to form strategic alliances or partnerships with organizations and/or business advisors or consultants. His advice?
“Hiring someone that can assist them [shop owners] in understanding the broader influence and impact of all the various segment dynamics on their business and help develop a plan to deal effectively and successfully with them.”
For example, body shops are not the only ones consolidating. The paint companies have also started to do this. This trend will affect the industry as a whole.
“There’s no single point of reference, it’s a complex map,” Romans says. “If you are a singularly focused company, you run the risk of becoming irrelevant in the near and moderate term. It’s not just one trend or event that could somehow impact one’s business but a confluence of simultaneous, dynamic and ever present events or trends that can impact a shop’s business.”
Competing Alongside the Big 4
“It’s tough to outperform a good local operator,” says Dave Mitchell, owner of the Florida-based Car Guys. “As long as you take care of business and you’re doing what you should do, there’s no reason you can’t compete against the Big 4.”
Both Mitchell and Matt Ebert, president of Crash Champions, have made a big splash in a short amount of time. In five years, Mitchell has gone from zero to 14 locations and Ebert has gone from being a part-owner of a shop to being the sole owner of seven locations in the competitive Chicago marketplace.
How have the two been able to find success in such a competitive market? Finding ways to make their respective businesses stand out.
1. Location is Key
“We looked at markets that didn’t have a lot of competition and had potential for growth,” Mitchell says. “We were able to create a market where a market didn’t exist.”
For Ebert, the situation was different, but the solution was the same. The Chicago area is a saturated market, but by finding ideal locations for his shops—whether it was an acquisition or a greenfield—he was able to grow quickly.
“I’ve tried to pick locations in a place that customers would want to come and insurers would want to send their people to and employees would want to work,” Ebert says. “I’ve invested a lot in locations as a way to compete. I can’t compete on a national level, but I wanted to stand out as a local.”
2. Use Size to Your Advantage
Mitchell also points out that the small size of his MSO allows him to quickly switch directions when there’s a new trend in the industry—something that’s difficult for larger companies to do.
“Think about it: which can turn quicker, a speedboat or a barge?” Mitchell says. Another way that the smaller MSOs have found a way to compete is by differentiating themselves to their employees.
“People still like to work for people,” Mitchell says. “With the larger corporations, it’s hard to feel like that.”
Ebert agrees. Both Ebert and Mitchell are in and out of each of their locations on a regular basis and make it a point to get to know their employees. With the technician shortage, finding ways to appeal to potential employees is key.
3. Find a Speciality
A broad customer base isn’t for everyone. Another way to differentiate is to find a speciality. Romans says that shops that are having a difficult time competing, specializing in one type of repair, such as heavy hits, express repair, high-end certifications, might be a good option to provide a competitive edge.
4. Power in Numbers
“The Big 4 have unlimited funds, resources and relationships at the highest level,” Mitchell says.
This is a huge advantage when it comes to training and certifications. With a push for OE certifications and many speculating that this could be the way of the future, this could give the Big 4 a competitive edge.
Dean Fisher, COO of CARSTAR, says that the franchise option can provide local shop owners the type of resources that insurers are looking for, such as centralized call centers, that smaller MSOs wouldn’t be able to produce on their own.
Buy, Sell or Franchise
Macaluso believes consolidation, which has hit a bit of a lull right now, will pick back up again close to 2020. If this happens, market share will become a critical feature of success. Macaluso has seen this happen in Canada.
“The Canadian market is about 5–7 years ahead of the U.S. market,” Macaluso says. “The franchise model is the ‘stronger model.’ Franchise groups are larger and insurance partners embrace it sooner.”
Fisher says CARSTAR’s presence in Canada has been an advantage for its U.S. market because they’ve been able to look to the north to see what management will look like. Because of this, both Fisher and Macaluso have confidence that the franchise model is a stronger model than the purchase model.
Romans again stresses the case-by-case basis and that what works for one shop owner may not necessarily work for the next. MSO owners should consider their future. Shop owners that are having health issues or exploring retirement options and would like some financial stability may find the best option is to sell. This could also be a good option for a shop owner that is in an area where the Big 4 have limited market coverage and want to enter or expand that marketplace.
For shop owners like Mitchell or Ebert, who have established a string of successful shops but aren’t ready to retire, might find a franchise model, like CARSTAR, more appealing. At the same time, shop owners in this position, who have established a good operation, may be able to continue to grow at a rapid pace. The best option for the future of a particular MSO depends on a number of different factors and has no simple answer.
“For the foreseeable future, I’m not going to sell,” Ebert says. “All I’ve done is build. I haven’t had years of making money.”
Mitchell is happy where he is now, but he’s not counting anything out.
“We would entertain anything that made good business sense. Would we sell? Sure. Would we continue to buy? Sure. Run for many years? Absolutely.”