Collision shops all over the country have seen profits shrink as insurers raise their prices. More consumers are using credit cards to pay for their deductibles, but many shops haven’t created a retail model that accounts for the profit loss this creates. In the competitive collision repair industry, large, unexplainable gaps between labor rates exist in some markets.
Tim Ronak, a senior services consultant for AkzoNobel, recently talked with FenderBender about today’s pricing pressures, explaining the issues associated with them, some potential solutions, and his prediction of what’s ahead for the next year in pricing.
How are pricing pressures affecting the labor rate at collision repair shops?
The issue I guess is that over the last 30 years, since 1974, we’ve watched an environment develop where we’ve got vendors who are choosing to create programs that allow them to purchase bulk services, and for that they get discounted pricing. And the original reason they did this was under the guise of being in the benefit of the consumer. Also, the cost of repairing cars has greatly lagged behind the cost of actually purchasing car insurance—pretty dramatically, actually. Just in the last 33 months, we’ve seen a 26 percent increase in the cost of insuring cars relative to the cost of repairing cars.
—Tim Ronak, senior services consultant, AkzoNobel
So how are shops responding?
Historically we’ve been watching a Nash equilibrium unfolding time after time after time. And we’ve seen individuals that may gain a 60-cent or a $1-an-hour increase in the labor rate, only to turn around and give up an average of one or two hours of repair and refinish time through negotiated settlement with the carrier. So in the end they wind up getting far less money. … Over the last 10 years through my position with the company I work with, I’ve seen the average number of refinish hours on a per-job basis decrease from a little over 12 to now right around six.
To go back to the original question, what are the pressures that are affecting the labor rate? Well, it’s two-fold. It is [that] the units are decreasing… along with a very inelastic or a very resistant approach to raising the labor rate. Because you can go ahead and raise your rate, but you may not qualify for that program you’ve been on where we would recommend people to use your services, because you’re not now competitively priced.
The labor rate also seems to vary quite a bit. Why is that?
It can vary within a 25-mile range. California has all the same laws throughout the state. And we have the same insurance companies doing business in the state. Pricing for insurance is by and large done on a statewide basis. Yet, in the greater [Los Angeles] area … it’s not uncommon to see a [$40 per hour] negotiated labor rate. … Up in the Bay Area and Sacramento, we’re looking at in excess of $90. How do you justify more than twice the labor rate the closer you get to the political center of the state? How do you explain that?
…In the state of California, Dave Jones, the new insurance commissioner, is really looking at a way to define that process—that labor survey process. Because what may be happening now is so many individual shops only work through a negotiated contract. They really don’t have a retail rate anymore. That negotiated rate for all the work that they do is now really the only rate they ever do work for. So when they complete a survey, and they’re asked what do you charge this insurance company’s customer for work, the only rate they charge is the rate they charge the insurance company—not necessarily a retail-paying consumer who may choose to pay with a credit card. [That] costs the business a dramatic amount of foregone profit in order to have that privilege of taking a credit card.
What effect does consumer pay have on pricing pressure?
Because of the increasing deductibles … consumers are starting to self-insure, basically. They have insurance for the catastrophe, but for minor repairs … they’re just writing a check themselves because they’ve determined that it’s cheaper. Two things happen when that happens. One, the insurance-claim-paid amount—severity—instantly is going to increase because the smaller ticket claims have been pulled out of the data pool. The second part of that is the individual shops that are doing this retail consumer-based business, now they’ve got a whole new set of circumstances.
The pricing model … doesn’t have a margin built into it to absorb the credit card discount for the entire repair cost. And it’s not just [that] you take the credit card just for the labor sale. No, you take it for the [entire sale]. In many cases, [for] things like parts, there’s a retail published price list, and it’s not really practical for them to surcharge parts by 3 or 5 percent in order to capture enough revenue from it so that when it’s discounted through the credit card transaction, that you capture enough money back. People typically … can only adjust their labor rate.
Even though it’s only a 3 or 4 percent transaction discount, you typically need to … mark it up between 11 and 15 percent to provide enough money for that 3 percent on the entire repair cost, not just the labor sale, plus any sales tax that may occur. If your state has a sales tax, there’s going to be an additional 3 percent on that sales tax, which you now need to reach in your pocket and pay on behalf of the transaction because the credit card company doesn’t give you all that money.
How have you seen shops respond to this?
In those marketplaces where they understand this, I went through a discussion on how and why labor rates vary between these markets. And there are really four things.
The first thing was that there was some guy in that marketplace that was willing to take a bullet. He’s the whack-a-mole. He’s the first guy to raise his rate, he sticks his head up and he gets whacked. … As long as all the competition in that area are a buck or two under him, they’re heroes. So if he’s constantly putting pressure up to keep raising prices, the rest of the market may trail up behind him, and they’re still heroes.
—Tim Ronak, senior services consultant, AkzoNobel
The second factor that may impact this is on an individual area’s current level of competition. Is it really, really tight, or is there an expanding customer base, and then capacity isn’t keeping track with that? So you’ve got far more people and you’ve got longer lead times. And typically if you get long lead times—one month, two months—typical supply and demand dictates that you raise your rate to decrease the backlog, and you capture more profits. Well, that doesn’t work in the collision industry. The rate is already determined, and then the rate will stretch out. …
The third thing that affects these rates is an individual market ability to say no. If all shops in a particular marketplace … are above their break-even sales level, they can literally say no to some work. … And when those sales leave, they still are at or above their break-even, and they don’t go bankrupt. But if somebody’s treading water and he needs those sales to keep the pump working because there’s no additional profits to be had, he’s going to say yes to any concession because any small little change in the operation cash-flow wise will cause him to just expire.
The fourth thing… is the education of the business side of the shops in the area and whether or not they’ve got a retail rate posted. Because if a marketplace has not established a practice of having retail customers and all they’ve built it on is supporting and doing a wholesale book of business, which would be the DRP side, they are not going to have an ability to truly be profitable doing retail work. [That’s because] the pricing model they’ve used is already backwards, and conceded to, on a pricing side. And that’s not necessarily wrong; that’s a business decision that individuals make. But when we’ve seen areas that don’t have a retail model or a true retail pricing point, we notice or at least I notice that the prevailing rate… is far lower than the surrounding area.
How can a shop use retail solutions in response to pricing pressure?
We don’t have to look very far to see great examples of retail. There’s an organization some people have heard of, it’s called Wal-Mart. Wal-Mart does a great job. They’ve got the guards at the front door, calledgreeters.
Really, they were initially put there to make sure people didn’t walk out with stuff. …When I go and buy goods and services at Wal-Mart, I typically pay around 1 percent more than I should because there’s this little phenomenon, despite their best efforts to control the inventory that’s there, they still have an issue with shrinkage. … That shrinkage they factor in [is] about 1 percent. Now, if you established use of a credit card in a business, a collision business, our shrinkage or our theft is that when someone uses a credit card to pay for a nonretail transaction, they basically removed profit or [have] stolen profit from what your bottom-line, agreed-upon pricing point could be.
So that 1 percent, somebody pays a deductible on an insurance claim, for example, when you negotiated that rate with that particular insurance provider. Many shops have not factored in the need to have a retail component built into their negotiated discounted wholesale rate because a large portion of the repair may be paid on a credit card as a deductible. And as deductibles got larger and larger, that component became much, much larger.
… A door rate that’s 11 percent higher than the prevailing rate in a marketplace for your negotiated vendor work—while 11 percent may be adequate to just cover the costs of the credit card transaction from a retail standpoint—if you want to build a cushion in for that profit theft that occurs when deductibles are paid with a credit card, you might want to go as high as 15 percent. [That leaves you with] an extra 4 percent cushion in there on your retail transactions to help you cover the cost of that shrinkage, and still be consumer-friendly and allow individuals to pay for their deductible and things with a credit card. Now, Wal-Mart does it. They do it when I buy a pack of gum… it’s 1 percent more money than it should be. Why wouldn’t a collision shop charge a premium on their retail amount to cover them when someone comes in and pays a deductible?
Are there any other solutions besides having government come in and make new laws to combat this issue?
Individual marketplaces have taken it upon themselves to structure survey programs. And I know in the northeast right now, we’ve got a CSI firm who is going to be doing telephone surveys of repair areas. I’ve had individuals in California here make a 10- to 20-shop labor survey themselves to dispute a prevailing rate assertion by an individual insurance provider.
What do you predict for the next year in terms of pricing?
I do believe what is happening is that many more shops [understand] the necessity of establishing a true retail pricing point for their business to make themselves far more consumer-friendly, and [to] be willing to accept whatever form of payment the consumer wants to make.
Consumers love the idea of points and being able to use their credit card and manage their electronic transactions that way. Collision centers that want to do well will create a business model that absolutely embraces that.