Inside the Big 4
Tim Adelmann cringes at the term. He doesn’t like it; doesn’t think it fits. ABRA Auto Body & Glass has been growing since 1985, he says. That was the year Adelmann, now the company’s executive vice president of business development, personally opened and managed ABRA’s second-ever facility, located in St. Paul, Minn.
“We’ve been known as operators throughout our business life,” he says. “We’re collision repair people. We’re just shop operators.” So, calling the company a consolidator? Adelmann just doesn’t see it.
But that’s the perception, he admits, and to many in the industry, the perception exists for a clear reason.
ABRA is an anchor of the U.S. collision repair industry’s “Big 4,” a term commonly used to refer to the country’s four largest multiple-shop operators (MSOs)—a list that also includes Caliber Collision, Gerber Collision & Glass, and Service King.
Combined, the Big 4 gained roughly $1.5 billion in collision repair work over the past two years through the acquisitions of other, smaller MSOs and individual body shops. That number alone accounts for Nearly 5 percent of the $33 billion U.S. industry. By the end of 2015, the Big 4 represented more than $4 billion in total work, a market share of more than 12 percent.
The big are getting bigger, and the total amount of shops continues to decrease; hence the “consolidator” moniker, says Vincent Romans, managing partner and CEO of The Romans Group LLC, an industry consulting company whose research provided the aforementioned data.
But don’t mistake the wave of acquisitions for ruthless business tactics, Romans adds. There are a number of factors that have led to the industry’s rapid consolidation in the past 10 years—and there are clear reasons why it isn’t going to end any time soon. One of those reasons, though, often surprises many familiar with the impersonal, cost-cutting stereotypes that are often affixed to America’s largest corporations.
“The truth is,” Romans says, “many of the industry’s largest [MSOs] operate very strong, very successful, and very consistent businesses. Much of their success is based on performance.”
Performance. Procedures. Systems. Structure. Philosophy.
The Big 4 (and other large MSOs close behind them) have created repeatable, sustainable business models, geared to allow each individual shop to perform at the same level regardless of its market. And for independent shops looking to compete, it might be time to start looking more closely at what these companies do to thrive.
“We’re shop operators just like you are,” Adelmann says. “It’s not about doing something overly complicated. We take something simple and do it very, very well.”
AN INDUSTRY IN TRANSITION: UNDERSTANDING THE 'WHY'
Let’s take a step back for a moment, Paul Gange says. Before fully discussing the industry’s consolidation trend, he says it’s best to understand the reasons behind it first.
And that starts with insurance carriers.
“Whether they know it or not, they are fundamentally fueling consolidation,” says Gange, the president of Fix Auto USA, which grew its franchise network above 100 shops in 2015.
The collective push from carriers for a more consistent and efficient claims process—a push that started nearly 30 years ago with the first direct repair programs—has led them to favor single points of contact for larger volumes of work, Gange says. In other words, it’s far simpler and more cost efficient for them to deal with an MSO, a company that can offer multiple distribution points across a market.
That’s part of it, he says. The rest comes down to the financial setup of the industry, one that still is very fragmented with many more facilities than needed to cover the total amount of work across the country.
Romans says this has been obvious for quite some time, and ultimately, it was inevitable that the industry would follow many others before it (pharmacies, hardware stores, hotels, etc.) and slowly tighten up its broad reach.
The recession eight years ago acted as an accelerator, Romans says, as private equity swept through collision repair, pouring money into MSOs and launching a race for each to capture more market share.
The landscape changed quickly, and while the Big 4 seem to stand as a symbol to the entire industry of the continued push toward consolidation, the overall shift in the market certainly isn’t limited to those four companies.
According to Romans’ data, MSOs with more than $20 million in annual revenue accounted for $6.2 billion in total sales for a 19.2 percent market share in 2014 (the most recent year for which The Romans Group had complete data at time of press). That’s a $1.3 billion increase over 2013, and more than double the output from when that same demographic generated $2.7 billion in 2006.
Throw in franchise networks, like Fix Auto and CARSTAR Collision Repair Experts (two companies that very much consider themselves to be rivals to the Big 4), and that’s another $1 billion and change to that pool.
And there’s this: The large MSOs, on average, processed $3.3 million in collision work per location in 2014. The rest of the industry? Roughly $964,000.
“It used to be easy as an independent to sit back and say, ‘Well, we outperform those consolidators and those franchise shops. We’re better,’” Gange says. “But the truth is that most independents don’t.”
AVOIDING GROWING PAINS: THRIVING AS AN MSO
Driven Brands made the largest acquisition splash in 2015, adding CARSTAR to its collision and paint group that already included Maaco.
The acquisitions get the headlines, but Driven Brands group president Jose Costa says success is also measured in the amount of closures an MSO has in a given year—a number that normally sits at 3–5 percent in the collision industry.
“Just as important as unit growth is maintaining the number of existing stores and keeping closures close to none,” says CARSTAR president Dan Young. “I have two goals: no closures and [add] a lot of stores.”
Net growth, as Costa and Young describe it, is a large focus of all large MSOs and franchise networks.
To have sustained success amidst rapid growth, Adelmann says, you “can’t afford a step backward every time you take one or two forward.”
And that’s an area in which the industry’s largest MSOs, and the Big 4 in particular, have truly excelled. But how have they done that? What allows them to stand out? It comes down to three key areas of business:
A SYSTEMIZED APPROACH. To grow, Adelmann says, a business must be truly “replicable.”
“We want quality on every repair at every location,” he says, “and that’s customer service, having a sense of urgency, managing the cost ... all of that. And the only way of doing that is taking a real operations and systemized approach to it.”
ABRA has had an operations manual, referred to as its “playbook,” for more than 30 years, but Adelmann says that recent changes in the last 10 years have truly streamlined the company’s operations and allowed its growth to take off (ABRA has gone from 114 to 338 locations in the past four years). The playbook serves as an easy reference guide for any operator in the system, containing all the company’s policies and procedures. There are also video tutorials that go with each portion.
Tim O’Day, president and COO of Gerber, says his company takes a similar approach with its “Wow Operating Way” system, and both Service King and Caliber have their own programs, as well.
“All our internal processes link back to our mission statement, to ‘Wow Every Customer ... Be the Best,’” O’Day says. “Every morning, our people come to work knowing exactly what they need to do and why. This is what allows us to build a true culture of excellence from the inside out, across hundreds of shops and thousands of team members, from the shop floor to the executive offices.”
There are finer details to each operating system; for instance,Service King utilizes its proprietary, electronic scheduling and management software systems, ACCUCenter and Overdrive, CEO Chris Abraham says.
O’Day says Gerber is focused on segmenting repairs by job length (e.g., fast lanes within facilities), and that pre-repair preparation is a large focus—disassembly, blue- printing, parts procurement, etc.—in order to begin repairs within hours of a vehicle arriving, rather than days.
The systems in place, Adelmann says, allow team members to act on their sense of urgency without inhibitors.
POOLING RESOURCES. As the average driver needs collision
repair services only once every seven years, brand recogni- tion can be a large benefit for the larger MSOs, particularly when they move into new markets. (For example, Fix Auto spent more than $1 million in traditional advertising in 2015; CARSTAR is mostly a business-to-business operation, but Driven Brands has a combined budget north of $60 million for its Meineke and Maaco brands.)
The largest MSOs also take advantage of their immense buying power with suppliers and limited overhead through call centers. It greatly curbs overall costs and allows each shop to focus on value in its offerings without shaving the price of the actual repair work itself.
“Do you want to shop at a Wal-Mart or a Nordstrom?” Adelmann says. “We’re not the lowest price, but we provide the best value. It’s something we take a lot of pride in. We contain costs by repair vs. replace, properly sourcing appropriate parts, not blending into adjacent panels, doing work correctly the first time. We’re giving consumers and our business partners a Nordstrom-type outcome at a fair price and the best overall value.”
RE-INVESTING FOR SUCCESS. Training and education is at the foundation of what allows Gerber to thrive, O’Day says. I-CAR Gold status is the standard, not the exception.
Eighty-one percent of all ABRA facilities have achieved I-CAR Gold status, and the rest, Adelmann says, are in the Road to Gold program. Every ABRA center has multiple technicians who have completed I-CAR welding certification.
Continuous training puts each shop in a place where it can achieve that desired level of quality, Adelmann says. It’s a prerequisite for success. Put employees in a position to succeed, and the business will, too.
Then, there’s also the career advancement opportuni- ties, Abraham says, noting that Service King prides itself on providing more than just jobs to its team members; the company offers clear career paths.
If you’ve been following along at home, you’ve likely noticed the pattern. Some examples:
There was the Gerber acquisition of Michigan-based Hansen Collision, and then the company acquired Collex Collision Experts of Florida in a $45 million deal shortly after. In December 2014, Service King acquired seven-shop Central Collision Centers out of Chicago, a business run by 2013 FenderBender Award winner Mike Caruso.
For its part, ABRA had three head-turning pickups in 2015: all 23 locations of Kadel’s Auto Body; all 12 Keenan Auto Body facilities; and the entire seven-shop business of Lehman’s Garage.
And, finally, on Jan. 19, another former FenderBender Award winner, Kim Parson of Automotive Collision Technologies in Baltimore, also sold. Caliber acquired her seven-shop business.
So, that pattern: “The Big 4 consolidators clearly have a strategy of seeking out high-performing platforms with strong reputations in their markets,” Romans says.
Reputation is the key word there.
O’Day says it’s critical that Gerber finds “customer- oriented” businesses that can integrate well into the company’s culture. Nothing is more important than “delivering a high level of customer service,” he says.
“We strive to partner with like-minded management teams that share the same values the Service King family of repair centers is built on,” Abraham says.
Adelmann agrees. ABRA wants an acquisition partner that already fits the mold of an ABRA shop.
“Our goal is to be the employer of choice in each market place,” Adelmann says. “We want the best team from the top down.”
Platform acquisition is often used as a launching pad for MSOs to enter new markets, Romans says. The idea is simple: The MSO purchases a large collision busi- ness with multiple successful locations. That gives the consolidator a market presence, a high level of distribution points for its insurance relationships, and allows it to build on the reputation of the business it acquired. Then, it builds out from there, either through purchasing smaller MSOs in the area, single-location acquisitions, or new, ground-up facilities.
That’s the process ABRA follows, Adelmann says, and it uses its franchise option to help fill in markets (the company has nearly 60 franchise locations). And market build-up can come on just as quickly as market entry. ABRA first went to the Chicago market in mid-2014. By April of 2015, the company had more than 40 locations in the metro area.
“We look for the right opportunities, the right partners, but once that’s identified and a deal is made, we can wrap it up on a Friday and have it operating as an ABRA center by Monday,” Adelmann says. “For [new builds], we can be up and running for $400,000 in equipment.”
New builds and smaller acquisitions will come into play much more in 2016, Romans says, as there are far fewer MSOs in the 20-plus facility demographic to purchase.
“All MSOs will be building more greenfields and brownfields. They’ll be building out their cluster markets,” he says. “These guys, when they build a greenfield, they don’t care about the land in the same way an independent would. They can do it at a much more affordable price and get a very high ROI in a very short period of time, because the insurance carriers are following them and are going to influence that business toward that.”
OUTLOOK IS HAZY
Remember those other consolidated industries mentioned earlier? Romans says to take a good look; collision repair could wind up going in the same direction as hardware stores and pharmacies, industries dominated by a handful of large brands and topped off, to a much smaller extent, with small independents.
That would be a good ways down the road, though, he says.
Currently, the U.S. collision repair industry is
Romans. His data shows that, at the end of 2015, nearly 33 percent of the industry’s total revenue was processed by a little more than 200 shops—a group that includes all MSOs with $10 million or more in annual revenue, the highest- grossing dealer-owned shops, and franchise networks.
“Is that where consolidation ends? I don’t think so. I see that point of total consolidation being more like 60 percent,” he says. “And my projections ... say that’s about five to seven years off still.”
That leaves 40 percent of the market for independent repairers. The dollars and jobs will still be there, Romans says, but the road will be harder for those businesses.
“Does it look bleak? I wouldn’t say that, but it’s going to be harder,” he says. “You have to look at where your business is today and what you’re planning to do now, in five years, in seven years, in 10 years. What’s the end gain? What do you want to get out of your business? And what are you willing to do to make sure that happens?”
Because, Romans says, the MSOs likely won’t be slowing down anytime soon. CARSTAR’s Young says that unit
growth is his company’s No. 1 goal right now. Costa says that he aims to see both CARSTAR and CARSTAR Canada double in stores by 2020.
Fix has similar lofty goals, Gange says, and while leaders at the Big 4 didn’t disclose their specific target numbers for growth, they all expect the rampant wave of acquisitions to continue.
Both Romans and Adelmann say they wouldn’t be surprised to see one Big 4 acquire another within the next two years. “Just looking in my crystal ball,” Adelmann jokes, “but I can say ABRA will not be a seller.”
It’s an odd position to be in at this point, Adelmann admits. It doesn’t seem that long ago that he helped ABRA with its maiden expansion. Everything’s changed—and then again it hasn’t, he says.
“You know, through all of it, I don’t feel that we’re any different,” he says. “Things are more [sophisticated], we’re always improving, but at the same time, we’re still just body shop guys. That’s who we are.”