Inside the International Struggle of Independent Shops
It’s funny, Michael Macaluso says, because, most of ten, Canadian business industries cast their collective gaze southward to see the trends that could make their way north across the border.
Not so in collision repair, he says. “In a lot of ways, we are about five years ahead,” says Macaluso, president of CARSTAR Canada. “We had accelerated consolidation happening in the early 2000s. Now, we see it starting in the U.S.
“We have a very consolidated marketplace [in Canada]. The top four or five shop groups do almost 60 percent of all insurance work today and that number is increasing (projected to reach 85 percent by 2018). The insurers do much more work and push it through their DRPs. Those that are part of a big, national network have capitalized on this and have benefitted.”
Meanwhile, independent collision businesses, particularly those of the single shop variety, struggle to keep up. And Canada isn’ t an outlier, either. Other repair industries around the globe, ones that share many similar characteristics to the U.S., have witnessed a similar trend—some to drastic levels.
Canada. The United Kingdom. Australia.
Each of those demonstrates a potential future for the U.S. marketplace, Macaluso says. And it could be up to U.S. repairers as to which path they choose.
“Collision repair is changing rapidly; there is a lot of change going on in the industry,” he says. “It ’s up to everyone how they approach it. Are these challenges and problems? Or is this an opportunity to improve and make yourself better? How are you going to look at it?”
THE U.K.’S ‘BIG SQUEEZE’
THATCHAM, STANDARDS, AND ONE SHOP’S QUEST TO KEEP AN INDEPENDENT SHOP RELEVANT
Paul Taylor came home in tears, and did his best to explain to his wife how his shop lost nearly a quarter of its annual sales with a single phone call.
Here’s the story: Taylors Vehicle Repair Centre Ltd. had been one of 180 independent facilities across the U.K. on a direct repair program for a major British insurer. That insurer wanted to raise its referral fee (more about those later) from 15 to 20 percent. Taylor balked at the considerably steep rise.
His shop was dropped.
Never mind that Taylor served on the insurer’s industry advisory board, or had a deep relationship with many in that company. And ignore that Taylors VRC is considered by many to be the premier independent, single-facility repair business in all of Great Britain.
It didn’t matter—none of it mattered. A longstanding business relationship—a steady stream of 450 vehicles per year—ended with that single phone call in 2013.
“I cried and I told my wife, ‘I don’t know what we’re going to do,” he says. “These decisions are made on money, on greed. But we’re worrying about the people we employ, the families we support. What do we do?”
When telling this story, Taylor says that, as much as it pains him, he understands now why all three of his sons have decided against following in his footsteps in collision repair. They see what Taylor sees: an industry in trouble.
“It’s scary; I’m not going to lie about it,” he says. “But it’s not hopeless. This is an industry that has provided a great life for me. It’s an industry I believe in, and I know we can make it right.”
Taylor wants to be the example of how to do that.
Some quick math: Since 2006, the number of body shops in the U.K. has decreased by 32 percent, according to the latest U.K. Car Body Repair Market Report, released by independent research company Trend Tracker back in February. And that total is projected to drop by another 9 percent by 2020, leaving the British repair industry with just over 3,000 total repair facilities—and a possible deficit in the amount of shops available to complete the industry’s total workload.
All of this is overlaid with the “big squeeze,” as Taylor puts it, of insurance carriers on the market. Trend Tracker’s data showed that roughly 70 percent of all work was paid for by insurers in 2014, and that work yields very small margins.
The average ticket on insurance work was £1,380 in 2014 (or, roughly, $2,152.39), and U.K. association Auto Body Professionals Club estimated that a “large insurer-approved bodyshop [sic], operating on modern factory flow-line repair principles, will typically earn just £13.52 ($21.09) net profit on a job taking 15.7 hours to complete.” That’s £0.86, or $1.34, per hour—a margin of less than 1 percent.
Just to repeat: That’s a net profit margin of less than 1 percent on 70 percent of all work in the U.K.
“It sounds crazy, but it’s reality here,” Taylor says of the miniscule margins for shops. “That’s the U.K. industry today. This is where we are.”
So, how’d they get there? By now, most repairers stateside know about the PAS 125 standard for U.K. collision businesses, and the coinciding “Kitemark” designation required of shops to be considered up to standards designated, to a large degree, by Thatcham, an insurance-funded research, development and training organization in the U.K.
The move to the Kitemark created a schism in the industry—shops that were now deemed “reputable,” and those that weren’t.
This move to shop standards also happened to coincide with a catastrophic economic recession, which in turn caused a chain reaction of race-to-the-bottom insurance rates and drastically sped up the rate of shop closures, says Thatcham’s Neale Phillips, who serves as the strategy and development director for the organization.
Then, of course, there are the changes in vehicle technology and the increasing cost of remaining competitive in an ever-changing industry.
“It wasn’t just one thing,” Phillips says, “but a host of things that all came together.”
The big have gotten bigger, the strong stronger, Phillips says, and it’s led to a market place now dominated by large repair groups. The single-facility shop is dying off.
“With the current state, I see no reason for that to stop,” he says.
Taylor is 51 years old—just old enough now, he says, to start thinking about the “finish line.”
“I started my business at 19, and I thought by this point I’d be a very wealthy man,” he says. “I couldn’t have imagined [the industry] turning the way it did. But, it did, and I’m not going to sit around and feel sorry for myself.”
Instead of wallowing in weakness, Taylor decided to strengthen his business. In 2013, his business felt at capacity; he needed to either expand or find new ways to create efficiencies. He chose the latter, investing nearly £200,000 to retrofit his 6,000-square-foot shop to allow for a linear repair flow and the implementation of gas-catalytic drying equipment.
He saw an almost immediate boost, increasing output by 25–35 percent, he says. Overall key-tokey cycle time dropped by more than a full day to just above five, technician efficiency rose to just north of 135 percent, and tech utilization is at nearly 100 percent.
The shop picked up a lucrative DRP and did £1.7 million in total sales in 2014 (roughly $2.7 million).
Still, they aren’t absolved from the insurancerelated hindrances, he says. His shop uses five separate electronic estimate softwares for various insurers. It carries multiple paint lines, and is rarely able to choose from where it buys parts. And those referral fees, in what amounts to a “commission” the insurer takes on each job, cost Taylors VRC £190,000 in 2014. (For many shops, those fees can be as high as 25 percent on a job, Taylor says.)
Despite it all, the shop turned a net profit margin of 13.7 percent in 2014.
“That’s really quite exceptional for this industry here, incredibly difficult to reach for an independent shop,” he says.
Taylor did it all, he says, by making a choice. He didn’t want to continue to be pushed around by insurers; he didn’t want someone else determining the success of his business. He decided to put all his focus on quality and taking care of the customer—hoping that any “sensible person” would still be able to see that difference.
“We just made a decision that it wasn’t about making that insurer happy; it was about that customer and making sure they come back to us, and that their dad comes to us, their children, their children’s children,” he says.
Taylors VRC was named as the top “Centre of Excellence” at the 2015 British Bodyshop Awards.
And remember that insurer that unceremoniously dropped Taylor’s business from its DRP? Well, they came crawling back last fall.
Taylor told them, “No thanks.”
“It’s hard, it’s very hard to be an independent shop here,” he says. “But you can use that as a strength—make your business strong by being independent and not letting others make decisions for you.”
“This is a very difficult industry and very tough time to do business in,” he adds. “But this industry has given me everything I have in my life, and I’m going to give my business everything I have.”
Thatcham’s View: An Industry Rebuilt
In an exclusive interview, Neale Phillips, strategy and development director for Thatcham, weighed in on his organization’s role and the overall state of the U.K. repair industry.
WHAT IS THATCHAM’S PURPOSE?
We’re funded by the motor insurers in the U.K. as an automotive research center. Our core purpose is to mitigate and reduce insurance claims so it keeps motor insurance premiums to a minimum here.
It’s a very competitive market in the U.K. and margins are very, very tight. Because of that, it’s a very processed market here. We do a lot of NCAP (New Car Assessment Programme) safety testing and repair training, but our core competence is in repair methods and times. We develop independent repair methods with the view of getting the car back safely and quickly and in the most economical way.
WHAT IS THE IMPORTANCE OF REPAIR STANDARDS?
One of the key drivers for insurers in this market was to have very high standards of repair. The PAS 125 standard ensures that of a collision repair network or shop. It enables insurers to select a repair
shop in a consistent way, so they know that a body shop would repair to the standards their customers would insist upon.
HOW DO THE STANDARDS FUNCTION?
The standard is categorized into four main areas: man, method, machine and material. They are designed to be comprehensive standards. “Man” is the skills of the technician; “method” is going
about the repair in a safe and efficient way; “machine” is equipment; and there is now an increasing importance of “materials,” as vehicles develop. All of this falls into place to fit the purposes
of the OEM.
WHAT HAS THE IMPLEMENTATION OF THE STANDARDS ACHIEVED?
The standard is vital. There was a competition authority inquiry into insurance repair last year—from January to September—where they looked at the quality of repairs, and the industry came out looking
very good. No action was taken by the authorities. If you look at the insurer networks, roughly 65–70 percent have achieved this. Then there are even more who have achieved the standard but didn’t go the full level of reaching the Kitemark—which gives you permission to advertise it. The standard is now transitioning to become a [British Standards Institution] standard, which is an upgrade. It does not make it unachievable, but adds a few dimensions to make it a higher level of standard. It will be BSI 10125.
HOW DO STANDARDS PLAY INTO A SHOP’S ABILITY TO THRIVE?
The shops that invest sensibly and are facing these challenges and preparing will prosper. They will get more business from insurers and prevent that sort of drift of the repairs going to the vehicle
manufacturer’s body shops. How quickly you get the return on your investment is hard to say.
DO YOU FEEL IT HAS PLAYED A ROLE IN THE DEMISE OF THE INDEPENDENT SHOP?
When you see the split between large groups and smaller groups and independents, the independent line has been dropping over the last 10 years consistently. The larger group is quite stable, and the
smaller groups have stabilized and held numbers. That’s a transition from being an independent to joining up—maybe it’s five or six that join up to form one entity. It gives them more resources for
investment and raise revenue.
BUT CAN A TRUE, SINGLE-SHOP INDEPENDENT SURVIVE?
It’s increasingly hard to be a true independent these days, based on demands placed on body shops in safety, and in standards. With the current state, I see no reason for that to stop. No. The upgrading
of the standards to the BSI sort of says it all really. That’s to reflect the increasing complexity in repair market and need to stay ahead of it.
THE AUSSIE ‘PANEL BEATERS’
UNIONS, INSURER INTRUSION, AND AN INDUSTRY PLAGUED BY MISPERCEPTIONS
Basil Scagliotta spits out each number as if the thought of it puts a sour taste in his mouth.
Cycle time is six days.
“Could be three,” he quickly adds.
Car count is stuck at about 75 per week.
“Should be 100.”
Overall annual revenue sits at $6 million.
“We have the capacity to do $7.5 million.”
Those numbers define his business’s success—and it is successful; Gino’s Car Craft Panel & Paint is one of the premier single-facility repair businesses in West Australia.
Still, poring over the metrics of the shop is just about the only thing that dampens Scagliotta’s perpetually positive demeanor.
“We battle ourselves to a degree,” he explains. “We can sit and point to this and that and blame certain [segments of the industry] but I’ve watched it change for 40 years. … We haven’t done much to stop it.”
THE ‘RIPPLE EFFECT’
The Australian repair industry is swept up in a dramatic “race to the bottom,” Scagliotta says, based on an accident insurance market that features a cheapest-is-best philosophy.
“We might have the cheapest insurance in the world here,” he says, “and you have drivers switching
between companies every year over $20. It has a ripple effect.”
So does the technicians union that forces salary based pay with an additional 9.5 percent tacked on for retirement. Then there are logistical issues: Gino’s Car Craft is in South Fremantle on the coast of Western Australia, or, in other words, roughly 2,134 miles from Melbourne and 2,456 miles from Sydney—the country’s two main cities from which the majority of parts are shipped.
The consolidation of insurance carriers (for all intents and purposes, there are roughly five major companies that control all insurance work in the market) has led to shop consolidation; both in terms of insurance-owned facilities and networks of independent body shops that are growing, allowing operators to join forces to increase buying power.
And speaking of buying power, margins on parts are increasingly low, considering the difficulty of repairing nearly 250 different makes due to the country’s eclectic mix of European, Asian and American vehicles.
Got all that?
“Things are a bit complicated here,” Scagliotta says with a laugh.
FORGING A NEW IDENTITY
Scagliotta opened his shop in simpler times, he says, with just himself, an apprentice technician and 2,500 square feet of shop space in 1973. His career could be considered an old-fashioned example of the
“American Dream,” he jokes.
His business grew steadily over the years, today operating out of 8,200 square feet with 35 employees
(including six apprentice technicians). And the industry has evolved as well.
“I’d say that 20 years ago, we were a good 10 years behind [the U.S.],” he says. “Now it’s probably only
a year or two.”
The escalation of insurer-repairer relations, though, hit critical mass sooner than in the states, Scagliotta says. Similar to the U.K., margins are now miniscule; Scagliotta says that the goal is to simply break even on labor and rely on parts markups for profit, which generally land in the 10 percent range.
“Look at it this way: Taking into account all overhead, all costs, it takes about $130 per labor hour to operate my business,” he says. “The insurance company pays us $30 [per hour] for labor. So you need to find a way to make up that difference.”
The problem starts from a troubling perception of collision repair, which is often referred to by industry
outsiders in the Aussie market as “panel beating.” It’s a reputation that has caused consumers to look
negatively at shops, and undervalue their services.
And it’s allowed insurers to impose their will, opening their own MSO networks and controlling workflow in the industry.
Scagliotta says independent shops have improved greatly, and are reacting to meet new demands. He joined the Car Craft network, and last year, installed advanced drying equipment in his facility to improve efficiency.
He sees a lot of similarities to the issues his market faces to that of his colleagues stateside. And he feels there’s a simple way for both industries to fix their respective problems.
“At the end of it, the reality of it is that we need them and they need us,” he says. “We just need to look at each other, and see our needs and figure out solutions to get cars back on the road in a way that works best for everyone. Doesn’t seem so complicated, right?”
FANNING THE FLAMES OF INSURERREPAIRER SQUABBLES AND FINDING A MIDDLE GROUND
Now, back to Macaluso of CARSTAR Canada.
“I think it’s fairly easy to see the similarities between what’s happened [in North America] and places like the U.K.,” he says. “Consolidation and procurement practices are an issue in all these industries—and it’s likely gone too far in the U.K. and repair centers are suffering for it.”
So, what’s the solution? How do shops find firm footing when the foundation of power in the industry continues to shift away?
Macaluso prefers to use a specific example, pointing to an issue of great consternation today in the U.S.: insurer-mandated parts procurement systems. Similar to the State Farm-PartsTrader rollout in America, Canada dealt with the implementation of multiple programs from multiple insurers nearly four years ago.
“We believe in collaboration rather than confrontation,” he says. “We recognized this change was coming, but that we needed to keep the integrity of our programs, the safety of repairs, and credibility of the entire supply chain.
“So, in order to have a seat at the table and effect change, you have to be willing to sit at that table. If you stand there and say, ‘We don’t want anything to do with parts procurement,’ then you’re stuck on the sidelines.”
Industry leaders and individual shops worked closely with carriers and the respective software makers to make the programs more shop friendly. Macaluso estimates that 90 percent of repairers’ suggested changes were implemented.
“The systems were coming, [and] we needed to make sure we weren’t going to be facing seven systems from seven carriers, all of which don’t benefit shops,” he says. “We worked together to find reasonable solutions, and now it’s a non-issue here.
That’s just one example, Macaluso says, but the overall difference between Canada and markets like the U.K. or Australia is the lack of animosity between industry segments.
“Change can be a good thing, and those that are on board with it, those who embrace a changing dynamic, will be the ones who benefit,” he says. “We see problems rising here or what’s happened elsewhere, and we want to look for solutions. We want a voice at the table—and that’s what you must have to succeed moving forward.”