Consolidation’s New Trend
Despite what headlines may indicate, the rate of consolidation in the collision repair industry hasn’t been a linear rise toward domination for the Big 4 consolidators—Service King, Caliber, ABRA and The Boyd Group. Instead, think of it more like a bell curve, Vincent Romans says.
Romans’ industry consulting and analyst firm The Romans Group recently released its data-driven report, "Profile of the Evolving North American Collision Repair Marketplace." There were attention-grabbing highlights (such as the forecast for the Big 4 to gain a 20 percent total industry market share by 2020) but the overall message was far more tame: After peaking two years ago, the rate of consolidation has slowed.
The numbers: In 2012, roughly $300 million worth of multiple-shop operations (MSOs) was acquired; that rose to nearly $1 billion in 2014, before falling back to just under $250 million in 2016.
Consolidation is still very much the reality for the collision repair industry, Romans says, but it’s far more nuanced than many seem to think.
Why has consolidation appeared to slow in the last couple years?
There are a number of reasons that this slowdown is happening, and let’s go back to 2012, when large private equity firms played a huge role in consolidating the industry. It was understood by them that this dry powder they had would be leveraged to aggressively grow through acquisitions and they did just that.
But during the last five years, the cost to acquire these targeted, MSO platforms, steadily rose due to the aggressive competition among the Big 4 consolidators as well as the owner-operators’ increasing value perception and price expectations for selling their businesses.
It was just getting too costly for the MSO consolidators to spend the money that the sellers wanted.
And that value shift is simply a supply-and-demand issue, correct?
Some of it definitely is. There was a lot of cash/dry powder available and financing was inexpensive. Consolidators were aggressively purchasing multiple-location platforms, and we had this shift in owner perception about the increasing value of a business and the price expectation for selling. A lot of this was due to the MSOs' market-entry strategy many in which they targeted other MSO platforms. The larger consolidators did this to gain entry and large market share in target areas, and as they formed their competitive beachheads, it took out most of the early sellers that had the largest platforms.
Once all those acquisitions were made, they had to be integrated by the four consolidators. Those platforms and individual markets across their networks needed to standardize as much as possible. They’ve done a fairly good job of that, but it takes time. Now that those acquisitions are somewhat developed, there are very few large multiple location operators left that would be as desirable at a reasonable price for acquisition. That means that the buyers—our four large consolidators—are now actively building out those target markets with what they call “tuck-in” or cluster locations with single-location acquisitions, brownfields or green fields.
All of this has really led to this gap between the seller’s value and sales price expectations and the buyer’s expectations, which has shifted the real and perceived value of an acquisition.
That said, your report forecasts the Big 4 doubling their competitive stake by 2020, reaching a 20 percent market share? It’s a significant number, but does it signal “mass consolidation” for collision repair?
The future is clear that the top four MSO consolidators today will grow their businesses at a faster rate than those in the other segments of the industry. After the Big 4, those repair organizations in the $20 million-per-year or higher segment will have the second fastest growth rate; then the $10 million to $19 million, and so on.
The combined sales at the end of 2015 was about $3.7 billion for the top four consolidators, which is nearly an 11 percent market share. By 2020, I believe they’ll have between $6.5 billion, which would be about 16.3 percent share, up to $8 billion, which would be a 20 percent share.
So, to answer the question: It depends on how you view mass consolidation. That’s still 20 percent of what I estimate to be a $40 billion market at that time in 2020. Is that mass consolidation? I don’t think so.
Now, when you bring in the franchise networks and the $10 million-and-up single- and multiple-location platforms, those segments combined with the Big 4, we see one forecast shows them at about $15.6 billion, or 39 percent of the market. You look at it the other way, that’s still a strong 60 percent market share for all other repairers.
So, I wouldn’t say that’s mass consolidation. I’d say the universe is unfolding as it should, more than mass consolidation, and that the concentration of collision repair revenue will continue to shift to these consolidating segments I mentioned. The industry as we know it today, will look a lot different when those combined segments reach 50 percent market share. I think critical market share happens when those combined segments have 55 percent of the industry, and I'm not prepared at this time to say when that will happen.
There’s no need for mass panic. There is an opportunity for smaller shops and smaller MSOs. In order to remain relevant and achieve optimal success, these repairers should consider progressively planning and plotting strategically how they can build and maintain a competitive market position