An Alternate Business Model

Dec. 1, 2014
Taking advantage of an untapped market, MAACO opened a direct-repair facility at a Hertz airport location.

There are no signs, no logos, no promotional posters, no neon lights—there’s nothing on the building to indicate it’s anything but another in a long line of warehouses at Chicago’s O’Hare International Airport. 

The building is wedged on a lot next to a Hertz Rent-A-Car office. There are a few windows in front, a pair of garage doors in back. That’s it, and that’s all
by design. 

It’s Jagdish Patel’s ninth Maaco location in the Chicagoland area, and it’s Maaco’s first in what it hopes to be a brand-new business model at airports spread across the country. 

The entire idea is backwards, says Frank Petrane, vice president of Maaco fleet solutions in North America, and that’s exactly why it works.

Here’s the concept: Take a modern repair facility, flush with the latest in repair processes and technology, and eliminate all the variables that hinder production and profitability. Marketing and advertising—the shop doesn’t spend a dime. It doesn’t have a plush, comfy lobby for customers, either; in fact, it doesn’t have traditional customers at all.

What the shop does have is a guaranteed repair volume, capped, right now, at roughly 40 vehicles per week. It’s been open since August, and was profitable within two months. It’s on an annual pace of $1.5 million sales out of 15,000 square feet.

Patel’s shop is part of Petrane’s vision, and through a unique partnership with Hertz, it’s opening up an avenue shops could take to a completely different business model.

“As the industry changes, we need to alter the way we look at the business,” Petrane says. “Maaco isn’t the same company compared to 10–15 years ago. We have a specific model we’ve found to be successful, but if there’s an opportunity out there, we will do it if there’s a return.”

The Backstory

For years, Petrane has looked at airports as a sea of opportunity for Maaco fleet accounts. Major rental car companies set up shop at major airports, each stocked with parking lots full of vehicles. Those fleet accounts are guaranteed, high-volume customer sources (albeit at lower margins) for collision facilities, Petrane says.

And rental companies have always been a large component of fleet work for Maaco shops: The company’s facilities will do upwards of 17 million repairs for rental car groups nationwide in 2014. 

Patel is one of the beneficiaries of these relationships. One of his eight original shops sits roughly a mile-and-a-half from O’Hare, and over the years, he’s built a strong fleet business through Hertz—so strong that he says he’s never had the manpower to take full advantage of the surplus vehicles the rental company has available. 

The Problem

No one shop has ever been able to truly tap into the potential business a rental car company can provide, Petrane says. 

He prefers Maaco shops to have a balanced model in terms of work type—a chunk devoted to retail sales; another to insurance direct-repair work; and fleet thrown in for good measure. But the more he looked at airport real estate, and the more he spoke with the company’s rental car partners, the more he saw potential to break away from Maaco’s three-pronged approach.

“If you could partner with a rental car company, like Hertz, and make an agreement to operate out of some of their warehouse space—and there’s a lot of empty warehouse space at airports—you could get a guaranteed amount of work, you’d get guaranteed volume,” Petrane explains. “They’d supply the vehicles, we’d supply the repairs.”

Of course, there’s a catch: making it profitable. Fleet work with rental car companies is very often a low-margin affair—lots of dents, dings, repaints, and minor fender-benders. 

“So, you’d have to find the right mix, have everything mapped out in a way to make this a truly profitable business model,” Petrane says. “That was the challenge.”

The Solution

“Reverse-engineering a shop” is the way Petrane refers to it. 

“It’s the opposite way most shops get to do it, but we were able to start with a select volume level of work, and build out the business from there,” Petrane says.

Petrane went to Hertz in early 2014 with the concept, and it was an easy sell. (Among the perks: shorter cycle time due to no delivery/pickup worries, and turning unused real estate into a profit center.) Hertz had a 20,000-square-foot warehouse on site at O’Hare—space that was going unused at the time—that seemed to be a good fit. 

Maaco then went to Patel, given his place in that market and his prior relationship with Hertz. Patel was a tougher sell. A mechanical-engineer-turned-entrepreneur, Patel bought his first Maaco location in 1986. He slowly grew his stronghold in the region over the years, and also owns eight hotels.

“For me, it was just, will this actually make money?” he says. “I liked the idea, but it took a little convincing. 

“They would guarantee volume. I knew what the margins would be—I was doing that work already. So, once we had the rent figured out, it made a lot of sense.”

Patel followed a similar footprint to his other facilities, and between Hertz, Maaco and Patel, all parties came to an agreement on space and volume: The shop would rent 15,000 square feet of the building and get at least 40 vehicles per week. (Rent was not disclosed, but it was set to generate a specific margin on an estimated average repair order of above $700.)

Patel built a roughly 300-square-foot front office (“Just enough space to handle all the paperwork,” he says.), and left the remaining 14,700 square feet for shop space. He put in two paint booths, and hired a 10-person team, including four body technicians, three pain-team members, one painter, and two front-office workers.

The shop opened in August.

The Aftermath

The shop was fully functional on Day 1, Patel says, including its output. 

“The thing for us is that the business was there, right there,” Pattel says. “We opened up, and we had cars, we had volume from the first day—and that’s volume that will stay year round.” 

Petrane says it was like “turning on the faucet.”

The shop, which is open five days per week, has kept a steady sales pace at nearly $30,000 per week, which comes out to roughly $1.5 million on an annual basis. Net profit is lower than in Patel’s other eight facilities, which normally net 18–25 percent depending on the work mix. The Hertz-only shop has stayed between 12 and 15 percent since opening. 

The profit is aided by a lack of overhead—no marketing costs and a lean from office being the biggest gains—and could take a large boost in the near future, as Patel says he is looking to hire on a second shift in 2015. It would help increase production to 60 vehicles per week (and more than $2 million in annual sales) by adding only a handful of staff to the payroll.

“Is it as profitable as other shops? No, it isn’t, right now. But because you’re not worrying about marketing or advertising, or about car count, all you do is focus on efficiency and pushing more vehicles through,” Patel says. “When we add a second shift, I see that facility getting up near the same profit margins as my other shops.”

Petrane and the Maaco corporate team are very satisfied with the results, and are looking to do this at four additional airport locations in the coming year. 

The Takeaway

Just as Petrane doesn’t want individual shops to “throw all their eggs in one basket,” he doesn’t see this being a widespread model that compares to Maaco’s traditional facilities.

“There’s a reason this hasn’t been done before: It requires a lot of commitment from the shop and the rental car company,” he says. “You have to stay committed to the script. You have to follow the process, and make sure you don’t overextend yourself.”

And Petrane says that’s a good lesson for any shop, regardless of business model.

“Efficiency is always the key,” he says. “You have to stick to your model and know your model. You have to match operations to what your workload is going to be and adjust to make it as profitable as possible.”

“There are a lot of opportunities that haven’t been explored in this industry,” he adds. “This [Hertz partnership] is one. With the changes in the industry, we want to be as flexible to these options as possible, and adapt to make our model function in a number of ways.” 

Expert’s Take

As Maaco explores this direct-repair model with rental companies, Axalta’s Steve Trapp sees the industry trending away from low-margin, high-volume work. He explains why he would caution shops when looking into this type of business segment.

It’s an interesting concept, because this is that low end of the market where shops never want to go. Should a shop do this as its sole business? I’d say no; don’t do it. The main problem is that you’re trying to do things smaller and cheaper—you’re asking everyone in the value to chain to take a haircut to make it work.

But, I will say this: If you’re looking to add an additional profit center—or in this case, as an eighth or ninth facility—there’s a way to make it work.

For instance, say you’re the typical one-location shop, open 8 a.m. to 5 p.m., five days a week. You can take on this kind of work in a cosmetic-repair segment, adding a second shift. You determine a size of damage that qualifies (maybe smaller than a silver dollar) and you put straight, menu-style prices on jobs. Then you have a team of technicians, different from those during the day, that are capable of light disassembly and micro-repair techniques. You can have that shift run from, say, 5-10 at night, and then it’s an added profit center. 

The biggest issue is keeping full warranty on those jobs—whether you do full clear or partial clear over that paint job. That’s something to consider. It’s all about doing things quicker and smaller. The people who are profitable are the ones who can minimize the repaired area.

Read more from the MSO Project »