Consolidation of the consolidators

July 6, 2016
Smaller MSOs are selling to bigger names as consolidation continues to steamroll

In case you haven’t been paying attention, for some years now there has been a slew of reorganization, buyouts, consolidation and a push for market share in the collision repair industry.

Names like Blackstone, Hellman & Friedman, Palladium, Omers, Boyd — who are they? Never heard of them?  You might know them by the names they operate under like Service King, Caliber, Gerber and ABRA. In case you haven’t been paying attention, companies like Driven Brands (who operate under better known brand names like MAACO and CARSTAR) are also vying for opportunity and market share in regional markets that make up the nation.

According to the Collision Repair Education Foundation’s annual report, the total number of shops operating in the U.S. has decreased by 12-15 percent over the past 15 years. In addition, the number of multiple-shop operations (MSOs) generating annual revenue of more than $20 million grew from 9.1 percent market share in 2006 to 13.4 percent in 2011. But that trend is moving backward. With so many shops getting acquired by the big boys, the MSO market is dwindling. Smaller privately-owned MSOs are selling, and at a fast pace. For example, the Philadelphia area has seen the three largest MSOs sell to companies like ABRA, Caliber and Service King. Those sales alone represent better than $75 million  of collision repair revenue in the Philadelphia and surrounding suburban and Southern New Jersey areas — and it isn’t over yet! One executive I interviewed, who asked to remain anonymous, told me that there is a large push for acquisition up through the New Jersey and New York areas by the end of 2016. That’s a LOT of money and a lot of market share. The east coast is one of the most consumer dense markets in the country, with New Jersey rated No. 1, which means there are more people per square mile than any other state. Take a look at the map below and see why the push is in the Northeast portion of the country. 

Image courtesy of Wikipedia

Consolidation will continue because the industry is still somewhat fragmented. There are approximately 30,000 repair shops in the U.S., and about 14,000 repair shops that participate in some sort of DRP program according to a recent presentation by I-CAR. The number of smaller independent operators is shrinking as well due to increasing vehicle complexity and the costs associated with equipment and training. Consolidation will continue but it will look different than it has in past years.

Continued consolidation — how big is it?
According to the Wall Street Journal, the Blackstone Group acquired Service King. The deal values the Texas-based chain at about $650 million, according to people familiar with the matter. Blackstone plans to continue the expansion that more than tripled Service King's locations under the ownership of Carlyle. With pushes like this and the aggressive acquisition plans slated, large consolidators will be amassing locations that will lead to an inevitable showdown of consolidators consolidating each other. This will be undoubtedly driven by Wall Street, the stock market and short- and long-term profitability and projections. With roughly 34,000 body shops in the U.S., according to Focus Investment Banking LLC, private-equity firms see plenty of room for more consolidation. Already, Service King grew rapidly following Carlyle's acquisition of a controlling stake in August 2012, adding 130 shops through acquisitions to the 47 it already had. The Richardson, Texas, company's purchases have ranged from two family-owned north Texas shops to Sterling Collision Centers Inc., a 62-shop national chain it bought from insurer Allstate Corp. As you can see, it has already begun. Two of Service King's biggest competitors are ABRA Auto Body & Glass and Caliber Collision Centers, both of which have roughly doubled their store counts since the start of 2013. ABRA is backed by Palladium Equity Partners LLC, which bought the Brooklyn Park, Minn., company in late 2011.

Consolidators buying consolidators has been very profitable, which helps explain the turnover. Onex Chief Executive Gerald Schwartz told investors that the firm made more than seven times its money when it sold Caliber, based in Lewisville, Texas. Palladium has reported that ABRA paid it a $24 million dividend, or 44% of the cash the firm pumped into the company. A sale could bring the firm's ultimate return to several times its investment. This is BIG money. Five different private equity groups have owned ABRA since 1997, he said. The current owners are Hellman & Friedman LLC, an international company with $8.9 billion in committed capital overall, according to the firm's website. The four biggest consolidators active in the United States — Boyd, ABRA, Caliber Auto Body and Service King — picked up 317 shops in 2013 and 2014, according to Focus Securities LLC, which tracks automotive industry acquisitions.

Consolidators under the radar 
Companies like CARSTAR and Maaco, under the Driven Brands umbrella, are also taking advantage of the push for consolidation. Many shop owners nowadays are either scared, concerned or determined to stay in the business that is so good to them. Notably, a local MSO in the Philadelphia area — 3D — is investing over one million dollars in technology to assist them in achieving superior cycle times with a European infrared paint curing system. Other more prime single-store collision repair facilities, faced with the threat of consolidation coming to their market, are being courted heavily by the Maacos and CARSTARs who are looking to give a them a competitive advantage in their respective markets. CARSTAR represents an opportunity with brand name recognition with insurers, material and bulk buying pricing and to exercise some leverage should you decide to stay in the game against the larger adversaries. Maaco is also seeing a great potential for opportunity for existing collision repair facilities to convert and remain prosperous. One Maaco official I spoke to told me that their objective in the market is unique in that they aren’t competing with anyone else in the collision repair market; they are competing with Best Buy in a financial sense in that the consumer is going to make a decision to either paint their older car or buy a new TV. Maaco is also very confident on their price point. “We have no competition,” I was told. There just isn’t a larger company that has come in to compete against them. When I asked if they would welcome the competition, I was told, “Absolutely! It’s another purchasing possibility!” More consolidation? Here we go again!

Tapping the brakes — the future of claims

In the 21st century, we are seeing self-driving cars, accident avoidance systems, etc. These systems will likely be standard on most cars in the very near future. Autonomous braking reduced bodily injury liability claim frequency by 14 percent to 32 percent. While the reductions are sizeable, these systems were first introduced on a small number of luxury vehicles. Consequently, the impact of these systems on the population of all crashes has been limited. Prior Highway Loss Data Institute (HLDI) studies have indicated that some collision avoidance systems are reducing insurance claims. A prior report from HLDI (2012) showed that it typically takes approximately three decades for technologies to spread through the fleet. The current analysis uses similar methodology but focuses on collision avoidance features. The analysis shows that it typically takes decades before most vehicles on the road could have a given feature, either because it came as standard equipment or was offered as an option. For example, it will not be until 2037 that 95 percent of all registered vehicles could have rear park assist, which was rolled out in the United States in 1995. Front crash prevention systems, which rolled out in the United States in 2000, could take even longer. If it continues to follow its current trajectory, the crash avoidance technology will not be available in 95 percent of registered vehicles until 2048. Federal mandates would accelerate the fitment of these features.

Proof
On April 21, 2016, State Farm Insurance discussed its outlook for 2016 in a video posted on its business-to-business website, highlighting strategies for repairers in its network and saying that it may downsize the number of repairers in its Select Service program. Most insurers have already discussed the possibility of reduced claims due to these systems. One insurer representative from the Big 5 told me that their company has forecasted over a 50 percent reduction in claims over the next 10-15 years due to this technology. This isn’t around the corner, mind you, but it is on the horizon. With fewer and fewer cars to fix, certainly this will have a major factor in the consolidation portion of the collision repair industry.

About the Author

Lou Berman

Lou’s career in the collision repair industry began with Collision Care. Starting at the bottom, Lou has served in practically every capacity within the company, from estimating, to sales and marketing, to customer service and production management. Lou’s area of expertise is wide ranging within the sales and marketing field. Lou has traveled the country consulting in the automotive industry and is a sought after columnist and speaker. 

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