Consolidation to continue in aftermarket

The auto repair industry, and the collision repair segment specifically, will continue to contract as consolidators and franchise operations continue to gobble up competitors in major markets, fueled by private equity. The FOCUS Automotive Services Group hosted a webinar titled "Consolidation Trends in the Automotive Aftermarket Industry" on July 21 to discuss these trends.

Major structural changes that affect OEs, parts manufacturers, aftermarket parts suppliers, insurance companies and investors are fueling these changes. There has been significant consolidation among rental car companies, glass companies, aftermarket parts suppliers, data information providers, paint/body/equipment companies, and a number of private equity acquisitions.

"On the insurance side, more than half of all auto insurance is handled by five companies," says Vincent Romans, founding partner at The Romans Group. "The top ten insurance companies have increased their market share by 10 points in 13 years, and State Farm and Allstate alone have 30 percent of the market."

The collision industry is a $31 billion market that is seen as a strong investment opportunity by equity investors, despite the market challenges faced by shops. With the number of vehicles on the road increasing, and the average age of vehicles climbing, the aftermarket repair sector is seen as a segment with steady growth potential in the coming years.

According to Brian Devening, vice president of business development at The Fred Jones Companies, manufacturing trends will have a major impact on the collision space, as more OEs are implementing expensive technology and new materials like high-strength steel and aluminum into vehicles. The new CAFE standards are responsible for many of these changes, which center around light-weighting the vehicles.

"A lot of those changes will have to be absorbed in the parts manufacturing supply chain, in delivering services, and in repairs," Devening says. "A lot of this will be taxing financially and technically on smaller operations. We'll see a lot of private equity money go into the collision repair space because there will have to be investment to match up to the new products and new cars coming off the line."

Shops will likely need to have separate equipment for both steel and aluminum-frame vehicles.

"The entire repair scenario is being changed, and lot things are still unknown in terms of what types of adhesives should be used, and how to bond these parts," Devening says. "The service scenario hasn't been entirely thought in many cases, because the priority is to reduce weight in the vehicles."

While steel manufacturers are trying to compete with lighter weight steels, Devening says the manufacturers will continue to reduce the amount of steel in the vehicles. "Once a major OE goes in, as Ford has, and completely outfits assembly lines for a new material, that's a hard change to move back from," Devening says. "The trend is running away from steel, and the steel industry will have to come up with something with the lowest cost and lower weight, better repairabilty, and better characteristics across the board."

Collision Industry Shrinking
It's a much smaller collision repair market than it used to be, in terms of the overall number of shops. That $31 billion in revenue is split among 34,000 shops. Around 27,000 to 28,000 of those shops are independent operators or smaller, regional MSOs. Four major consolidators (ABRA, Caliber, Gerber, and Service King) generate nearly $2 billion in revenues. The rest of the market consists of around 160 MSOs with greater than $10 million in revenue, 24 dealer MSOs, and the four multi-location networks (CARSTAR, FixAuto, MAACO, and ABRA franchisees).

The industry has lost about 18,000 shops over the past 20 years, according to David Roberts, managing director of the automotive group at Focus Investment Banking. Another 19,000 may disappear by 2030.

There are fewer collisions, repairs are more expensive, and the number of totals is increasing. "That has left owners uncertain and afraid, and the industry is wondering how many shops we really need," Roberts says.

Insurer DRP networks are also tightening. State Farm, for example, has around 10,000 shops in its network; Geico has fewer than 1,400. "Everyone is contracting because they want to send more cars to fewer providers," Roberts says. "Insurers also drive contraction by having very strict KPIs. That creates higher demand for skilled managers and the investment in equipment. It keeps upping the game and making it harder for individual shops to keep up."

The big are getting bigger, in other words, and insurers are rewarding those larger networks with more business, which improves margins and fuels additional investment.

Smaller shops and MSOs are putting themselves up for sale, and consolidators are buying at a rapid clip, armed with private equity cash at a time when the cost of capital is lower than it has been in decades.

But the consolidators are focused on the top 125 markets, and not all of those are as "consolidated" as others. As an example, Roberts cites Denver, where a handful of consolidators and MSOs control most of the market. Compare that to Philadelphia, which still has more than 600 independent shops. "Chicago has also had a number of transactions, but it's barely made a dent in the total volume there," Roberts says.

There are gaps where smaller shops can thrive, Robert says. "In rural markets, there is more opportunity to grow as an independent," Roberts says. "We won't see the big consolidators go into the sub-125 largest MSAs for years. And if you are specialized in high-end vehicles or aluminum, or you do restoration work, you can maintain your business in those larger markets, too."

Challenges to the market will include competition from low-cost foreign parts suppliers, increasing competition from OEMs who are creating more proprietary processes and materials to drive repair work into their own dealerships, and direct-to-consumer parts sales.

The need to invest in new equipment will also drive many repair shops out of the market. For MSOs, there are also risks in that insurers provide no long-term commitments and may in fact use their market share to gain more concessions from the repair networks they work with.

You can hear a replay of the webinar here.

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