During a recent SCRS seminar at SEMA 2016, Brad Mewes began his presentation by asking a room full of body shop owners to think back a decade ago when there were just a handful of consolidators in the industry, such as Caliber.
“This was a time of much uncertainty in the collision repair industry and a time when the power of the independent was very strong,” said Mewes, founder of Supplement, a company that specializes in strategic advisory services to the automotive aftermarket.
“But there were changes that were happening in the industry.”
He recalled attending a meeting at that time when businesses came together to discuss how to compete in an environment that was consolidating around them. He remembered one of the successful business owners saying that if you ever suspect auto body to be run like Wall Street, you are going to be waiting a long time.
Fast forward 10 years and the largest four collision repair operators in the United States are all run like Wall Street companies and backed by some of the largest, most prolific private equity groups in the world, said Mewes. The Big Four include ABRA, Boyd (Gerber), Caliber and Service King and own more than 1,400 locations combined.
Mewes said that from the end of 2011 to year-end 2015, the Big Four have collectively tripled in size. Service King, the fastest growing of the four, increased in size six-fold. In the first three months of 2016 alone, the top four consolidators added nearly as many locations as they added in all of 2012. “They have clearly become experts at identifying, acquiring and integrating repair facilities. This is significant because how they are doing business is different than the way we might be doing business,” Mewes told attendees.
Meanwhile, private equity firms are investing in the body shop industry due to its scalable platforms and backable management teams where they believe there is substantial revenue and margin benefits from consolidation, said Mewes.
These trends seem to be here to stay. “They aren’t going to change; they are only going to continue,” he said.
So how is it possible to compete in such an environment? Mewes shared five ways shops can make more money and outdo their competition in 2017:
Organic Growth
With this model, Mewes said generally speaking, there is a potential to grow your business five to 10 percent annually. Some of the advantages include diversifying your customer base and increasing your contribution margin. However, he said there tends to be a maximum amount you can grow. “One of the bigger challenges growing organically is you can only grow so much before you run out of space. Additionally, as you grow organically, you have to continue to invest in staff and working capital,” said Mewes. “An ongoing investment is required.”
Efficiency and Cost Reductions
In terms of opportunities, Mewes said that shops can improve both gross margins as well as operating margins. “Buying right, minimizing waste, and increasing throughput are all ways to increase efficiency and boost profit,” said Mewes. “But there is a natural limit to this growth and margins can’t increase indefinitely. In other words, you can only sharpen the knife so many times.”
New Development
New development is generally a low-cost option for businesses that want to expand. Mewes said the new shop can be used as a training facility to educate employees until operations ramp up; usually over 18 to 24 months. If shop owners invest a substantial amount of money into the business, they must finance the development over this time, as well as pay their employees during the ramp up phase. This can be a costly proposition as the shop gets up to full steam, and it is important to plan accordingly.
Acquisitions
Many in the industry consider this a risky option; however, Mewes said there are advantages to making an acquisition. Not only can it diversify your risk, the business is already in place with employees, a customer base, insurance cash flow, revenue, etc. “Generating cash flow from day one makes it more attractive and manageable to grow,” said Mewes. However, acquisitions can be very complex and often require a substantial financial commitment.
Culture
Mewes said that the biggest advantage independent collision repairers have is the ability to drive culture. Although large companies in this industry spend a lot of time and money on developing a culture and education, he said it’s one of the biggest challenges they have because they simply cannot touch every employee in the organization. “The ability to drive culture is really one of the differentiating factors that a small organization can leverage and has to leverage in order to grow aggressively,” said Mewes. “Because you are a smaller operator, you can be flexible in a way that a larger operator can’t.”
As the industry continues to change and evolve, Mewes said there is still opportunity for independent shops to grow. “There are investors who want to invest in companies that are growing and expanding. It’s a huge opportunity,” he said. “In a consolidated industry, you effectively have one choice: grow fast or be acquired!”
This article is based on an SCRS seminar during SEMA 2016.
Stacey Phillips Ronak