Top body shop consolidators step up competition with dealers

The four largest body shop consolidators have quietly continued to grow, and appear poised to play a bigger role in the collision repair industry — and compete more aggressively with dealership-owned shops — as the cost of doing business climbs.

Because three of the Big Four consolidators — ABRA Auto Body & Glass, Caliber Collision and ServiceKing Collision Repair Centers — are owned by private equity firms, they provide only occasional basic information about the numbers and locations of their shops, little about their strategies and none about sales or profits. That makes it hard to gauge who's moving ahead in the game of body shop acquisition.

The fourth consolidator, Boyd Group, is more transparent because it is traded on the Toronto Stock Exchange. Boyd, which operates Gerber Collision & Glass stores in the United States, issues quarterly and annual reports that give clues to where analysts say the collision repair industry is heading.

The big consolidators are likely to get bigger because they have the means to invest in new equipment and training and earn repair certification by automakers. They are forging stronger partnerships with insurers and some new-vehicle dealerships to provide collision repair.

The major consolidators also will pose a greater threat to dealerships that retain body shops but don't invest in and cultivate their collision repair operations, says Brad Mewes, principal of Supplement Advisory, a consulting firm in Irvine, Calif.

Mewes says the four major consolidators have the capital and scale to overcome the headwinds that face the industry: fixing vehicles packed with advanced driver assistance systems, meeting automakers' certification standards and regulators' stiffer environmental rules and dealing with greater legal liability. That gives them the chops to compete head to head with dealerships, he says.

"This is an industry whose cost structure is going to continue to increase," Mewes told Fixed Ops Journal. "It will become more difficult for smaller operators to compete in that environment, because the larger companies are going to have an investment advantage."

Companies such as Boyd and Caliber, as well as large dealership groups such as AutoNation, "are investing in certification and OEM relationships and making all the investments now so that five or 10 years from now, they have an established network they can leverage," Mewes adds.

Boyd has a goal of doubling its revenue from nearly $1.2 billion Canadian in 2015 to more than $2.3 billion ($1.8 billion U.S.) by 2020. Achieving that target will require annual growth of 15 percent and hinge on a stable currency exchange rate, the company says,

Part of Boyd's strategy is to build more relationships with insurance companies for direct repair programs. Five of the largest U.S. auto insurers — Allstate, Farmers, Geico, State Farm and USAA — generate 44 percent of Boyd's revenue.

Boyd also plans to invest heavily in new equipment and training, earmarking 1.6 to 1.8 percent of its revenue this year for capital expenditures, including equipment, technology and acquisitions. Boyd reported 2017 sales of $1.57 billion Canadian ($1.2 billion U.S.).

"Emerging vehicle technologies will require new, specialized repair equipment as well as greater information technology requirements," Boyd CEO Brock Bulbuck said during an earnings call. "We expect that many other collision repairers will not be making these investments."

Mewes says capital is "really driving a big shift taking place in the industry. When you compare [Boyd's investment] to a smaller dealership chain or smaller independent collision repair chain, they just don't have the capital to invest tens of millions of dollars in tools and equipment," he says.

Like the other consolidators, Boyd also is building partnerships with new-vehicle dealerships to provide collision repairs. Boyd opened two dealer service centers in the Chicago area in the first quarter, its first in the United States. Boyd's Assured Automotive has 33 such centers in Ontario.

Customers referred by dealers take their cars and trucks to the centers, and the vehicles are then sent to a Gerber repair operation geared to fixing their brand. Other consolidators operate similar service centers. Bulbuck wouldn't say how many more Boyd plans to open.

"It is a highly competitive area of our business, and we don't want to provide extensive commentary on the nuts and bolts of that strategy," he said during the earnings call. "We think that the dealer service center strategy gives us another tool in our toolbox for achieving same-store sales growth. We plan to continue to add more over the balance of this year."

Other consolidators have partnered with dealership groups and, in some cases, taken over dealership body shops under their own brand names.

Ganley Auto Group, which has 31dealerships in the Cleveland area, still operates seven of its own collision centers. The company sees collision repair as another way to keep customers in its family.

"We don't want to send our customers to any other facility for any reason," says Bill Housholder, Ganley's fixed operations director. "Once you send a customer somewhere else, they're likely to continue doing business with them. We want all of our customers' collision work in the Ganley organization, and we also want to keep all of our service customers in our dealerships."

When a customer asks about collision repair at a Ganley dealership that doesn't have a body shop, Housholder says employees follow a simple strategy: "The ones that don't refer them to the ones that do."

Those customer referrals from Ganley's Ohio dealerships, which sell nearly 20 vehicle brands, help keep the shops busy, Housholder says. But the bulk of the business comes from direct-repair relationships with insurers, which he says have been cultivated over decades and are key to a profitable operation.

"I don't think you can run a collision center strictly on referrals from your own store," Hous- holder says. He estimates that 60 percent of Ganley's collision work comes from direct repair and 85 percent overall from insurance work.

"You've got to have direct repairs and insurance business, and if you don't, you're probably not going to survive," he says. "There's a certain amount that you can do based on your reputation, but the insurance companies really control the business."

Housholder says the big consolidators are well-managed, formidable competitors, but he notes that dealership groups such as Ganley have advantages. One is the loyal base of sales and service customers from which they draw business. Another is their close ties to automakers.

"We have direct access to all the manufacturers on their technology and how to repair their vehicles." he says. "We don't have to go through third parties like I-CAR and others. For example, we have to run different tests after repairs to make sure we haven't triggered any sensors, and we have all that technology in house."

Ganley is adding 20,000 square feet to a 10,000-square-foot building for a new stand-alone collision center; it is scheduled to open next month. Housholder says the new building "will cost in excess of seven figures" and that Ganley is committed to staying in the body repair business.

"As long as it's a viable business, we're going to continue competing in it," he says. "If it starts to slip, we're going to try to find ways to make it better and streamline our operations. You have to be the best of the best, or [customers will] go somewhere else. There are too many people who want that business who don't have it."

Fewer than 40 percent of U.S. new-vehicle dealerships operate body shops. Mewes says dealers "oftentimes don't fully grasp or understand" the collision repair business. He estimates that the average body shop labor rate is $50 to $60 an hour — about half the labor rate in the service department — and dealers don't see the potential for as much return on investment, he says.

But Mewes insists "there is a big opportunity for dealerships to generate attractive returns in the auto body space."

"As the influence of OEMs continues to impact the industry, as vehicles continue to become more complex and expensive to repair, those trends are going to benefit the dealer and the dealer-owned body shop," Mewes says.

But he warns that dealers will have to put more skin in the game to compete with the big multishop operators and large dealership groups such as AutoNation and Berkshire Hathaway Automotive, which he says are investing heavily in collision repair.

"The companies that win will continue to grow and invest in their business, whether you're a large repair operator or a dealership chain," Mewes says. He predicts the collision repair industry will continue to consolidate, with fewer dominant players.

"You will probably see a consolidation of consolidators, one of the larger Big Four players merging with another one," he says. "That makes a lot of sense for a lot of different reasons."