The profit potential for the collision repair business is huge

When Baxter Auto Group of Omaha, Neb., realized it could not run its collision repair business as profitably as local independent competitors, the company, with 15 stores in three states, sold its three body shops.

Conversely, the managers at Bowman Chevrolet, just north of Detroit in Clarkston, Mich., evaluated every part of their store's collision repair business then decided to invest in growing it.

When it comes to playing their cards with body shops, dealers face more choices than just hold 'em or fold 'em.

Though Baxter no longer fixes accident- damaged vehicles, it still has a winning hand in the collision repair business. The company is making more money than ever from collision repair in an arrangement that just may be the template for dealers struggling to operate their own shops.

Baxter sold a majority stake in its collision repair business to a local rival and now derives profits selling repair parts from its former shops. It also frequently provides technicians to carry out complex repairs and calibrations to work on advanced electronics.

"One of our largest wholesale customers in town is an outfit called B Street Auto Body," Kevin Quinn, Baxter CFO, told Fixed Ops Journal. "We've known the family for years and they have wanted to buy our body shops for years. We said, 'We don't want to sell. We'll buy your body shops,' because that's the typical dealer ego, right?

"We finally agreed to combine our entities. They know how to run body shops. They know how to get that throughput and meet customer expectations to deliver that experience we just couldn't."

It's easy to see why dealers such as Bowman are doubling down and staying in the collision repair business. The profit potential is huge.

The average insurance company-paid repair ticket in 2021 rose for the 12th straight year, to more than $3,700, according to CCC Intelligent Solutions, a collision repair industry consulting firm in Chicago. If a shop nets 15 percent, that's $557 profit per repair ticket — far higher than what most repairs in the service department generate.

Despite the potential for making money, the number of dealerships operating a body shop continues to fall.

Last year, AutoNation, which ranks No. 1 on the Automotive News list of the top 150 dealership groups in the U.S., sold around a dozen of its shops and now sells parts to those shops as well as refers customers there for accident repairs.

In 2022, according to the National Automobile Dealers Association, 35.7 percent of franchised new-car dealers are operating on-site body shops. That's a drop from 39.2 percent just five years earlier.

It's easy to see why.

Worker shortages caused by the pandemic and increasing insurance company bureaucracy are exacerbating issues that have long challenged dealership-owned body shops.

Collision repair complexity brought about by the proliferation of electronics is growing. The shortage of body shop technicians, estimators and managers is increasing. Capital investments in new equipment and extensive training in the era of electric vehicles and advanced driver-assist systems are rising. These and other factors have some dealers in the collision repair business heading for the off-ramp.

David Roberts, managing director at Focus Advisors, a San Francisco merger and acquisition firm specializing in the collision repair business, predicts more dealers will follow Baxter's path and partner with strong local multiple-shop operators. He believes many of those dealers can be more profitable by turning over collision repair to companies whose only business is fixing wrecked vehicles.

Roberts' company is working with several dealers who are selling their shops. He says most dealers — unlike Baxter — have not retained an interest in the shops they've sold.

In a white paper on the issues facing dealer-operated body shops, Roberts says dealers who exit collision repair can see their fixed ops profits increase by:

• Converting body shop space to service bays.
• Increasing parts sales to the multiple-shop operators they partner with.
• Offloading recruiting, training and certifying body shop personnel to the partner.
• Charging rent to the partner if the body shop remains housed in dealership facilities.

Roberts' message to dealers, especially those with just one store, is to commit to operating their collision repair businesses as efficiently as the national chains and strong local competitors or, like Baxter, find a local partner to operate the shop.

"Dealers have a choice," Roberts wrote. "Step up, invest and perform at the level of competitive consolidators and [multiple-shop operators], or step back and realize improved operational and financial benefits by selling their shops."

Susanna Gotsch, senior director, industry analyst at CCC Intelligent Solutions, a Chicago automotive repair software firm, says the increasing complexity of automobiles will require dealers who want to remain in the collision repair business to increase their investments in people, equipment and facilities to repair wrecked vehicles efficiently and properly.

"About 85 percent of 2021 model year vehicles are minimally equipped with front automatic emergency braking," Gotsch told Fixed Ops Journal. "So, the tools and the training needed to repair even the most basic vehicle is dramatically more high-tech than what it had been even just a few years ago.

"You are going to have vehicles that require things like scanning and calibration, and there are the checks of those repairs that require significant investments in real estate because you have to have a lot of space around the perimeter of the car. So, this is one of those types of investments that requires an all-in. If you are going to do it, you have to make the proper investments," she says.

Earlier this year at Bowman Chevrolet, Rhonda Jensen, the store's general manager, looked at options for the dealership's collision repair business. "I could make a case for keeping it and I could make a case for partnering with somebody," Jensen says.

In the end, it was the store's relationship with its customers that convinced Bowman to invest in its body shop.

"Because of our customers, wanting to keep them under our umbrella and really make a positive experience for them, we chose to keep ours open at this point," she says. "Our customers know that if they get into an accident, they can call somebody they know and trust. They've built a relationship with their salesperson and their service adviser, who'll get them into the body shop."

But she acknowledges there have been disruptions in the last couple of years, such as parts and technician shortages and supplier issues that have made collision repair more challenging.

Jensen says the store now has a strategy aimed at solving one of the most pressing issues facing all body shops — recruiting technicians and painters.

"In service, we have a trainee with almost every tech. Now we are putting trainees with the body shop techs," she says. "We are aggressively growing our own."

Mike Anderson, owner of Collision Advice, says Bowman is making smart decisions.

"For dealerships, their knowledge base is more on the sales and service side — and a body shop is not really their area of expertise," Anderson says. "But getting out of collision repair is a huge mistake. Dealers should embrace collision repair and educate themselves on how to run that business.

"It's a huge opportunity," he adds.

Anderson says automakers will drive collision repair business to dealerships by using the data they collect from vehicles through such systems as General Motors OnStar service, which can automatically direct a wrecked vehicle to a certified GM dealer for repair — a notion echoed by CCC's Gotsch.

Other reasons to stay in the collision repair business, he says, include:

• Consumers trust dealers to fix cars more than they do independent shops.
• 43 percent of vehicles brought in for regular service need some kind of bodywork.
• Collision repair helps dealers protect their brand by not sending customers elsewhere to get their vehicles fixed.

Most dealership and independent body shops are booked from two weeks to four months, he says, and even a small dealership collision center could easily book $3 million to $4 million in annual sales, with gross profits of more than 40 percent and net profits of well-run shops hitting 15 percent.

Each dealership has to make its own decision on how much it wants to invest in collision repair to chase those profits, consultants say.

After years of struggling, Baxter finally turned around its body shops and made them profitable, Quinn says. But the net profits were still lower than Baxter's competitors.

"We were watching the industry statistics on body shops and we were missing about 5 percent net," he says. "We were netting about 10 percent. If you look at body shops, they usually do between 12 and 17 percent.

"So, if we are doing 10 percent, 15 percent to 17 percent is about a 50 percent difference in the bottom line," he adds.

Because Baxter owns a percentage of the three shops it sold, the group's net profits from collision repair are higher now than before it sold, Quinn says.

"We don't have the headache," he adds, "but we're getting more income from these stores than when we were running them."