Has
Collision Hit The Wall?
For
years, there have been the prophecies. Judgement Day. The collision
repair business eventually to be hit hard. Too many shops. Too little
demand. Backyard operators offering cut rates. Insurers demanding
discounts. A labour crisis. Industry indicators that seemed primed
to destroy the business. And then it happened. Nobody can identify
the exact day. But sometime this past winter, business slowed. To
a grinding halt for some. A considerable drop-off for others. And
while collision repairers are not closing their doors en masse,
everybody is wondering what happened. The industry downturn was
not supposed to happen so fast. It was supposed to be gradual. Perhaps
the biggest question facing our business today: Has the collision
industry hit the wall?
These
are strange days. And what is particularly strange about them is
that despite the industry forecasting a coming downturn, nobody
quite knew it would come the way it did.
In
years past, astute collision repair observers envisioned a day when
oversupply would catch up. Small shops, the legend went, would be
cast aside. The labour crisis would cease, as the closure of many
smaller shops would put new journeymen into the free agent pool.
Businesses would disappear overnight. Door and material rates would
increase to adequate levels as insurers finally had to compete for
shop attention.
If
today is, in fact, the coming of this prophecy, then it has not
happened the way we imagined. But something has happened. And it
is a wave of change that seems to be engulfing the industry quicker
than anyone could have predicted.
Coast
to coast, but particularly in private insurance provinces, business
has not just slowed down. In some shops, it has stopped altogether.
Shops that were feeling good about their prospects a year ago are
wondering whether they will survive the summer. And even shops that
have yet to experience a serious reduction in business cautiously
wait to see if next month will be a disaster.
Or,
as Victor Marciano, executive director of the Alberta Service &
Repair Association, aptly puts it: "70% of the shops are slow.
30% are moderately busy. And each month, you never know which shop
will fall into which category."
REDUCTION
OF BUSINESS
There
are not many statistical indicators to prove business is slow. Despite
the array of numbers that comprise the collision business, few are
publicly available. And while shops are willing to share their experiences,
they are understandably less interested in opening their books.
But
anecdotally, shops are feeling the heat.
"Usually,
winter is my big money maker," says Ralph Paolini, vice president
of Stoney Creek, Ontario-based R&R Collision. "But not
this year."
Rick
Whitty, owner of Airdrie Autobody, in Airdrie, Alberta, believes
business has been down 10% since the start of the calender year.
"There was nothing to prepare us for the slowdown. It just
came."
A
medium sized east coast shop that asked not to be identified noted
that the winter came, and no business came with it. "The weather
was so bad, nobody drove. Now that the winter's over, the business
hasn't come back. And I don't know when it will."
Dave
Fox, owner of Crowfoot Image Auto Body, in Calgary, Alberta, says
his business has been steady. Still, he has heard the despair of
other shops in the region. "I've spoken to a lot of people
who are seeing business edge off. And there are rumours that a lot
of big shops are laying people off."
Lorenzo
D'Alessandro, general manager of Toronto-based 427 Auto Collision,
has not fired staff because of the slowdown. Still, in these depressed
times, he says he's reduced employee hours from 43 hours per week
to 40.
"Our industry has experienced steady growth for the past 15
years. This is the first time we've seen a decline in the marketplace
that's lasted for more than five months."
Some
shops, like Crowfoot, have not experienced a dramatic fall-off.
Still, Marciano's 70-30 dice-roll split seems to be affecting most
shops. "If you start talking to anybody about their April performance,"
D'Alessandro remarks, "most shops wish they could take it off
their books."
Two
shops contacted, both asking to remain nameless, were silent when
asked about their future prospects. One is currently questioning
whether to stay in business through to the end of the summer. "I
know other guys that are like me. They are waiting to see business
pick up. By my stalls are empty. I've got no business. If I wait
until next winter, maybe things will be different."
Ken
Friesen, president of Concours Collision Centres in Calgary, sums
it up. "Business is slow. And it's happening right across the
country. I've talked with friends in the United States, from Los
Angeles to New York. Everywhere I'm hearing it's slow."
But
is this condition the playing out of the Judgement Day prophecy?
And, yes or no, why now?
ECONOMY
AND ENVIRONMENT
Careful
examination of the variables causing current economic disruption
to collision repair would suggest we have yet to see Judgement Day.
The causes of today's downturn are the result of four external variables
that, despite extraordinary odds, are simultaneously aligned against
collision industry prospects.
Simply
put: The reason for the current depressed market is an amalgamation
of everything that could possibly go wrong at the same time:
1.
THE ENVIRONMENT
Traditionally,
the busiest season for collision repair are the winter months. Unfortunately,
due to global warming, winters in Canada are becoming rather balmy.
This
past winter was the 16th warmest winter since 1948. It would have
ranked higher but the Maritimes and Ontario had unseasonably wild
weather --still, too much snow meant not many people drove anyway.
The rest of the country experienced a winter that was 3C higher
than normal.
To
put further context on where we're headed, the five winters before
this past winter had been among the top ten warmest winters since
1948. So mild winters are not expected to dissipate any time soon.
Strange
days: Where the winter weather was good, people were not getting
into accidents. Where the weather was horrible, people were not
even getting into their cars.
2.
INSURANCE PREMIUMS
Premium
rates in private insurance provinces are among the highest ever.
Consumers are afraid to file claims.
One
repairer relates a story where a customer was rear-ended, and not
at fault. The customer paid for her own repair because the person
at fault could not afford to. Neither individual wanted to file
a claim -- fault or not.
Another
shop contrasts figures from October to March of this year and last
to illustrate the shift away from insurance pay, and its affects.
From October 2002 to March 2003, he says, customer pay and fleet
work represented 27% of business. From October 2003 to March 2004,
customer pay and fleet work rose to 41% of total work. To put this
into greater context, the shop owner points out that the average
severity of customer pay/fleet work is
$760 plus taxes. The average severity of his insurance work is $2650
plus taxes. Take that to its logical outcome and it is clear that
every percentage point reduction in insurance pay work results in
many dollars that are disappearing from the books.
Thus,
the reduction of insurance pay has had a dual affect. There are
less claims to go around. And the average repair is lower because
consumers are less inclined to restore their vehicle to exact pre-accident
condition.
"I
had one customer," says Paolini, "who had an at-fault
accident on his record. This year, he got T-boned. His broker advised
that he should pay the claim out of his pocket -- even though it
was not his fault -- because this coming year his insurer may drop
him. So, from a potential $8000 job, I just hang the door and it's
down to $2000. I just lost six grand."
This
scenario is playing out across the private insurance spectrum. Information
provider stats corroborate the experience. According to Mitchell
International's Spring 2004 Industry Trends Report, average severity
on insurance claims is up to $3196 in the first quarter of 2004
from $2999 in the first quarter of 2003. This nearly 7% increase
reflects the fact that
many lower-costing repairs are not being put through insurance.
The
rumour mill also indicates that industry stakeholders are experiencing
this trend. One insider says that a major online claims service
has seen a reduction from 1500 claims processed daily to 1000. And
while certainly, many of these online claims are reverting to consumer
pay, some are no doubt falling through the cracks. One thing's for
sure: The claims reverting to customer pay are definitely not as
big a job as insurance pay.
3.
GAS PRICES
Better-than-average
winter temperatures. Insurance premiums scaring consumers away from
filing claims. So what happens next? Gas prices reach record levels
resulting in some people contemplating parking their cars altogether.
From
his office, D'Alessandro can see the QEW, a major highway vein that
links downtown Toronto to Hamilton, Niagara and abroad. "Since
the gasoline prices started to escalate," he says, "there's
been about 25% less traffic on the road. The QEW always used to
be backed-up. I haven't seen a back-up in about a month."
What
he has seen are cars with more people in them. The immediate affect
of gas price increases: Less cars on the road. More car-pools. Less
accidents.
4.
LOW INTEREST RATES
But
when a consumer does get a dent, insurance is not the only element
holding them back from getting a repair.
D'Alessandro
points out that the current low interest rates -- which have extended
far beyond what was originally prognosticated -- are having a significant
affect on where consumers spend their money.
"Low
interest rates (and the low cost of borrowing money) result in consumers
shifting their priority toward purchasing houses and condominiums,"
he says. "The majority of disposable income then goes toward
furniture, landscaping ... anything that has to do with the house."
In
the low interest rate market where big expenditures go toward the
home investment, the theory goes, there is less disposable income
to put toward cars.
This
has been reflected, D'Alessandro adds, in a current reduction of
new car sales by 10% to 15% in Ontario. And it is also seen, alongside
the insurance dilemma, in more cars being driven around with dents
and dings on the body.
ECONOMIC
OUTLOOK
All
four of the above variables -- unprecedented in that they've never
occurred to such degrees at the same time -- have resulted in the
collision slowdown.
D'Alessandro
estimates the industry has seen a business drop-off of 20% the past
three months. He believes business will reduce another 25% in the
next few months.
He
is not alone in his outlook.
Marciano
agrees that all four of these variables are playing a role. But
he contends that the insurance premiums are the biggest factor.
"This might be a chronic condition until the insurance situation
is worked out."
He
adds that the current economic environment has lead shops to fight
tooth and nail for rate increases by the penny -- where in the past,
it would be for the dollar.
Friesen
believes that the current downturn is a result of an industry that
must evolve. "I think this change has been a long time coming.
And I think there is still going to be a big fall-out. My personal
opinion is that the day we've been talking about for a lot of shops
to fall off is here and now.
"It
is a righting of the industry," he adds.
LESSONS
FOR THE FUTURE
So
what now?
Some
repairers believe the current drought is a herald toward new ways
of conducting business.
Mark
Timson, owner of Ken Timson Auto Body in Caledonia, Ontario, says
that the current market demands that repairers provide more options
to consumers. "When a customer pays, it is no longer a five-minute
estimate," he explains. "Now, I'm spending 20 to 30 minutes
with the customer. I'm sending them home with three estimates. What
the customer can afford to pay for, that's what I can do."
Timson
has not felt the heat of the current slowdown. Business was slow
during winter but during the past month, it has picked up. Still,
he and others agree that shops must always do a complete, safe and
quality job while offering different tiered options. In other words,
find a way to make the repair price tag palatable so that you won't
lose that consumer to a
shop down the road.
D'Alessandro
agrees with providing an estimate tailored to the exact needs and
wants of the customer. He also believes that business will go on.
In fact, plans that began last year to add 7000 square feet to his
operation are underway. The current downturn will not deter expansion.
"In
fact, I'm putting more money than ever into advertising," says
D'Alessandro. "When the market isn't good, that's when you
need to market your business."
Friesen
is using the current slowdown to work on new efficiency. "This
is a great opportunity to continue to work on new processes. To
figure out how to get better," he says. "The insurance
industry is going toward a performance-based model. We're going
to have to figure out better ways to turn out cars. Faster and cheaper."
Many
shops believe the market will bounce back after a slow summer season,
as autumn turns to winter. Others believe than when one or more
of the four variables change, the industry will turn.
It
could be a hot and dry season for collision. But as conversation
with both shops and suppliers has indicated, it is not just the
small that are being hurt. Everybody hurts. The leveraged -- big
and small -- more than most. Now it is a matter of bearing down,
of creating better efficiency, of recognizing the need to create
an even more compelling value proposition for customers and insurers
that are directing even less work.
But
above all, and while doing the above: Wait out the storm. Because,
in time, this too shall pass.
(with thanks from Lowell Conn, Editor, BODYSHOP magazine)
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