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Collision Repair Centers Present Big Opportunity For Dealers

Lucas Deal November 15, 2012

Proper people and processes can lead to big profits.

By Denise L. Rondini, Executive Editor

drondini@randallreilly.com

Only about 20 percent of truck dealers currently operate collision repair centers, according to Mark Martincic of KEA Advisors. Another 10 to 20 percent do some parts replacement and collision work in their mechanical shop, but sublet panel and structural repairs along with paint work.

            While statistics do not seem to be available on the market size for only heavy-duty vehicles, Martincic says there are approximately 13,400,000 vehicle crashes in the U.S. each year that generate  almost $29,125,000 of repair work. There are approximately 52,000 collision repair center so the potential volume per shop is 4,400 repairs or $565,000. Of that, insurance companies pay approximately $23.8 billion.

            Survey results show that 41.1 percent of collision parts are replaced with OEM parts, 25.4 percent of damaged parts are repaired, 17.9 percent of damage parts are replaced with aftermarket crash parts and 15.6 percent of damaged parts are replaced with salvage parts.

            The bulk of sales volume in a collision repair center comes from parts (37 percent), followed by refinish work (31 percent), metal labor (22 percent), structural labor (5 percent) and sublet work (5 percent), according to Martincic’s research.

            While it takes a lot of work to open a collision repair center there are many  benefits to doing so: improved fixed absorption, improved customer relations from being a full-service dealership, increased parts sales through the body shop, more sales leads for new or used trucks sales resulting from heavily damaged or totaled vehicles. In fact, Martincic says in dealerships with body shops, fixed absorption is 19.4 percent higher than in dealerships without body shops.

            “If a customer goes to a competitive dealer for collision work you lose the parts sales and if he goes to an independent there is no guarantee that you will get the parts sales. The biggest reason to offer collision repair is that it keeps the customer in your family rather than allowing him to go  somewhere else.”

            The parts to labor ratio in the collision repair center is one to one, he says. And every dollar of parts sales can equal 30 percent gross profit, while every dollar of labor sales can equal 75 percent.

            But there are also some significant challenges to operating a collision repair center, according to Martincic. “This includes environmental regulations, equipment needed, training, quality management, and most important, expertise in developing an effective business plan and operating process.”

            Before deciding to add a collision repair center, dealers need to determine if they have economical bay space available and qualified managers to run it. “They also need to do some market research to determine the need and project potential volume and gross sales,” he says.

            Dealers need to be aware that the hourly rate for collision repair is usually lower than that in a mechanical shop, but the amount of hours and the proficiency numbers should be higher. “The proficiency rate for a mechanical shop is 95 to 100 percent,” Martincic says, “and the guide for a collision repair center is 150 percent or more.”

            Once a dealer decides to proceed he should keep in mind that “a well-run collision center can produce more gross profit per square foot of bay space than a service department bay,” Martincic explains. “However, the biggest reason for lackluster sales and gross profits in most dealership collision centers is lack of an effective, efficient repair process and a lack of well-trained collision center management.”

            Dealers often will take a good technician or foreman and make him the body shop manager without giving him the proper management or sales training he needs to effectively run the operation. “Yet [these managers] often are responsible for a department that produces hundreds of thousands of dollars in labor sales and matching parts sales,” he says.

            The collision repair manager needs to understand that he is serving two customers — the vehicle owner and the insurance company. “The perception is the insurance companies manage and control times, rates and parts pricing, similar to what warranty does for a mechanical shop,” Martincic says. “Dealers don’t feel they have control, but in reality they do have control. There are laws in place to give them control, but without management knowing how to negotiate those deals, where to stand their ground and when to let something go, they may not be profitable.”

            There are guides available, which provide times for collision work, but Martincic points out that those guide usually cover the time it takes to replace a part, not the time it might take to repair the part.

“When you get into the repair side of it, when you are repairing a panel or a frame, the time is negotiable so you need to negotiate it,” he says.

            The marketing of a collision repair center also is different because the dealer needs to reach not only the truck owner but also the insurance companies who often determine where a vehicle will be taken for a repair. “Since insurance agents are the ones who steer work to you, so you need to build a relationship with them that is based on solid business practices and warranties, etc. so they are more likely to recommend your shop,” Martincic says.

            You also need to promote your services to your customers. You should do that at the time you sell them a truck just as you would introduce them to your service department.

            If you already are operating a body shop but it is not as profitable as you would like it to be, Martincic suggests you take time to “map your customer handling and production process. Compare it to best practices and then develop your gap analysis and action plan for improvement.”

            There are many sources of information available to assist dealers including: The Collision Industry Council, The Society of Collision Repair Specialists and the Industry Conference On Auto Collision Repairs.

            “As with any initiative, be sure you have real accurate metrics in place to measure real results of your efforts. Some of the more common daily and weekly key performance measures include: technician proficiency, effective labor rate by category, estimate close rate, estimate supplement rate and customer satisfaction and retention,” he says.

Important Goals & Guidelines

Martincic provides the following benchmarks for a successful collision repair center.

  • 25 percent cost of sales (100 percent of total labor sales minus labor gross profit percentage)
  • 30 percent personnel expense (Total personnel expense divided by total labor sales)
  • 15 percent semi-fixed expense (Total semi-fixed expense divided by total labor sales)
  • 10 percent fixed expense (Total fixed expense divided by total labor sales)
  • 20+ percent net profit on labor sales (Net profit on labor sales divided by total labor sales)

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