Is Collision Repair Recession-Resistant? Part 2
Published in Hammer & Dolly – Thomas Greco Publishing
Everyone who operates a business does so with the goal of making a profit, but when economic uncertainty abounds, small business owners may worry about their ability to remain operational.
As mentioned in the May edition of Hammer & Dolly, the auto body industry may be a bit more recession-resistant than other businesses, providing shops with a chance to take advantage of different opportunities that others may not enjoy.
What exactly makes this industry so much more fortunate than most? To begin with, though many consumers drive less, Americans continue to rely heavily on their personal vehicles, and the combination of inflation and increasing interest rates have created a situation where buying a new (or even used) car is largely prohibitive. In fact, 2022 ended with new car prices averaging over $48,000 with an average interest rate of 6.5 percent resulting in a $700 monthly payment! Given the economic uncertainty pervading society at large, few people seem comfortable making such a large purchase right now.
“People worry about going into debt with such high car payments being financed for long periods of time,” explains Maylan Newton (Educational Seminars Institute). “Rising interest rates also cause people to hang onto their cars longer, investing in engine replacements and major repairs to avoid a new car payment. They’re more willing to invest in what they have to avoid the hassle of buying a new car; between surcharges and premiums, some dealerships are charging more than $30,000 above sticker price! The average consumer cannot afford that and would rather repair their current car instead of going into such massive debt for six years with high rates, especially with the way they’re rushing to complete vehicles now. I expect a lot of recalls in the coming years because they aren’t taking the time to build cars correctly. It’s going to be a good couple years for repair shops because of all these reasons.”
“With new car loans averaging 77 months and 14 percent of new car loans over $1,000 per month, this is the easiest time to take advantage of the opportunities that exist in the repair world,” agrees Rick White (180BIZ). “Consumers often resist investing in repairs, but why throw a $60,000 solution at a $4,000 problem? Service advisors can sell the repair by demonstrating the cost for a new car in payments and interest over a seven to eight year note. Help them understand that their vehicle is an investment and that we’re selling the ability to get more miles out of their car. The next 10-12 years will be one of the best times we’ve seen in the auto repair industry in a long time. People will keep their cars and invest in them because they understand that’s a better use of their money. Even a $3,000 repair costs less than six months’ worth of payments!”
Shops may need to spell this out for consumers, however.
“A lot of consumers are not very intelligent about their cars,” Newton observes. “Our job is to help them understand the value of fixing the vehicle as opposed to replacing it. I use statements like ‘protect your investment’ and encourage them to make sure their car ‘lasts longer than the car payments do.’ Emphasize that neglecting to care for their car means it won’t last the length of time that they finance the car for. We have to change our mindset to focus on the customer’s needs, and that means talking less about the technical side. Instead, we need to explain how we’re protecting their investment and making it last as long as possible.”
In the collision industry specifically, a variety of opportunities arise from this decrease in the demand for new vehicles.
“Customers are more apt to fix their car instead of buying new, whether that means filing insurance claims or bringing the car in themselves,” suggests Mike Anderson (Collision Advice). “Shops are likely to see more customer pay vehicles which are usually the most profitable jobs since they mean more labor, less parts and a higher gross profit, plus there’s the added benefit of working directly with the consumer instead of a third-party payer.”
He also points out that people tend to focus on collision repairs cyclically. “As people slow down and start preparing for summer vacations, it’s likely that they’ll invest in their cars at that point to make sure they’re running properly and that they’re looking their best.”
Amid all these factors, shops focused on maintaining – or even growing – their market share may want to consider whether they are offering all the services that will help propel their business forward in the future.
“It’s important for any entrepreneur to be nimble and able to pivot and change their strategy,” says Rachel James (Torque Financial Group). “Could you market detailing services to help make that old car feel like new again? Or maybe, a conventional collision shop might consider offering some a la carte maintenance and service items to add some line items to their blueprints while creating convenience for their customers. Adding a band of business you’ve never engaged with before, such as glass repair or calibrations, could add an additional stream of revenue and more security.”
Shops that want to convince collision customers to purchase those add-ons will have more success if they’re able to establish those maintenance items as an investment.
“It truly can be an investment to the consumer, so that’s how shops need to position it,” James insists. “As a consumer who doesn’t want to spend additional money on a monthly car payment, you’ll have to accept that there will be expenses associated with maintaining that vehicle. From a shop’s perspective, it all comes down to communication, and a qualified customer service representative can effectively have that conversation to explain how maintenance prevents bigger repairs down the road and reduces the overall costs by sustaining the vehicle through some due diligence and a little TLC.”
Customer communication makes a huge difference for forward-thinking shops, especially as it relates to explaining technological advancements. “Shops should be holding car care classes to educate people and teach them how to be involved in protecting their investments,” Newton recommends. “It’s amazing how many cars we see without oil in them because people don’t even know how to check their own oil! Attend meetings of the local rotary clubs and chambers of commerce to explain how much technology exists in today’s vehicles.
“Cars aren’t cars any longer,” he continued. “Multiple systems and modules are communicating with each other electronically via airwaves. Most people don’t even know their car is hackable. We need to educate consumers so they stop learning from Google and YouTube. They think it’s easy, and then we make it sound easy by advertising prices or quoting prices over the phone. We need to educate customers and talk about how it takes special knowledge and tools to even know WHAT to fix before it can be fixed.”
White believes that advancing technology is one of the reasons that people are keeping their vehicles longer, but “as technology continues to grow, the do-it-yourself market is going to get smaller and smaller because they can’t keep up with the technology. And although there are early electric vehicle (EV) adopters, a lot of people are resistant to EVs, plus there are still enough bugs in the infrastructure that I think internal combustion engines are going to be around for a while, even after they stop being made. So, while shops need to start investing in future technology to repair tomorrow’s cars, today’s vehicles are already complex and will be around for a long time, offering plenty of opportunities for us all.”
“No one has all the answers, but I definitely believe there are lots of opportunities for our industry,” Anderson says. “This whole EV revolution provides opportunities and will likely separate some shops in a way that aluminum never did. We haven’t even scratched the surface in regard to ADAS and calibrations which will continue to grow, and I suspect more shops will embrace it and bring it in-house. COVID jump-started the utilization of some technology, but we’re not quite where we need to be in terms of researching repair procedures or utilizing software…There may even be a place for 3D printing in our industry’s future! We just need to stay open-minded and willing to accept the opportunities when they come knocking.
“Too often, we kick new software solutions to the curb because they don’t offer 100 percent of what we need, but we all need to learn to crawl before we walk, before we run,” he encourages. “Instead of penalizing them for what they can’t do today, understand that we need traction to advance along even further and consider what that software might be capable of in the future.”
Despite these opportunities, many shop owners still express fears related to rising costs, but inflation is nothing new…it happens annually or even more often!
“We have increasing costs every year, whether there’s a recession or not,” Newton points out. “Shops need to stop being afraid to charge what’s correct. Reevaluate your hourly rate every year – or preferably every quarter – and increase it as needed. Quarterly increases allow you to keep up with inflation, plus it’s easier to raise that number a little at a time instead of a lot all at once. It’s important to do the math and calculate your true cost of doing business, but understand: your hourly rate isn’t as important as your effective labor rate, which is the amount you’re actually charging based on productivity. You need to understand your numbers in order to make money, and we also need to sell value, not repairs. Sell knowledge, not what our hands can do for us. We’re selling peace of mind and safety, not just parts and labor.”
Anderson concurs that shops should be looking at their labor rates more often. “Most people do it yearly, but I recommend evaluating your cost of doing business every quarter in order to build budgets and pro formas for the upcoming year. Surround yourself with experts like your 20 group peers and other knowledgeable people that can help you better understand what expenses you should be considering and what rates you should be charging. We need to be monitoring our expenses and our overhead, especially as we look at repairing EVs due to the investment we’ll need to make in training and equipment for those vehicles. It’s a good rule of thumb to have at least six months’ of expenses saved in cash reserves; that’s the sign of a healthy business.”
White shares a similar viewpoint. “We should be watching inflation all the time because it averages around three percent each year. It’s the silent killer of profit since people don’t always pay attention, but it’s about buying power. Something that cost $100 in 2019 now costs $117. Prices go up constantly, so shops should be adjusting their rates quarterly or even monthly. Realize that these increases don’t allow you to make more money; they’re simply giving you the same buying power. And when you’re thinking about that, you also need to be giving employees a cost of living increase because if you’re worried about inflation, so are they. As the shop owner, you need to be taking care of them. No matter how hard things get, it won’t last forever. Know that it may be tough, but you can thrive if you keep a positive attitude and work smarter.”
James offers some financial advice for all business owners: “Over the next 12 months, look at your budget and develop a plan. Many look at their checkbook as an indicator of success, but in reality, that’s not the whole picture. Evaluate your P&L for the past year to see what it costs to run your operation. Are there any discretionary expenses that can be eliminated to free up cash flow? If you’re unsure, now is the perfect time to get a better understanding of your monthly financials so you can remove any unnecessary costs and better position yourself for financial success.”
At the same time, shops must recognize the difference between necessary and unnecessary costs, and in a time of financial uncertainty, it’s easy to make the wrong decisions on which expenses should be cut…and which should be increased.
“Market when you’re busy to stay busy,” Anderson recommends. “We need to market now more than ever before, but don’t overextend yourself. You can’t overspend in your personal life and ask your business to support that. It’s not about what you make; it’s about what you spend.”
“Struggling shops may not make it through a recession, leaving only stronger shops to survive, and that gives those shops an opportunity to increase their market share,” White notes, citing the example of AirBnB’s decision to decrease marketing during COVID. In contract, Vrbo increased marketing 10 times, and by the end of the pandemic, AirBnB had lost 15 percent of the market, while Vrbo had picked up 61 percent. “Go big! When it’s really busy, the audience isn’t watching the stage, but during something like the pandemic, people are watching. And if 98 of 100 shops hide to ride out the recession, that leaves two shops trying to get the audience’s attention…and they’re going to get it! This is a great time to record videos to help people get to know and trust you. When no one else is marketing, now’s the time to build credibility. Increase your marketing, grow your market share, and you’re going to do really well.”
“The hardest part of financial planning is the emotional aspect,” James acknowledges. “It’s challenging to navigate because it’s so easy to fall into the fear of scarcity versus abundance, but more pressure equates to better results. Sure, issues occur, but you buff it out or realign it. There’s no perfect day in a collision shop, so you need to plan for the good times and the bad. Develop options for abundance and a contingency plan for when things get tight. There’s no crystal ball telling us if the next 12 months will be horrible or not, but we can rest assured that some point in the future will hold a difficulty for every business, whether that be economic, market or product driven. Being prepared is key.”
“Most people reading this article aren’t the cheapest shop in town, yet they’re busy,” Newton emphasizes. “We worry too much about price due to fear, but we need to stop advertising and quoting prices and start charging a fair amount based on the cost of doing business. Fear causes us to stop marketing when times get tight, but we should continue advertising, just redirecting our focus on service, quality and value. If we convince ourselves that the sky is falling, our employees will believe and perpetuate that; if we tell them it’s slow every day, they’ll slow down and create productivity problems. We need to be optimistic because there’s plenty of opportunity. Charge the correct amount, do the best job you can, constantly build value, and you’ll have a good year!”
