Editor’s Note: Brad is at NACE this week. This is an excerpt of his article originally published in Aftermarket Business World. Next week Brad will return to discuss the role of private equity in the collision industry.
The paint jobber industry is undergoing significant change. Increasing customer concentration in the collision industry is putting pricing pressure on the entire refinish materials supply chain.
A second round of jobber consolidation is now underway adding competitive pressure within the industry. Adding to these pressures, paint manufacturers are placing ever more start up, technical and back office requirements on jobbers in an attempt to drive efficiency and lower costs. Combined, the result is a jobber industry that is undergoing and will continue to undergo significant change.
Consolidation in the collision repair industry is hot news. Backed by billions of dollars of private equity investments, the collision repair industry is witnessing what may be a once in a lifetime transformation. In 2014 alone more than $800 million dollars in revenues were acquired by the four largest collision repair companies in the country. In a few short years these same nationwide collision repair operators have doubled their market share. The pace of consolidation in the collision industry is projected to increase exponentially.
As the collision market becomes more concentrated, the impact on companies that sell into the industry becomes more apparent. Private equity is now also active in the jobber industry. The jobber industry in particular has seen a shift in the way business is conducted. As larger collision repair companies have taken more market share they have become more demanding on both price and operational integration, creating a fear in the industry that paint distribution is becoming a commoditized business.
Selling to a large multi shop operator (MSO) is different than selling to a traditional single or dual location business. Large MSOs are able to demand aggressive pricing with a focus on price first and value added services second. Many of the largest MSOs are able to buy direct and negotiate nationwide sales agreements at steep discounts. In conjunction with an increased focus on price, there are also increasing demands that the jobber deeply integrate their business operations with the MSO. There is a particular focus on KPIs and ensuring the jobber is performing as agreed. In return, jobbers servicing the largest collision repair operators in the industry reportedly earn gross margin on delivered product in the 5 percent to 8 percent range.
Selling high volumes at low margins alters the way business has traditionally been conducted in the market. For large distribution companies with already existing investments in inventory, sales and distribution staff, equipment and facilities, selling to a large regional account can prove to be a lucrative opportunity. In exchange for selling at low margins, many MSOs demand less in the way of costly value added services that smaller customers require.
Large MSOs tend to have their own technical experts on staff and demand substantially less support. Jobbers serving this market engage in traditional distribution, essentially becoming drop shippers that add value by closely integrating operations with large MSOs as opposed to providing technical and operational support.
There are substantial differences between the needs of a large nationwide MSO and a smaller organization. Smaller organizations do not have the resources to have technical experts on staff or the financial resources to negotiate long-term purchase agreements at significant discounts. As a result, these customers are less price sensitive, and while price is always important, it is not necessarily the overriding purchase determinate.
“We choose not to sell on price,” says Mitch Penny of UYL in Houston. “We focus on selling value add services. We sell ourselves first and paint second. If a client is focused exclusively on price then that is probably not the right client for us.”
Josh Bergeron of Pro Color Auto Paint in New Orleans agrees. “In this industry you have to do things differently than you have in the past. This industry has changed more in the past five years than the (previous) past 20 years. The reality is that all the paint lines work otherwise they wouldn’t be in business. For us, it’s really about what additional support we can provide to our client.”
Both Penny and Bergeron do not sell to large MSOs by design. Penny says, “I’m not sure I would want to. The margins are just too thin. We provide a lot of services to our clients and I don’t think it would necessarily be a good match for our business model.”
Bergeron echoed similar statements. “Well sure if the right deal came along I would. But most of the MSOs already have their own training and technical staff. The line between collision repairer, paint manufacturer and jobber continues to be blurred.”
Have you seen an impact on vendor relationships as a result of the changes in the industry? If so, I would like to hear about it. Please shoot me an email via my contact page. Consolidation is not only impacting the collision repair shop. I find the transformation in the industry truly fascinating and all communication is kept strictly confidential.
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The full article can be accessed directly on the Aftermarket Business World website