Crunch time for crash sector?
Over the past year, around two dozen paint and panel shops have closed their doors, according to the Collision Repair Association. It’s being seen as a further sign that the New Zealand collision repair industry is changing as insurance companies keep a firm grip on pricing, forcing repairers to constantly look for efficiencies and improve throughput.
There are a variety of reasons for the recent closures. These include owners who who have retired and sold their buildings. However, among those who have shut up shop are several known to have gone into liquidation, unable or unwilling to invest in the changes needed to remain in business.
What is happening
The international shift to vertical integration (where insurance companies own part (or all) of a paint and panel chain and consolidation (where a big body shop buys up others to form a bigger enterprise) is only just starting to take hold here. So far, Suncorp (which owns Vero and AA) has opened up four of its own Capital SMART crash repair sites in New Zealand (one in Christchurch and three in Auckland). Just a few weeks ago IAG announced it was setting up its first repair centre in Auckland later this year. If the international trend isn’t thwarted by the small and scattered population of New Zealand and shortage of qualified technicians, we can expect to see more insurance company-owned sites in this country.
What those in the industry say
With a steadily growing number of vehicles on the roads - up by half a million to 3.55 million in the past four years – it should be a boom time for the repair sector with plenty of work for everyone. But it’s tough out there. MTA has talked to a range of members around the country about the state of their collision repair business. The general view is that insurance company repair contracts are unfair, with no room for negotiation and little to no flexibility to reflect local situations. Very few business owners felt they were in a position where they could challenge, or even walk away from, the ‘take it or leave it’ contracts on offer.
Too tough for some
One former business owner invested heavily in his building, new equipment, new bake oven, and better processes. But he couldn’t get approved repair status, couldn’t service his debt on the $65 hourly rate paid to him by the biggest insurance company, IAG, and after a three-year struggle, sold up. Most paint and panel shops say it costs $90 to $105 an hour to run their businesses. Insurance payments run at around $65 for a non-authorised repairer through to $85 for authorised repairers and around $90 for ‘gold’ or specialist repairers. On top of this, there’s very tight pricing on paint and parts. Paint prices go up by around 2-3 percent a year, but insurance company payments do not keep pace. Some repairers say they lose money on their paint lines. Insurance companies also cap the margin a repairer can make on parts at between 5-10 percent (around 20 percent for used parts). All this provides very little wriggle room for businesses that are heavily reliant on work from insurance companies. As one says “It’s all about quantity, getting through as many repairs you can, as fast as you can. But if you stuff up on one job, it can throw everything out of whack and you lose.” Some in the industry are concerned that the time and cost pressures could result in poor quality repairs, and many reported being stressed.
CRA reports around 70 percent of all collision repairers have a turnover of less than $2 million a year and employ an average of 11 people. The rest have an average turnover of $4 million. Businesses that are well run, able to keep up with modern technology, and with a physical layouts that allow streamlined processes, are doing well. They make enough money to return a profit and invest in new equipment. They tend to be companies that own their own buildings and are not subject to rent rises. Some have moved, or are moving to larger premises so they can put through higher volumes. Those who are doing well also mentioned the importance of ‘getting along’ with their insurance company assessors. Even those operating at peak efficiency say a poor relationship with a major insurance company can leave them penalised by pettiness. Those with good relationships report more flexibility and reasonableness when it comes to asking for payments for jobs that turned tricky.
One repairer, with eight technicians, is putting through around 40 units a week. “We’re doing very well. We run a very efficient workshop and that’s the only way to succeed. All processes and procedures are thoroughly worked out; staff are well motivated; we have a profit share scheme and good pay.”
He says good leadership is important and he has five people on the admin side to keep things flowing smoothly. Another company making good profits says about half its work is insurance and the other half is from tidying up vehicles for sale. Having more than one income stream allowed the business to drop IAG work because it was not profitable and came with onerous administration. “We are now planning to move to a bigger site in a year or so and move into non structural repairs. It’s not easy to be profitable in collision repair, there are only two possible income streams: accident and prep for vehicle sales. Both insurers and car dealerships have the upper hand and if you are too reliant on income from either one, you can be screwed.”
The owner of another profitable business employs 12 people (including three admin staff), works 70 hours a week and takes home the same pay as his top technician. “We put through 25-30 vehicles a week but insurance rates are not keeping up with costs. I’ve had discussions with them about the true work costs and told them we have to make $105 per hour to open the shop. The most we get from any one insurance company is $80 an hour, so we have to double the speed on repairs to make a profit. We have to have the parts and everything lined up ready to go. Money is time.”
One owner, whose business is struggling with its IAG relationship, says “We are able to self-assess jobs worth $2,000 but the repair times we can do the work in are consistently cut back by half an hour and no amount of evidence we provide will result in payments being adjusted.”
Operating costs increase
One large business had made all the efficiencies it could, down to swapping its lightbulbs to LED. However, its operating costs have gone up by 35 percent in the past four years and income is not keeping up. “We are now looking at our operation to see how we can keep going.” One option may be to move to a larger site further out of the metro area, but its a big capital investment with the worry that long-time, inner-city customers will be lost. Increasing efficiency costs does not always mean bigger, better buildings, or the latest Car-O-liner. One company reported spending $60,000 on IT, including massive servers to store the tens of thousands of photo files now required by the insurance companies.
There is general dissatisfaction with the inability to bill insurance companies for the administration costs involved with each claim. Similarly, no-one is happy with the cap on parts margins. As one says, “We have to choose the lowest priced part. We only get an 8 percent margin but have to deal with all the crap if a part arrives damaged or whatever. Margins disappear very quickly. Old, cheaper parts are preferred by insurance companies but they come with their own set of time and cost issues. Only if a car’s under warranty do they want new parts. “IAG and Suncorp set the price for the industry on parts. It is unfair. Parts are nearly 40 percent of our revenue. To make only 8 percent mark-up is just totally unreasonable. They are ignoring the overhead cost pressures and direct costs. Like the increasing cost of paint; you have to absorb it for years and years. It is only through market dominance they can do that.”
There is no doubt that the three big insurance companies, IAG, Suncorp and Tower, have huge control over the businesses of the collision repair sector, says MTA Advocacy & Strategy Manager Greig Epps. “Our submission to government on unfair business contracts very clearly pointed to the fact the insurance companies dictate both the price and the terms. The insurers provide no guarantee of set amounts of work that will be provided. However, businesses often need to make a hefty investment to become an approved repairer. They feel forced to accept the contract terms because if they don’t, they may not get any work from the insurance company – or if they do, it will be at a much lower rate.
While the contracts insist the repairer must act in good faith, there is no such requirement for the insurance company and its assessors.” Greig says MTA believes these kind of contracts fit the definition of ‘unconscionable’ and the government must intervene through regulation.
“We have submitted on possible contract regulations and we continue to have discussions with MBIE about our position, which shows they are thinking seriously about the issue,” he says.