Franchised auto dealerships have spent the past several years beefing up their fixed-operations departments in an effort to boost profits. When auto sales plummeted during the most recent recession and margins were cut to the bone in an effort to win back customers, the service department became a critical source of revenue.
But even though service has gotten more attention from dealerships, the majority of them still don’t operate body shops. That is steadily changing, however, as repairs become more complex thanks to the introduction of new materials and new technologies.
As collision repair becomes more nameplate and material specific, it’s difficult for generalist body shops to keep up with the training and equipment investment. Dealerships see an opportunity to gain a foothold in a profitable business that can help keep customers in the service fold after their warranties expire.
The number of dealerships that operate body shops has not fluctuated much over the past eight years, but it is slowly trending upward. After falling from 38 percent in 2010 to 35.9 percent in 2014, that figure rose again to 38.6 percent in 2015, then dipped slightly to 37.4 percent in 2016 according to data from the National Automobile Dealers Association (NADA).
“Body shop decisions are based on dealer’s discretion,” says Patrick Manzi, senior economist at NADA. “If they see that there is enough business coming in and can operate it profitably, they will do so.”
While dealership presence in the market is still marginal, there are indications that some OEMs and large dealer groups are going to expand their collision repair footprint moving forward.
AutoNation, for example, is adding new locations to its existing 70 collision centers as part of a nationwide restructuring and revamping of its service operations that will include the company releasing its own branded line of repair parts. AutoNation is also renovating its collision shops based on a new, standard corporate design. According to the company, this will expand its collision production potential by as much as 40 percent.
The Cochran dealership group in western Pennsylvania is also expanding its collision operations. Electric vehicle maker Tesla is also opening its own body shops, according to an announcement the company made in May. Tesla already has a network of certified collision shops.
According to a shareholder announcement from Tesla: “To significantly improve the customer experience with out-of-warranty body repairs, we intend to open the first Tesla-owned body repair shops later this year and expand the existing network of third-party Tesla certified body shops.”
For an industry that often has to absorb wild swings in demand, fixed-ops and collision repair represent a stable, steady source of profits.
Brad Mewes, principal at Supplement, an Irvine, Calif.-based consulting firm, believes there are two primary trends that indicate the industry will see more dealer-owned body shops. One is technology – dealer groups are in a better position to invest in the technology and equipment needed to make more complex repairs. “For a larger, more well-capitalized group like AutoNation to invest a few million dollars into equipment and training is a drop in the bucket related to their total cap-ex spending,” Mewes says.
Those groups can also spread the fixed cost of that training across multiple facilities. “They can have one centrally located body shop that services five dealerships, for example,” Mewes says. “That makes the business case much more compelling.”
Sonic Automotive in Charlotte, N.C., for example, operates 18 collision repair shops as part of a hub-and-spoke-like network to increase efficiency. Each shop serves multiple dealerships.
The second trend that Mewes thinks is important is profitability. Dealers see profit potential in collision repair, which is a relatively high-margin business compared to auto sales. (The outlier here would be Tesla, which owns its own dealerships and actually loses money on its service operations.)
Still, opening a body shop presents some risk for dealers who may lack experienced technicians and who generally don’t have a lot of experience dealing with the insurance industry. In some instances, dealerships are partnering with independent shops, large chains or consolidators to run their collision repair businesses, or setting up shops outside of their own dealer campus, sometimes with different branding.
“In some cases they want to avoid the headache,” Manzi says. “That may drive their decision to outsource or partner with another firm. It’s purely a business decision.”
“Dealer groups realize that they don’t have as much experience in the collision business, but they are very comfortable with the franchise model,” Mewes says. “Those partnerships can help them leverage purchasing on the cost side. For a smaller dealer group that may not represent every brand of parts they work on, there are lot of benefits to that model.”
Several dealers and dealer groups have partnered with CARSTAR, for example. “They may not have focused on the collision space as a core competency, so when they see a customer opportunity they may contact us,” says Michael Macaluso, president of CARSTAR North America. “CARSTAR can also assist in bringing more insurance DRP exposure to the table.”
Fred Beans Auto Group in Doylestown, Pa., for instance, partnered with CARSTAR on its own collision centers. ABRA has similar relationships with more than 40 dealerships in the U.S.
In the case of CARSTAR, the dealer may have the company operate a franchise location within the dealership, or establish the body shop off-site. “Having the shop off campus enables more opportunities for branding and additional growth,” Macaluso says. “We can also work within the restrictions that the OEM may put on the franchise dealer if the shop is on-site.”
According to Macaluso, CARSTAR benefits from these relationships as well. “In some cases they have information they can share with us,” he says. “Not trade secrets, but additional information or strategies that we can share with our network as a whole to improve the repair process. The beauty of dealer groups is their familiarity with the franchise model, and the two-way communication where they can provide us with insight, and we can provide them solutions across the board.”
There are still some good reasons dealers would stay out of collision repair, including the cost of building or running the facility. Space can also be a factor if the collision business eats into bays that would be better utilized for mechanical service.
“While collision repair is profitable, retail service is still more profitable than collision,” Mewes says. “If they have to make a choice, the dealer is going to keep those bays for retail service.”
Repair complexity will push more drivers to take their vehicles to dealerships for both mechanical and collision repair. As OEMs include a wider variety of new metals and composites in their vehicles, dealer shops may be well-positioned to gain additional collision business because of their access to equipment and training.
“Fixed-ops sales continue to rise each year,” Manzi says. “A lot of customers choose to go with the dealership because they employ technicians that have been trained on the new technologies that are appearing in these cars. As things get more complex, I see no reason why that increase in business wouldn’t continue.”
