The industry is consolidating. That statement probably comes as little surprise. The entire automotive aftermarket is consolidating. Dealers, tire vendors, parts distributors, paint distributors, software providers are all consolidating. But were you aware that industries tend to follow a predictable path of consolidation, referred to as the consolidation curve?
Big companies are acquiring smaller companies using affordable capital to grow. This growth creates economies of scale. And economies of scale allow larger companies to provide goods and services relatively more efficiently and at a lower cost than their smaller competitors.
Consolidation will continue because it is a virtuous cycle where success attracts additional investment that generates further business advantage. A growing consolidator will continue to acquire for two main reasons. First, each acquisition presents an opportunity to further build economies of scale to propel further competitive advantage. Second, disciplined acquisitions increase the value of a business in excess of the cost of the acquisition. This is generally referred to as an accretive acquisitions or multiple arbitrage in the financial world (subscribers: feel free to email me directly for additional explanation of accretive acquisitions or multiple arbitrage).
What are the Stages of Consolidation?
There are three stages of consolidation. Well actually four, but the last stage represents stability rather than consolidation. The stages are:
- Stage 1: Fragmentation
- Stage 2: Acquisitions
- Stage 3: Expansion
- Stage 4: Maturity
Stage 1: Fragmentation
Industries begin in a highly fragmented stage. Depending on industry dynamics some industries move very rapidly through this stage. In the collision industry, this stage has lasted for decades, but is rapidly changing due to internal and external forces that I discussed previously.
Leading companies in the initial stages of industry fragmentation focus on building a footprint. They are focused on establishing a “first mover advantage” in size and brand. These companies begin to develop an acquisition based growth strategy. They focus on building revenues over profit growth. Growth comes in fits and starts. Acquisitions are often “one off” in nature and tend to be opportunistic. Companies are still perfecting their acquisition and growth strategies. Sometimes there are spectacular failures. At this stage acquisitions are focused on enhancing revenues and expanding footprints.