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. 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 MSO’s are focused on price first and value added services second. Many of the largest MSO’s 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 KPI’s and ensuring the jobber is performing as agreed. In return, jobbers servicing the largest collision repair operators in the industry 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 MSO’s demand less in the way of costly value added services that smaller customers require.
Large MSO’s 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 MSO’s as opposed to providing technical and operational support.
While consolidation continues to impact the collision market, the majority of the market remains populated by traditional single or dual location small businesses. These clients continue to value face-to-face interaction, a high degree of technical support, and operational consulting and know how.
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 AutoPaint 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 MSO’s 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 MSO’s already have their own training and technical staff. The line between collision repairer, paint manufacturer and jobber continues to be blurred.”
Ongoing concentration of the collision repair market is driving structural change in the jobber market. As large nationwide collision repair MSO’s grow, increasing pressure to build scale and growth is exerted on jobbers serving these clients. Large distributors like NCS, FinishMaster, LKQ, and Single Source will continue to expand geographically with their collision repair clients in order to better serve those clients. This presents a unique opportunity for medium sized regional jobbers that have established a strong geographical market niche.
Since the last round of consolidation in the late 1980s and early 1990s when FinishMaster grew to a nationwide company, both the jobber and collision industries have changed substantially. Primarily, as a result of demographic changes, large companies in both collision and the paint distribution industries have grown to service needs in new areas. NCS, FinishMaster, Single Source and LKQ have all grown substantially in the past few years directly as a result of acquisitions. As the collision customer base becomes more concentrated so too will the jobber industry as only the largest, best-capitalized and best-organized distributors will be able to meet the needs of the large collision consolidators on a nationwide scale.
But in addition to operational shifts, there are also financial shifts that are impacting the jobber industry. Primarily through low cost access to capital NCS, LKQ, FinishMaster and Single Source all are able to continue to grow via acquisition to develop a truly nationwide footprint.
For smaller regional jobbers this serves as both an opportunity and a risk. Smaller jobbers can join forces with larger nationwide distributors by merging with other jobbers to create scale or perhaps by realizing a liquidity event and selling their company to such groups. They can also continue to specialize in a geographic area creating a near impenetrable moat by providing a level of service and expertise difficult for larger nationwide organizations to overcome. One thing is certain, however. Continued consolidation in the collision industry will drive continued buying and selling activity in the jobber industry.
Yet as the industry continues to evolve, changes on the supplier side are adding increasing pressures. Many paint manufacturers are aware that paint is becoming much more commoditized than in the past and price is playing an increasingly significant role in negotiating large nationwide purchase agreements. In an attempt to compete on price, many manufacturers are cutting back on value added services they traditionally provided, such as new client acquisition support, installation support, back office credit and accounting functions, and ongoing technical support. Whereas only a few years ago many jobbers and collision repair facilities leaned on manufacturers to provide such support, now the onus of responsibility rests on the jobber to provide such support.
Financially, the result of shifting additional costs to the jobber industry creates a much more capital-intensive business. “In order to support a new client acquisition I have to bring in at least three months of inventory,” says Penny from UYL in Houston. “After accounting for my sales staff expenses, it may be years before I begin to see a return on my investment.” Increasing capital will further drive consolidation in the industry as only larger, more supported and better organized companies will be better equipped to manage these new requirements.
The jobber industry is changing. Consolidation in the collision industry is creating a new need for a truly national paint distribution and jobber segment. Low cost access to capital will spur continued buying and selling activity in the industry. Increasing competition on price at the national level due to a more concentrated customer base is forcing manufacturers to offload capital-intensive support features to paint jobbers. However, these changes also present an opportunity to build a deep niche of loyal customers that value service over price. While the changes may be a threat to some, others are capitalizing on them to create true opportunity within the industry.
Editor’s note: Brad Mewes is managing partner of Supplement!, which provides financial insight for automotive industry professionals. If you would like to discuss how you can better position your company for success in this rapidly changing industry, contact him directly. You can see his extensive writing on similar trends in the collision industry and email him directly at www.supp-co.com. He loves discussing all things business related and has a passion for the automotive aftermarket industry.
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