A Dealer Guide to Body Shop Profitability

A. The Body Shop Market and Your Present Share of Cake

In 1999, the automobile collision repair market represented a sales potential of over Rs. 600 crores. Yet in 1999, despite an ever-increasing number of cars on the road, only (55%) of franchised new car dealers in India operated their own body shops. While their body shop business grew sizeably still a greater market obviously existed. The ideas, recommendations and procedures presented in this guide have been written to help dealers who already operate body shops (as well as those who are considering entering the body shop market) significantly increase their penetration in this continually expanding market.

Increasing dealer penetration in the collision repair market is one reason for having a body shop in your dealership, but there are other considerations:

▪	A quality body shop can build traffic for the dealership's new vehicle department.
▪	A properly controlled body shop can improve used vehicle gross at retail. Unlike "backyard" repaired vehicles, vehicles repaired at a dealership and later traded in at a dealership should mean higher trade-in price for the customer and higher retail markup since the quality of the work is a known commodity.
▪	Increased efficiency in the body shop coupled with quality work improves customer satisfaction. Dealership retention rates climb accordingly as customers perceive your facility as "full service".
▪	A body shop can increase parts department sales and gross profit.
▪	Body shop repairs generate more rupees in fewer transactions than service department repairs because body shop repair orders (ROs) tend to be larger and require less diagnostic work.

 
Today, Management must deal with increased capital investments to produce quality repairs. Equipment and price of producing repairs cannot be measured in the same way as in the past. To determine whether a body shop operation makes sense for your dealership, you should analyse your dealership operations, considering the following factors:

		Your own assessment
▪	Insurance companies' impact in your market
▪	Local body shop market
▪	Local competition (amount and quality)
▪	Equipment needs
▪	Credit availability
▪	Trained body shop technicians availability
▪	Body parts supply availability
▪	Damaged vehicle storage space availability
▪	Ability
▪	To control, paint and body shop materials

 
B. Insurance Business

Ninety per cent of business in the body shop is controlled by insurance cost. So, it is important to know how you/ your body shop manager can best work with insurance estimators/adjusters and companies. It is also important to understand the correlation of time allowed on an estimate to actual repair time. While an apprentice may turn one hour for every hour billed, a master technician could complete in an hour, a job scheduled for three hours. If an insurance company pays Rs. 100/- an hour labour rate, and a job requires three hours as per schedule, the insurance company would pay Rs. 300/- for the repairs. Hence, the body shop's labour cost will be based on the skill level of technician doing the job and time negotiated.

(a) Preferred listings:

Though insurance companies at the national level refrain from making recommendations, most local offices are free to offer customers a "preferred list" of body shops in their area.

Sometimes (particularly with unibodies) recommendations are based upon the type of equipment the body shop has. For this reason, it is important to keep your local insurance contacts informed about changes in service, training, costs, and equipment purchases/upgrades. Consider having an open house. Invite insurance companies to your body shop for a demonstration of your equipment and a chance to examine the quality of your repairs. Proof of quality work, efficient procedures and the right equipment for the job can go a long way towards justifying repair costs.

In many areas, the only way to ensure adequate volume is to become an "approved shop" for the insurance companies. This relationship can definitely help you attract more business, but be aware that it usually goes hand-in-hand with such concessions as lower labour rates, greater parts discounts and purchase of dedicated computerised equipments.

Both insurance companies and vehicle owners want complete and accurate estimates followed by quality work done in a timely manner and with no surprise. Try to have a positive attitude towards the insurance adjuster, who is your repeat customer. In your efforts to obtain insurance business, the following suggestions may prove advantageous:

▪	Provide reasonable parking facilities;
▪	Present a professional office and shop appearance;
▪	Do a thorough estimate of the necessary repairs before the adjuster arrives;
▪	Furnish the adjuster with office space that is clean and quiet. Include a desk, a telephone, a calculator or adding machine with tape, and crash guides; and
▪	Provide a place to evaluate the vehicle (sheltered, if possible). It should include diagnostic equipment, jacks, lifts, and someone to help "open up".

 
(b) Estimates:

As mentioned above, you should make your own estimate of the damage upon the arrival of a vehicle, determining the profit potential available on the job. Doing your own estimate gives you greater control over the situation. It lets the estimator know you are familiar with the job and that you have carefully considered the body shop's parts and labour requirements. In addition to helping both of you avoid future supplements and subsequent delays, it enables you to check parts availability and scheduling beforehand and provide a "ballpark" finish time for the work. After the insurance estimate has been written, compare the results with your own. Eventually, many insurance adjusters come to rely heavily on the body shop manager's estimate when writing their insurance estimates.

You may want to charge for estimates, crediting the amount to the customer's total bill if the repairs are done in your shop. The estimate should be a blueprint for repairs so the body shop does not have to absorb any unnecessary expenses. Consider setting a schedule of charges for the services. Establish a procedure for contacting customers who have had an estimate written recently, but have not returned to your dealership for repairs. During the follow-up you should inform customers as to what credit cards are accepted for deductibles and give hours of operation.

(c) Supplements:

Pictures may speed up approval of supplements (additional work). Consider working out an arrangement with the adjuster to accept Polaroid pictures of the additional work required and the parts removed. The job is not held up, the customer gets the vehicle more quickly, customers' claims to equipment they originally had on the vehicle can be verified/disproved and the adjuster need not make a special trip for authorisation.

(d) Payments:

The method of payment should be decided at the time of the write-up. One option is to bill the insurance company directly through a "proof of loss" statement. If payment is not received within a specified time, bill the vehicle owner. Upon receipt of the bill, the owner usually contacts the insurance company, which facilitates an early action.

Another way to ensure timely payments from insurance companies is to use the personal touch. If appropriate for your situation, advise the body shop manager to visit insurance claims centres to obtain business. While there, he/she can check up on past-due invoices.

You might also explain that the customer can avoid paying with a personal cheque by arranging to have the insurance company release signed and returned to you. Be sure he/ she understands that if a lienholder is named for the insurance payment, endorsement must be supplied.

▪	Consider explaining that to ensure proper settlement, one of the following conditions must be met: Payment in full when the job is completed.
▪	Collision Loss - customer must provide both the deductible amount of the policy paid in full when job is completed and an insurance cheque properly endorsed, or Proof of Loss properly signed.
▪	Liability Claim - customer must (a) provide an insurance cheque properly endorsed, or (b) release papers signed properly with direction to pay (dealership) directly.

 
(e) Marketing:

Because insurance companies actually pay for about 90 per cent of the repairs you perform, they should be treated as your biggest and best customers. As with all markets, a reputation for superior customer service increases your competitive edge.

1. Negotiate with adjusters and agents

Negotiation is a vital part of the relationship with insurance agents. It's important to keep in mind that if it weren't for the insurance companies, many body shops wouldn't be in business. So, it is in the dealership's best interest to make a concerted effort to establish a good working relationship with the agents and to negotiate each difference of opinion in a professional manner - sometimes you'll win; sometimes you won't.

2. Keep in touch with them

When people get into an accident, they call their insurance agents, not their adjustors. Maintaining a good relationship with the agent is just as important as working well with the adjusters. It's the agent who sends business your way. Keep in touch with several agents. Make personal visits to offices and claim centres. Send them letters and testimonials.

3. Offer them a comfortable working environment.

Provide your insurance adjusters with a clean comfortable place to work in the dealership, with a calculator and other supplies.

4. Keep them informed

Send letters to your insurance contacts reminding them of the quality of your equipment, the years of experience your technicians have, and your other competitive advantages. If ' your business has increased, tell them about it.

C. Penetrating the Local Market

Know Your Customers

Perhaps your best potential body shop customers are your current and past service customers and new and used vehicle sale customers. Take a representative sample of 100 to 500 repair orders and do an in-house basic demographics study. What per cent are male? What per cent are female? What age groups are represented? How old are their vehicles? Where do they live? Are the vehicles owned by individuals or businesses? Are the customers in dual-income households?

What marketing strategies will they respond to?

The best way to find out is to try a variety of marketing ideas and track who responded to what. For example, you could send a letter of introduction to your service customers on Monarch-size (5"x8") stationery. Offer them a free estimate or a per cent off, but tell them they have to bring the letter with them and that the offer is good only up to a certain date. When they arrive, note who they are. When the cutoff date passes, analyse who responded, again according to gender, age, location, vehicle age, etc.

Then try a new marketing tool (postcards, radio ads, direct mail coupons, etc.) and do the same demographics analysis. After you've tried several tools over a 6 to 12 month period, compare your results, and you'll see what worked best for you.

Local market penetration

If you're already in the body shop business, this is a good time to see how well you're penetrating your market

Use the following formula to calculate your market share:

(1)	Total number of vehicles registered in your market area	Nos.
(2)	Annual average cost amount of collision repair per vehicle registered (As per 3M company estimates)	Rs.
(3)	Collision repair sales potential in your market area (1) x (2)	Rs.
(4)	Your body shop's annual sales	Rs.
(5)	Your actual market share (4)/(3) x 100	%

 
D. Profit Centering

A successful body shop provides timely, fairly priced, quality work. The body shop should be perceived as a separate business. It has its own profit objectives and body shop manager is the responsible operating executive. To make an actual department profit, the departmental gross should cover the body shop's semi-fixed expenses.

Remember that the labour rate itself will be affected by the number of body shops in operation in a particular area. For example, a rural area with few shops can generally command a higher rate because the competition is much lower. As with any marketing situation, supply and demand are the determining factors.

Each body shop operation has seven profit-producing areas -

▪	Mechanical labour (Serv. Dept)
▪	Metal labour
▪	Frame labour
▪	Paint labour
▪	Parts
▪	Sublet
▪	Material

 
Profit centering maximises expense control. To turn the body shop into a profit centre, you must do several things.

1.	Determine the following:
	▪	Annual labour sales and gross profit
	▪	Annual body shop sublet sales and gross profit
	▪	Annual paint and material sales and gross profit
	▪	Annual number of repair orders
	▪	Annual direct expenses related to body shop.

2.	Establish reasonable allocation bases for body shop semi-fixed and fixed expenses.
3.	Set up a schedule of sub-accounts to segregate body shop expenses on a continuing basis. Calculate gross profit percentages and per cent of sales figures and calculate operating profit/loss.

 
Scrap disposal:

Don't forget income from other materials, especially cores. Bumpers, alternator cores, starter cores, catalytic converters, torque converters, transmissions and engines - all have a rupee value and should be handled accordingly.

For scrap disposal, a system may be made where every month the scrap is sold. Everyday, the scrap must be collected from the working area to designated scrap yard. At times, it is found that the workshop management is very slag in earmarking the particular item to be scrapped. It is suggested a "red tag" system may be used which indicates that it is to be scrapped.