Central Canada Report

Our June 30th survey demonstrates shop owners are starting to understand the importance of, and how, the labour component interacts with their overall shops performance. Shops are finally commencing to slow their processes down, build “client” relationships, and reap the financial rewards from their efforts.

The independent aftermarket shop tradition of thinking only in “sales” is beginning to break away and head down a different path, as over the past year we have witnessed “sales” dropping but “productivity billing” per vehicle has improved, consequently total shop gross profit percentages are increasing. This sounds like a contradiction for this industry as shops have experienced a decline in total sales, therefore if sales are down, the traditional thinking goes, profits should be down, but, the math does not lie.

Comparing June 2001 to June 2002, interesting trends, as predicted three years ago, are beginning to surface. In an overall average shop, Oil gross profit dropped 2% (44.7% to 43.9%), Tire gross profit dropped 12.5% (22.3% to 20.3%), Battery gross profit dropped 5.9% (32.0% to 30.1%), aftermarket parts dropped by 1.5%, (41.4% to 40.8%) and over all dealer parts gross profit dropped 4.9% (24.7% to 23.5%). To top this all off, total average monthly sales per hoist plummeted 7.2%, before inflation is factored in, so basic aftermarket thinking would say that total gross profit dollars must be down the drain. The opposite, however, is the contrary. Despite the hard goods lower gross profit percentages, the total shop gross profit percentage went from 60.4% as at June 2001 to 62% as at June 2002. It was the labour component that saved the day as shop operators participating in our survey appear to be beginning to work smarter rather than work harder. The average Provincial shop maintenance labour rate went from $68.08 to $70.85 which is only a 4.1% increase, but the average billed hours per workorder/invoice went from a Province wide average of 1.25 billed hours as at June 2001 to an average of 1.40 billed labour hours as at June 2002. This represents a 12% increase in labour productivity per invoice. On top of this, the average shop in our survey has successfully implemented a tier labour rate strategy for diagnostic work with the average shop setting a $85.33 tier labour rate. This rate level represents a 15.8% increase over the average tier rate in place last year at this time.

These financial results prove the business policy/philosophy of having the shop focus on labour productivity (which is getting paid for your knowledge in real dollars) rather than spending valuable time squeaking out “quarters” for hard goods profit, is the direction the independent maintenance/repair sector must continue to move. Slowing the business processes down is critical to enhancing workorder/invoice labour productivity. Couple this with getting the owner out of the bays to be up front in order to maximize relationships, which in turn allows the shop to obtain all the client’s business, is critical to gross profit enhancement. When gross profit is enhanced, net profit can be enhanced. Shops that only concentrate on activity (cheap/low pricing and high volume/busy, busy) rather than effective profitability (correct pricing with professional value added and focussed client relationships) will be shops that will pay a high price in the end for their ways…huge amounts of stress, working too hard for little personal financial gain, poor return on investment for the monies invested, many lousy business relationships, potential business bankruptcy, leading to personal family hardship not to mention their staffs’, and all because the owner is not willing to change his/her ways in this knowledge based business we have today.

Overall the average Provincial shop is changing as well. Last year at this time the average size shop had 3.5 hoists, and now the average shop contains 4.1 hoists, so capacity growth is taking place. Last June the average shop had 3.06 licensed technicians on the premises, and this year they are averaging 3.26. We expect this number of technicians in an independent shop to remain in this range for a while, as finding new competent technicians is very difficult, if not next to impossible in some areas. Also, future business efficiencies will allow one technician to produce more work which in turn will allow them to produce more billable time.

The independent shop is also working on an aging fleet. Last year as at June 2001 the sale mix was, on average, 80.8% aftermarket parts and 19.2% dealer parts and this year the Provincial average numbers have moved to 85.1% aftermarket parts and 14.9% dealer parts. This is a very dangerous trend, however, it is understandable when on-going competent technical training is getting scarcer every year.

Last year the average Provincial shop owner spent 29% of his time in the bays and this level has now dropped to 23%. This is a positive trend in terms of establishing a business format that supports a system to build strong client relationships, get all the work possible, and “manage” the productivity in the back shop.

One final trend to note is that we are seeing the process of professional business relationships being built with the shop’s chosen parts supplier. Last year at this time the average shop sent 69.1% of their aftermarket purchases to their chosen jobber, but this year we witness a Provincial average of 73.6% of all shop aftermarket parts going to one supplier. This loyalty allows the shop owner to free up valuable time to concentrate more on “management” issues rather than telephoning all over the place to make another ten dollars on a part. Parts sales may be down overall in the industry, but some jobbers are noticing their volume going up with the same shop. The jobbers who are witnessing lower volumes from their same customers had better start doing their homework, or they too will experience huge future consequences similar to the ones mentioned above for shop owners.

The following is a brief outline for each area:

Southern Ontario

This area of the Province saw a 4.1% increase in their “total” bay gross profit percentage over June 2001 from 58.2% to 60.6% June 2002, although sales per hoist were down a whopping 16.1%. The average maintenance labour rate in this area went from $63.21 last year to $68.08 this year, a 7.7% increase, but also managed to put in place a 14.8% increase in its diagnostic rate to an average of $84.74. Coupled with this was an increase of average labour hours billed per invoice which went from 1.14 labour hours last year to 1.36 labour hours billed per invoice this year. This is the right direction in productivity, representing a 19.2% increase per vehicle. The average shop saw a 12% increase in Labour revenue produced per technician over 2001 to an average of $7,250 per month. These combined factors lead to the increase in the total shop gross profit percentage.

Based on what the average technician is being paid in this region of the Province however, the minimum maintenance labour rate should be $75.50, with a minimum tier (diagnostic) rate of $96.80. All competent shops in this region below this level could move to these numbers immediately because the spread is not much at all.

Too many Jobbers in this area of the Province still have much work to do to “earn” the “clients” business because the “loyalty” percentage, in terms of aftermarket parts purchased from one supplier, is moving insignificantly from last years position. (69.5% in 2001 and 70.8% in 2002).

Central Ontario

This area of the province, especially the GTA,… IS… different from the rest of the Province in many ways.

1. They were the original Drive Clean area therefore they were the first to make all the mistakes that had to be made before they learned how to control the “monster of volume”.

2. This region was also the first to learn how to, and implement, tier pricing out of necessity.

3. This area of the Province has a very tough time in relationships with its jobbers, or is it vice-versa, or is it just “both wa
ys”?

These factors produce some interesting results for this region. “Total” sales per hoist are down 6.2% but labour revenue is up a huge 27% per technician to $9,217 per month, and up 4.6% in productive billed hours to an average of 1.36 labour hours per invoice. The labour rates are the highest in the Province with maintenance rates averaging $75.93 and diagnostic rates at $87.79. This may sound cool but the fact is, technicians earn more in this area and the maintenance labour rate should be a minimum of $90.00 with a minimum tier rate of $115.00. Supply and demand is reaping hardship on shops trying to move their business forward with no competent technicians to be found, therefore wages keep going up, but labour door rates are not keeping pace. Too many shops in this region focus on price only and this has a tendency to strangle owners’ attitudes in the better shops. Management in this area must still slow it down more, a lot more. Drive Clean is reasonably under control in many shops but still too many shops run “price specials” feeling they must create “activity” perceiving to cover their high overhead in the wage category. Stress levels in shops must be reduced to ensure not only a healthy staff, but also to ensure a satisfied client. 1.36 labour hours per invoice is not something to boast about as this region was at 1.30 labour hours billed per invoice last year. The fact is, the client is still not being properly served! The shop is not focussed. The math does not lie. Until “Management”gets control of the business all over again, does the math, and get away from the “activity” mode of doing business and into the “profitability” mode of delivering service and value, not too much can happen. Only “Management” controls this.

This panic attitude also affects the relationship with suppliers in this region. Central Ontario, and again the GTA stands out, has the lowest loyalty rating in the Province when it comes to percentage of aftermarket parts going to one chosen supplier. Do the math…..if you put your focus into productivity, client relationship building, and moved your average maintenance labour hours billed from 1.36 to 2.0 hours you would bring in an additional $48.59 labour per work order at the $75.93 labour rate. If you average 250 workorders per month, that is an additional $12,147.50 gross profit per month !!! You can’t average that with parts.

Eastern Ontario

This region of the Province still averages the highest “total” gross profit percentage from the bays at 63.7%, up from 62.4% last year, the highest parts supplier loyalty rating at 83.4% up from 74.2% last year, and the lowest amount of time the owner is in the bays at 14%, down from 17% last year, in the Province, but the signals are in place for a change.

Consider that Drive Clean is now in this region effective July 1. Consider labour rates are not established in the marketplace yet to cover the additional overhead that accompanies Emission testing and all its “variables”. The average maintenance labour rate is $68.55 and the average diagnostic rate is $83.46. Based on what technicians are being paid in this region the minimum maintenance rate should be $83.10 and the minimum diagnostic rate $106.55. Consider that the average labour hours billed per workorder/invoice in this region is 1.47, which is the highest, but when Drive Clean has full impact this will plummet, and stress levels will soar. Consider this region, as at the June 30 survey had 50% of the survey participants licensed for emission repairs, and 50% of the survey participants “own” their own dyno. “Ouch”… some are going to get hurt because they haven’t done the math. The June survey shows that this region has the lowest labour revenue per technician in the Province at $7,167 with the highest labour hours billed per invoice. That at least shows they are trying to service the vehicle properly. As “the monster of volume” settles in, hours per invoice drop and that is understandable; however, Management is the only person responsible for establishing the shop processes with the labour rate charge-out policy of the shop. Both the labour rates (maintenance and diagnostic) are too low to begin with, and if Management doesn’t change the labour rate charge out strategy, and learn how to structure/control the volume, stress between the technician and Management will occur as the funds dry up in the business. It is not the technicians fault, it lies squarely on the shoulders of Management.

Conclusion

There are many issues to still be addressed during these changing times in our industry, but not one more important than addressing the “training” issue. This issue must be addressed with commitment by the entire industry for the benefit of the entire aftermarket industry rather than under the present arrangement of each company (WD) trying to fund its own training, or find its own solution. With all regions of the Province, and quite frankly the country, experiencing an older fleet for service, the concerns must be there as to where our segment of the industry is going to be, or what will it look like, five to seven years from now. Without competent, committed, training in all aspects, the independent can not reach out to the clients newer fleet that needs servicing also. The Dealerships will maintain their growth in aftermarket market share. This should be unacceptable to our segment of the industry.

Also under the topic of training, a concerted, sustained, effort must be made to reach the education system to ensure proper technical training, and shop business exposure, is being put in place. Proper career counselling must be addressed in the education system to get rid of the old stigma of our industry and ensure the brightest students understand the tremendous opportunities available with us.

The reason I mention these items is it dramatically affects the profitability, and very future survival rate, of the independent sector. Our industry from the manufacturer, to the WD, to the Jobber, to the shop on the corner must participate and show an interest in resolving this issue. The challenges are there, but they can be addressed when everyone is working together to resolve the problems. Consider “the acknowledgement of our training weaknesses, is the first step in obtaining what we don’t have”. SSGM

Robert (Bob) Greenwood is President and CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has over 27 years of Business Management experience within the automotive industry, counseling individual shops in Ontario. E. K. Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive industry, preparing analytical operating statements for Management purposes, personal and corporate tax return completion, Business Management consultation and Business Management and Employee Development Courses. Visit E. K. Williams & Co. on the Internet at www.ekw.ca and sign up for their FREE monthly management letter sent to you by E-mail. Automotive Aftermarket E-Learning Centre Ltd. is a company devoted to developing Automotive Shop Business Management skills through the E-Learning environment over the inter-net. Students learn at their own speed, and at a time, and place, that best suits their needs; available 7 days a week 24 hours a day. Visit Automotive Aftermarket E-Learning Centre Ltd. on the Internet at www.aaec.ca Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 or by E-mail; greenwood@ekw.ca or greenwood@aaec.ca