Auto Service World
Feature   October 1, 2000   by Bob Greenwood

Critical Consciousness

Better shops stand out more now than ever before.

The June 30th survey numbers confirm the independent sector of the industry is having an agitated introduction to the new millennium. The in-depth numbers are showing the “nervousness” that many shop operators are experiencing towards their future, yet, under close scrutiny, there are more things to celebrate when comparing numbers year over year. Let’s embrace the positive in our industry vs the negative, and all of a sudden one can see a very bright light starting to rise at the top of the hill.

The light shining brightly is that the better shops in our industry stand out more now than they ever have before. When they stand out, people talk about them frequently, and these shops become the standard to be followed by the rest. As more independents disappear, because of management’s lack of willingness to change and adapt, the more professional operators will grow their shop’s business volume and have a very important role to play for the jobber, the warehouse distributor, the manufacturer, and their position in their community.

The fact is, the better shops within the independent sector have realized, and understand, that they must “know to whom they are selling to”, and this consciousness is critical if they are to move forward. It also confirms that these shops have embraced up-dated business management as a new skill to be reckoned with, compared to the mind-set of five years ago. These shop owners/managers have learned and have become more “aware” about their shop, their industry, and their individual market niche, in terms of how they must operate to grow a profitable operation. Now they are starting to accept the methods of measurement, and are directing their operation to meet these new challenges, and that of their society, to enhance their future’s new profitability. The biggest challenge for our industry is how do we get this to become the “average” shop owner/manager in our sector. Understanding the “challenge” is one thing, the real question that must be answered, and clearly demonstrated, is “does the entire industry collectively, have the will to make it happen?”

The average shop in Ontario fell back 1/2 of 1% in total sales per hoist, before inflation is factored in, for the first six months of this year compared to the first six months of 1999. Growth, you might perceive, is on a sabbatical so far this year, but the over all gross profit percentage of a given shop grew to 60.1 percent, up from 59.1 percent of June 30, 1999.

Total average monthly labour dollar revenue per technician in Ontario, grew 3.4 percent to $6,437 per month compared to the same period last year. This is a positive in that the industry is starting to recognize the value the labour component plays to total shop profitability rather than totally relying on hard parts profit to drive the bottom line. This productivity improvement was created by a focused effort by all, since management has only increased the actual labour rate by 1.4 percent over 1999 to an average labour rate in Ontario of $62.17 per hour. Although this is still too low, since the independent’s door rate should average $73.27 in Ontario based on the average technician wage cost, it is a positive step forward for the average shop in that it is being recognized that productivity improvement is the key to creating a profitable business. This has been further substantiated by the fact that the average shop has increased the average labour hours per work-order/invoice billed out by 9 percent over the same period in 1999. The average independent shop in Ontario is now billing out 1.33 hours per work-order/invoice as at June 30 2,000 compared to 1.22 for the same first six months of 1999. Mathematics is a very precise science, and when calculated, a 10% increase in productivity will get you one heck of a lot further, than an additional 10% discount on parts. The better operators now understand this and are changing their focus.

Another overall positive is that the average loyalty to one parts supplier has increased from 63.9 percent in 1999 to 64.6 percent in 2000. This was also confirmed in December last year by an increase in this percentage at that time compared to year over year. Although only a small increase each year is measured as each year progresses, as we watch the supplier and installer understand each other, develop a professional business relationship, earn each others trust, and have the installer/jobber truly make/display the effort to work with one another, efficiency and profitability of both operations starts to improve. Old management mind-sets at both levels (wholesale and retail) are slowly changing and it is being recognized by the more progressive ones, that this new change is for the better. Many shop and jobber managers have not grown this relationship yet as they just do not want to change. This attitude will be their demise.

The following is a brief summary of each region:

Southern Ontario:

Total bay gross profit has dropped from 57.8% in 1999 to 57.4% gross profit in 2000. This slight decrease was lead by a 9.2% drop in gross profit in oil to an average of 36.3% and a 22% decrease in gross profit in batteries to an average of 23.4%. Average total parts gross profit (aftermarket parts and dealer parts combined) increased very slightly to 32.2%. This slight increase came from the fact the average sales mix of the shop went from 82% aftermarket parts/18% dealer parts in 1999 to 86% aftermarket/14% dealer parts in 2000 for the same period. This swing is showing that older vehicles are the norm to be worked on, but also more total gross profit is earned in the total parts department with this aftermarket parts/dealer parts sales mix. The nervousness of this part of the province is showing as supplier loyalty dropped to 64.7 percent of aftermarket purchases from a consistent loyalty of above 66% throughout the entire year of 1999.

Also management was spending more time in the bays again, 37% of his time this six month period vs 34% for the same six month period last year, which produced a lower productivity level by his/her technicians of 5.8% over 1999. Management must learn to get out of the bays if efficiency and profitability of the operation is to improve. This is a discipline that this part of the province is having a tough time getting its head around, and it is reflected with a lack of a proper bottom line. Change in mind-set must be embraced in this part of the province or many individual people, families, and companies are going to suffer severe consequences. A very powerful statement says it all “Adapt or die!!”. I am confident that many of the retail and wholesale side, in this part of the province, can take the chips off their shoulders and come to the table to build the business relationships that are required to be progressive and profitable. The real concern is with the damage the ones that don’t, do.

Central Ontario:

Total bay gross profit in this area is up to an average of 60.2%, a 2.4% increase over 1999. The most intriguing part of this equation is that oil gross profit in this region is down 6.7% over 1999 to 43.0%, tire gross profit down 4.8% over 1999 to 21.7%, battery gross profit down 14.1% over 1999 to 28.6% and total parts gross profit (aftermarket and dealer combined) down 1.6% over 1999 to an average of 30.8%. The increase in the total gross profit percentage came from labour productivity improvement which went up 10.4% to an average of $6,989 per technician. The average labour rate is up 7.5% from $62.05 in June 1999 to $66.74 in June 2000 but the real significant factor came from management’s time in the bays which went from 43% as of June 1999 to 32% as of June 2000.

It is this understanding that, once again, must be embraced by everyone operating a shop, as the numbers prove that as management comes out of the bays, productivity and profitability goes up. As forecasted two years ago, hard goods gross profit will continue to drop throughout the industry, therefore it is imperative that management understand the relationship of the labour component to the total gross profit of the ope
ration and the net profit equation. This improvement is a “job well done” for this section of the province and can only be encouraged to keep on going. You’re on the right track.

Eastern Ontario:

This region of the province continues to “buck the trend” as it experienced a slight 1.4% increase in gross profit in tires, batteries, a 1.0% increase, and parts, a 2.4% increase over 1999. Oil dropped from an average of 50.7% gross profit in 1999 to an average of 46.7% gross profit in 2000, however, Eastern Ontario consistently has the highest supplier loyalty than the other regions of the Province which is part of the equation to improved gross profits. This loyalty has been observed for six years now. Coupled with that fact, this region enjoys the lowest percentage of time management spends in the bays, which once again, has allowed a 5.9% increase in labour productivity per technician over June 1999. This has occurred even though the labour rate has remained unchanged and still floats around an average of $62.11. This region is doing a better than average job in management of the shop, and is also managing client relationships very well too, as they average 1.77 labour hours per work-order/invoice in this region. Time, however, is working against them if they don’t make movement on their labour rates. The average door rate in this region should be $75.00 based on average technician wage cost, however, management inertia is showing its true colors here.

If rates don’t move soon, then not only will shop net profitability start to be sacrificed this year, the funds will not be there to keep the shop updated to clients expectations, or to ensure the right equipment is under the roof for the task being performed, or software throughout the shop is continuously up-graded, or even worse, management may end up perceiving it can not afford to have, and keep, the best skilled, best trained technicians in the shop. That is when the “end will start”. We encourage this region to keep up its excellent management skill level it has obtained, but you must move on the labour rate dollar component. Time catches up to us too fast in this industry when we let our guard down. Get re-trained on up-to-date business methods and fine-tune the formulas. If you are seeing your net profit after tax, turn out lower than last year after inflation is factored in, take a look at the person in the mirror; now address the problem.

In Conclusion:

Our industry continues on its journey of integration, efficiency improvements, and technological advancements, and it is exciting to see when the retail and wholesale sides of the industry face these challenges, and the unprecedented realities, by embracing the new mind-sets that are required to succeed today. The skeptics, from both sides of the fence, must take a hard look at their operations and compare it to the operations that have moved to a different level. The profit and stress levels are different under the new methods of doing business. A confidence level comes back to all parties, and that confidence is reflected within the staff that works with the operation. The independent installer must embrace a new way of looking at, measuring, and thinking about, his/her business.

This must be learned. The jobber must also embrace new methods of going to market by developing a professional business relationship with the shop he/she wants to do business with, and understand how his installer client makes his/her net income. The jobber can play an important role in the installers net income picture. This also must be learned. The jobber that continues to run his/her business based on 80’s mentality will normally not pick up the better shops as customer/clients, in fact, he/she as a jobber, are probably saying at this very moment there are not enough good shops for me to go after. Nothing could be further from the truth. There are many great shops out there, you just have to move up to their level of thinking.

The installer must still focus on labour productivity and ensure he/she gets all the business from their desired client base. “Do you know who you are selling to, and how do you prove the value you bring to the table to your customer/client?” Slow down, concentrate on these two questions and watch you productivity, and profits, go up. Make sure however, that the labour is charged out at the right rate in relation to the technician working on the job.

We are in challenging but also very exciting times for our industry. Don’t hide and run away from it. Embrace it, adapt to it, and watch your business and your profits grow beyond your expectations.

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