Too many shops focus on the low-price as their main business strategy, missing the fact that quality of service, work is what brings cars into the bays.
The independent sector of the automotive aftermarket industry in Canada continues to struggle, as confirmed by the December 31, 2005 statistical report. The numbers are scary, in that the same old story continues to be told.
Consider the following facts:
* Vehicles are built better and therefore service intervals have changed.
* New car dealerships are after the clients of the independent sector and are achieving their goal with each passing year as technology information and tool lockout impedes the progress of the Independent shop.
* The knowledge skill level required from a competent technician today is dramatically different than it was seven years ago.
* Independent shop technical training is getting harder to obtain.
* New car dealerships insinuate to the consumer that if the vehicle is not serviced at the dealership, it will void the manufacturer warranty. But they refuse to put that in writing.
* Independent shops continue to focus their efforts on markup pricing instead of gross profit management.
* Too many parts suppliers continue to go to market with low-price parts from offshore as their main business strategy. They talk only about price and the mark-up the shop can obtain in the marketplace, rather than on business issues such as shop processes and how to retain a shop’s customer/client base.
* There are too many independent shops that run their business based on price and not on service and quality.
* Brand name North American aftermarket parts manufacturers are under siege from off-shore products and OE parts from car dealerships. Brand name manufacturers are still failing to educate the independent sector as to the fit, form and function of their products on all makes and models (including imports) of automobiles.
* Brand name aftermarket parts manufacturers continue to price their products against other aftermarket part manufacturers instead of against OE parts.
Cutting through the noise
The question that must be asked is: What have these issues done to the independent sector?
Most shops within the independent sector are confused by the noise in the industry and miss the truth of what is going on. They haven’t been taught or shown how to do the math and the consequences of their actions to the business.
The average shop in Canada is working at an overall total bay gross profit as at December 31, 2005 of 54.4 per cent, whereas in the same period five-to-10 years ago, inclusively, the average was continuously over 60 per cent. This number needs to be 70 per cent today.
Shops have been taught by the commodity sector to always be price competitive and shop owners listened. Shop management didn’t charge out for the shop’s time, which represents their knowledge (labour) and productivity numbers across the country have dropped, now down to an average of 62 per cent. This number needs to be a minimum of 75 per cent. The average shop owner does not understand that when you use the same rules that worked in the 80’s and 90’s those rules will not work today. Using the same old mark-up rules on commodities, pricing your knowledge out improperly at the wrong door rate, where the actual time is not captured properly on the invoice/repair order and paid for, means fewer dollars come into the business.
This is supported by the fact the average shop’s debt load has doubled in the past year. Five-to-10 years ago, inclusive, accounts receivables pretty well covered off any business operating debt. Today the average receivable in a shop, although still $10,000 to $15,000 too high over proper business guidelines, represents one-half of the operating debt load (operating debt load does not include shop mortgages).
Aftermarket parts to dealer parts sales mix continue to fall to an average of 73.5 per cent of all parts purchased are from the aftermarket. The balance goes back to the OE car dealerships. The aftermarket is not focused on fit, form and function for all makes and models, and import vehicles continue to climb across the land. The average shop owner perceives the aftermarket does not have the right part for the job at-hand. The parts suppliers, WDs and aftermarket part manufacturers are at fault on this one.
Overall shop gross profit has improved in the past year. December 2004 saw an average total shop gross profit of 58.5 per cent and now it is at 60.4 per cent as at December 2005. Although still far away from the objective of 70 per cent, it is on the right track. Billed hours per invoice have improved nicely in this region to average 2.1, up from 1.59 a year ago, which is why the total gross profit percentage of the shop moved forward. The weak points in this region include door rates, which should be averaging $95.88 for maintenance work and $131.07 for diagnostic based on reported hourly pay rates of the technicians. The average shop’s receivables in this province, based on all the numbers reported, should not exceed $9,644. Yet the average shop is sitting on a receivable balance of $18,190, of which 63 per cent owed by commercial accounts and that are on average paying their account every 77 days. Meanwhile average shop’s operating debt load is now at $27,000 not including mortgages.
Management is not paying attention to the details of their business. Total shop gross profit has plummeted from 54.8 per cent to 51.2 per cent. Fluid/oil gross profit is down from 47 per cent to 43.8 per cent. Tires went from 22.4 per cent to an average of 20.1 per cent gross profit. Battery gross profit slid from 39 per cent to 28.2 per cent, and aftermarket parts are now averaging 47.5 per cent from 54 per cent last year. Labour rates are virtually standing still in the Prairies as last year they averaged $74.63 for maintenance and now they are averaging $75.27. Diagnostic was at $88.40 and is now $90.47. Based on the wage factors submitted in the survey, the Prairies should be in the range of $99.58 for maintenance and $139.64 for diagnostic door rates. It appears the shops on the Prairies are clinging to the old rules of commodity pricing and are thinking about being price competitive rather than value delivered for the price required. Time will work against these shops if their business processes are not immediately addressed.
This area of the province continues to struggle. Management is the problem, in that too many shop owners are playing mechanic and are not willing to learn how to focus on their business. Management is spending on average 48 per cent of their working day in the bays trying to fix vehicles. This is up from 43 per cent a year ago. Door rates are at a stand still. The average maintenance rate was at $74.44 in December 2004. Today, they are averaging $74.01. Diagnostic was averaging $90.24 in 2004 and now reported at an average of $90.88. Based on what this region is paying technicians, the door rates should be a minimum of $84.80 for maintenance and $119.78 for diagnostic. Average billed hours per invoice has dropped from 1.62 in 2004 to 1.2 in 2005. Technician productivity has gone from 49 per cent to 47 per cent. Average receivables are standing at $23,823, of which 41 per cent are owed by commercial accounts paying on average every 58 days. Operating debt load has gone from $12,830 in December 2004 to an average of $31,223 December 2005. This is a recipe for financial disaster.
Management couldn’t hold on to their top technicians and so management has gone back into the bays to try to make things work, spending 36 per cent of their working day under a hoist. Management never adjusted business processes over the past two-to-three years in order to retain a vehicle maintenance process within their shop, relying instead on repairs. Consequently, total shop gross profit has plummeted from 61.2 per cent a year ago to 52.3 per cent as at December 31, 2005. Added to this, is the trend that supplier loyalty is slipping again as the price of the commodities is taking precedent over shop productivity. Door rates in this region are at $79.05 maintenance and $98.00 diagnostic. Based on their technician pay scales, the minimum maintenance rate should be $95.46 and minimum diagnostic rate should be $134.07. Once again, as in other regions of the country, debt load is on the increase. The average shop operating debt load has moved from $18,603 in 2004 to $25,780 in 2005. Receivables in 2004 covered the full operating debt load. In 2005, the average receivables were $17,543 which is $8,000 short of the 2005 operating debt load and the receivables are also $6,000 higher than the shop can afford to carry.
This region is in close competition with B.C. when comparing shop numbers. However, Eastern Ontario has a more dramatic dealer parts sales mix. This region has two issues to deal with. The first is that parts suppliers are not stocking what many shops need to operate. This has caused supplier loyalty to drop from 69.8 per cent in 2004 to 61.7 per cent in 2005. The second is that the number of new and import vehicles entering the bays. This mix of new and import allows for potential diagnostic billing to take place which supports the total gross profit dollars and percentages coming into the shop. However, the average shop billed hours per invoice have dropped to 1.2. This number should be 2.0 to 2.5. This means the front counter processes coupled with the right financial guidelines are not in place.
Some shops are playing the volume game, watching sales and car count instead of productivity. Maintenance door rates have stood still but there has been good movement on the diagnostic rate in this region of the country. The 2004 maintenance rates averaged $73.94 and now they are at $74.75. But they should be at $81.02. The 2004 diagnostic rate was $83.49 and the 2005 rate finished at $93.39, which is positive. But that rate should be at $109.30 based on current technician wages being paid. The biggest concern for this region is a parallel with so many other regions of the country and that is the debt load being carried. In 2004, the average shop debt load was $12,180 and by December 31, 2005 the average shop debt load was up to a whopping $30,843 with only $13,520 in receivables to cover it. The receivables may be within business operating guidelines.
This region is the poorest of any in Canada and that is said with the greatest of respect. Consider that vehicles do not cost less in the Atlantic region, equipment does not cost less and competent technicians do not run in abundance. So what appears to be the problem? According to the numbers submitted, most shops in this region watch their sales. They do not focus at all on a bottom line. It appears profit is a dirty word and the general attitude is, “As long as I made a sale to keep the boys busy in the back shop everything should be OK.” When management perceives profit as a negative, I can assure you the money will not be available to hire and retain the best technicians, improve the facility, have the right equipment and have a good financial standard of living.
Business as usual not good enough anymore
Their technician wage rates are too low for what a competent technician must know today. Management will lose good people who may move east, either to Ontario or the western provinces, where technician pay scales are at levels that it pays for a technician in Atlantic Canada to pick up and move. I don’t believe that is what the technicians of those regions really want to do. They want to live where they work as the Atlantic provinces are their home. But those technicians must be capable of supporting their families.
Consider that even at current technician pay scales the minimum maintenance door rate in the Atlantic region should be in the range of $70.43 for maintenance work with a diagnostic rate of $90.68. Compare that with the current average door rates from the survey of $59.63 for maintenance and $69.85 for diagnostic. Once shop management learns how to move to the correct door rate averages of the rest of the country and achieve the technician average pay scale of the rest of the country both technician and shop owners will be served well. It is a business process to get there. But first shop management must have the desire to get to that standard. The real bad news from Atlantic Canada is the debt load and receivable balance of the average shop. Currently the average shop debt load is in the range of $35,000, not including mortgages, and carries an account receivable balance of $32,124, being paid on an average of 90 days. This must be addressed in this region if change is going to take place.
This analysis has been my toughest to write about in many years. It is too negative. The profitability and management problems are getting worse in our sector of the industry and it appears the sector does not want to change its current and past habits to correct the situation. If things do not change, and our sector does not learn to come together to get on with what has to be done, then I see a huge amount of cleansing of our sector taking place within the next three years.
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