Special Report: Can We Ever Get It Back? Some Get It, Most Do Not!

The second half of 2002 created a great amount of anxiety/stress/depression (or whatever you want to call it) among most shop owners, as they are finding it hard to cope, because once again for the third year in a row, the rug was pulled out from under them. People are starting to wonder if, and when, will they ever get one full year of solid revenue and profits back into their business.

Business went for a tumble between July and December, down on average 6.7% in total sales compared with the first half of 2002. Shop total gross profit dollars, shop efficiency, shop labour rates, shop supplier loyalty, and Management wages all weakened during the second half, which in essence means “Management panic” is showing its ugly head throughout the marketplace. When Management panics about its business, rather than analyse and adjust the business processes accordingly, the first thing that disappears is the shops bottom line. That kind of trend will create a disaster in our sector of the industry if not understood, and “fixed”.

Our December survey revealed that the average shop’s car count was down 8.2% compared to the first half of the year. Although average billed labour hours went from 1.40 hours billed per invoice as at June 2002 to 1.44 hours billed per invoice as at December 2002, total billed labour hours in the shop dropped 7.2% compared to the first half of the year.

The average shop productivity dropped to 59% as at December from 61% in June 2002. The average shop labour rates are virtually stagnant for the balance of the year as owners did not adjust for increasing costs within the business. The average maintenance labour rate as at December was $69.66. This should have been $80.53 based on the average technician’s hourly wage. The average diagnostic rate was $82.57 as at December and this should have been $103.00. Both labour rates had to be adjusted again January 1, 2003 if Management understood their business costs. It appears the average shop is playing the game of “price competition” rather than offer a “value oriented” service. Working the math through, the decision by Management to conduct its business affairs playing the price game, has forfeited an average of $13,689.00 in net profit in 2002 from maintenance labour revenue alone for the average shop. This truly is on the verge of incompetency.

The average Jobber is losing “customer share” as well. Shop loyalty is disappearing as Jobbers are back to competing in the marketplace based on price, instead of educating shops about the advantage of, and delivering, true value. Perhaps this strategy creates some short term gains in “sales”, but not necessarily “profits”, but it definitely is developing long term “future pain” for their business. They are back to working much harder, certainly not smarter. The average shop loyalty dropped from 73.6% in June to 68.7% by December. This trend by Jobbers, and actions of shop owners to pounce, like a cat, on the price, price, white-box offers, was the reason a survey participant commented on his survey form to us “back to the same old crap, when will this industry ever smarten up?”

Management is also feeling the financial pinch personally. The average shop owner has decided to “subsidize” their business by reducing their own wages by 8% in the second half of the year. This kind of thing does not exactly create a positive attitude towards the business. Also, some survey participants own their land and building the shop operates from. These owners are further fooling themselves by not working in a “marketplace rent” factor for their facility into their business numbers. If this was done they would clearly see how much money they are losing. These shops have a tendency to charge a lessor labour rate, as Management justifies in their own minds that their overhead is lower since they do not have a mortgage payment. This “subsidy” is creating “smoke and mirror” bottom lines in our industry, not to mention sending the wrong message to the consumer with these subsidized labour rates.

The following is a summary of each area in Ontario:

Southern Ontario:

This section of the Province has been “bombarded” with white box junkies, and shop owners bought into it hook, line, and sinker. The average shops aftermarket parts gross profit went up from 37.9% in June to 40.8% in December, which represents a 7.6% increase. Shop owners focus was on hard goods dollars, not productivity dollars, and this mistake took their total shop gross profit percentage from 60.6% in June down to 58.1% in December. Monthly shop labour dollars went from $7,250 per technician in June down to $6,627 by December which is an 8.6% decrease. Total average shop labour dollars lost works out to $1,850.00 per month or $22,203 per year. Based on the surveys submitted the total additional dollars on their aftermarket parts made from these smooth selling jobbers works out to only $438.00 per month, or $5,256.00 per year. The math does not lie, you’ve been distracted. The best advice to give you, at this point, is get off the focus of hard goods pricing, and get back to your focus on your client by managing their vehicle(s) properly, therefore increasing productivity. Throw these best price in town salesmen out the door. These type of salesmen will do nothing for your business. Hook back up with a value-orientated jobber, build and support the relationship, and watch your bottom line increase.

Based on the technician wages being paid in this area, and taking into account the increases required as of January 1, 2003, the minimum maintenance labour rate should be $85.00 and the minimum diagnostic rate should be $108.00. As at December 31 2002 the average shop’s maintenance rate was $69.48 with a diagnostic rate of $84.39. The average shop in this area is only producing 1.27 labour hours per invoice, therefore the average invoice is currently $202.93 including taxes. If Management moved its maintenance rate to $85 it would mean the average customer/client invoice total would change by $22.66, taxes included, bringing it up to $225.59. If a shop Management feels they can’t do that by delivering some more value to the client, I would seriously advise winding down the business, and get out because this Manager just gave up $59,000 in additional gross profit, potential net profit dollars for the shop. You would never make that amount of money in additional hard goods profit. Slow down and study your business; the dollars are there for the select few who get focussed.

Central Ontario:

This area also lost a lot of focus last year. Total shop gross profit percentage went from 61.7% in June to 59.0% by December. Car count was down on average of 77 per month for the last six months which ended up sending Management into stress mode. Management went back to “price shopping” on hard goods as jobber loyalty took another drop going from 66.5% down to 63.0 % of all aftermarket purchases going to one chosen supplier. Some Managers went back into the bays, thinking that could generate more profit for the business. This move was some of the cause of technician productivity dropping from 68% in June to 55% by December, however, it appears no one at the front counter was readily available, or not doing their job, to counsel the customer/client on the maintenance of their vehicle. If the shop does not take responsibility for the maintenance “package” of the client’s vehicle, then you have a shop who believes the customer/client is the expert in the vehicle. This attitude will drive down productivity in the shop, not to mention net profit, and Management can not blame the technicians for not being productive. It is Management’s responsibility to set up the “shop processes” to be followed.

Labour rates in this region are also out of touch in regards to what the average technician is being paid. The current average maintenance rate is $72.40 and this should now be a minimum of $89.00 as of April 2003. The current diagnostic rate is $87.20 and this should be a minimum of $113.00. Once again work through the math in your own shop and see
what the true cost is to the customer/client. The difference is very small.

Eastern Ontario:

This region ushered in the Drive Clean program on July 1, 2002. The tradition did not change here either. Shops rapidly went out of control, and stress levels through the roof. Drive Clean tests brought in the volume of customers and it virtually took until October/ November to get the shop back under control. Emission testing started the process of sales mix change in this region as the average shop went from a mix of 89% aftermarket parts and 11% dealer parts to 81% aftermarket parts and 19% dealer parts. This created the opportunity for diagnostic billing but many Managers are nervous about learning this new curve as the average shops total gross profit percentage remained virtually the same as June 2002, that is 63.3%. Labour rates in this region are also out of line with technician wage costs. The minimum maintenance rate should now be $85 and with a minimum diagnostic rate of $110. This area is currently at an average of $67.10 and $76.12 respectfully.

Jobber loyalty is still the highest in Ontario, but it slipped a full 10 percentage points in the final six months of 2002. Shops were reporting that their main supplier was not stocking as well as they should be, forcing Management to shop elsewhere. Relationships are weakening as Jobbers are not making the effort required to secure all the shops business in this region of the Province.

Taking the Drive Clean invoices out of the count, the average shop was able to improve productivity going from an average of 1.47 labour hours billed per invoice to 1.53. A slight improvement, but also the highest average in the Province. Many Managers have become focussed on the right processes at the front counter to strive for managing all the maintenance business from a given client. It’s not perfect by any means, but this region is doing more right then they are doing wrong. If they got their labour rate component straightened out, their bottom lines would soar.

Conclusion:

Many shops have spent a lot of time working on their processes in the back. It is now time to move and straighten out the processes at the front counter. This area today has become the most important area to be managed in the entire shop. Without the right counter people, the right training, and the right counter processes, many un-billed labour hours walk right out the front door. Management must slow the entire business process down. Many shops have the right tools at the front but they don’t use them. I am talking about the Mitchell or Alldata maintenance schedules. It must become a ritual to always print the schedules and fully review them with the client. Counsel the client on what the manufacturer recommends, compare it to the vehicle history, and set up a customized schedule for the client. You are in the relationship business, therefore slow down and build the relationship with the client by advising them based on how they, the client, uses the car. This process will enhance your credibility as a competent outlet, and secure the work that is, or has been, missed in the past. You can get the business missed back … and some of you will get it … but most will not … because they won’t change how they think and do things in their shop.

Finally … please go to www.ekw.ca, click on Ontario, then click on “Survey Registration” and sign up for the next survey at the end of June. All previous survey participants must re-sign for the new electronic edition of our statistics. You only have to register once for all future surveys. The survey questionnaire will be sent to you in June via E-Mail. When completed by you, and submitted, it will be going into our secure server. If we get enough registrations we will be able to provide greater geographical area breakdowns and focussed commentary. It will be up to you. Participate in our sector of the industry, the Independent sector, and register on-line today!!!!

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