Business on the Bubble

Accounts Receivable — Up

Shop Operating Bank Debt — Up

Owner’s Time In The Bays — Up

Dealer Parts Purchases — Up

Billed Labour Hours — Down

What’s wrong with this picture?

Shop operators continue to be frustrated by their business dilemma, however, our first secure Internet survey confirmed many things that were only talked about before but never measured.

We asked many new questions and the feedback revealed and confirmed what many of the problems are within our sector of the industry.

Many shop owners are currently at a very high stress level trying to keep their bays up-to-date, and their business operating as a viable enterprise. Overall operation bank lines of credit have soared along with their accounts receivable. The average shop in Ontario had their shop operating debt in the form of a line of credit or business bank loan, but not including mortgages, come in at $38,590 as at June 30, 2003 which is a 98% increase in debt load from June 2002. Shop accounts receivable were up 8% over 2002 to an average of $21,438. The most revealing issue with regards to accounts receivable is that 45.9% of the average shop’s receivables were owed by commercial accounts and the average commercial account was 25 days past due. When accounts are due in 30 days, this puts the average commercial account coming in at 55 days.

Another very revealing fact of the state of the marketplace is that dealer parts purchases were up significantly. In June 2002, the average shop’s dealer parts made up 14.9% of the parts purchased and aftermarket parts were 85.1%. In June 2003, dealer parts came in at an average of 26% of the parts purchases made. Dealerships became very aggressive over the past year, but when you step back, the real story here is that the aftermarket is doing a terrible job defining the quality and exact fit of its own parts. Too many Jobbers are relegating aftermarket parts to “white box” which in turn is totally destroying the fabric of our industry. Surely Industry Associations, Warehouse Distributors and Manufacturers must step up with quality educational material clarifying, and comparing their quality aftermarket products to OE to circumvent these Jobbers who focus on the message that price and deals are the only things to consider in parts purchases. It appears that many shop owners are fighting back on their own by going behind their Jobber directly to the Dealership because no competent shop owner is going to place his/her reputation with their customer/client based on the price of a vehicle part. Better shops demand quality parts, and if the Jobber can’t deliver the product, or doesn’t want to deliver the product, the shop owner will go where he or she can be confident in what they are purchasing. Many jobbers are chasing their best shop owner’s away, and then people wonder why Jobbers continue to say “sales are down”, or “shop loyalty is questionable”. Jobbers must learn and understand the word “value” and get off of “price.”

Everyone within our industry seemingly has been voicing their opinion that the biggest problem with the aftermarket industry is the lack of finding competent technicians. This is a serious issue, however, the rankings are in. Finding technicians came in at #3 by the survey respondents (38% of the respondents). The two top business challenges from our June survey were #1 Self Discipline to manage the business (56% of the respondents), and #2 Maintaining on-going technical training (52% of the respondents).

There is no doubt about it, self discipline is required to manage this business today, however, the industry definitely lacks discipline when receivables are up, and past due; the owner is spending, on average, 32% of his time back in the bays, up 10 full points from 22% one year ago, yet total sales per hoist are down on average 18% over the same period last year. When you are in the bays, you are not talking with and educating your customer/ client base. This truly helps to clarify why average billed hours per work order/invoice have plummeted 17.8% to an average of 1.15 hours from 1.4 hours in June 2002.

The other factor that comes into play is that service intervals are changing as vehicles and the parts in them are built better. Things are not breaking like they used to!! And shops relying primarily on the heat of spring and summer to make them break endured a very cool spring this year dumping their cash and profits in the toilet, confirming the independent aftermarket has not adjusted their business processes to the new business realities.

The following is a summary of each area of the Province.

Southern Ontario:

This area of the Province is back struggling desperately. Management saw it necessary to get back on the floor trying to hold the business together as his time in the bays went from 26% last June up to 41% as at June 2003. It hasn’t worked. Even though the shop saw a 7% increase in labour revenue, total sales per hoist dropped 10.1%. Billed labor hours dropped from 1.36 hours per work order/invoice to 1.06, but the number of invoices shot up 25.3%. The shop appeared busier, activity was created, but any hope of profits have vanished and the average shop bank debt has shot up 200%!!! Overall business operating debt has skyrocketed from a year ago in this region of the Province. Shops are placing increased collateral guarantees on their personal homes to keep the business doors open.

Dealer parts purchases soared 15.9% from the previous year. Parts sales mix came in at 75.3% aftermarket parts to 24.7% dealer parts compared to 78.7% and 21.3% respectively last year. Basic maintenance labour rates climbed 4.5% (before any inflation is factored in) coming in at an average of $72.13. Based on average technician wage costs from survey participants in this area, the labour rate should be a minimum of $81.27. Diagnostic rates only went up 1.5% to average $85.65. They should be $113.15 based on diagnostic technician wage costs. Interesting enough, dealer parts purchases went up but the diagnostic rate virtually stood still. Management in the bays seemed to have good intentions, however the results speak for themselves. Management must have the self discipline to work on the business, not in the business. If Management doesn’t learn to change his/her business processes, and have the discipline to implement them, … do the math, … they are on their way out. We will hear about more shops falling as many owners do not want to accept reality that this business and its processes have changed! If many of these shops manage to stay open, it is only because of their ego … they accept the fact that they bought themselves a job, and it is a very poor paying job at that, but overall, time is totally working against them in this industry. The very sad part is that their families are ultimately the ones that will suffer the most.

Central Ontario:

This region of the Province concentrated on hard goods management rather than productivity management, causing their profits to suffer. No doubt about it, the psychology of SARS and the cool wet spring didn’t help either but the vehicle count was the same as last year. Oil gross profit went from 45.1% to 48.0%, tires from 21.8% in 2002 to 23.9% in 2003, battery gross profit went from 30.8% to 31.5%, aftermarket parts from 39.5% down to 39.1% and dealer parts from 22.0% up to an average of 30.1%. It can all sound pretty good as supplier loyalty went from 66.5% of purchases to one main supplier up to 69.5% which suggests that the message is getting through, however, even after a 3.2% increase in labour rates, labour revenue is down 27% per technician from the same period last year. Average billed hours per workorder/ invoice went from 1.36 to 1.03 yet the number of workorders/invoices written changed by less than 1% (1,584 invoices in 2002 and 1,570 invoices in 2003 for the same period). Management spent on average 33% of his time in the bays this year compared to 20% for the same time period last year creating the same results as in Southern Ontario. Once again the independent aftermarket mu
st learn that the old business model is broken and doesn’t work any more when it comes to shop profitability.

Eastern Ontario:

This region of the Province did not escape the wrath of lack of self discipline. Overall gross profit percentages are up, however productivity fell by 6.8% in terms of hours billed per invoice (1.47 in 2002 down to 1.37 in 2003). Year over year labour revenue virtually came in at the same ($7,167 per technician in 2002 and $7,143 in 2003) but that was after an 8.9% increase in the basic maintenance labour rate. As in the other areas of the Province shop bank debt exposure shot up 49% compared to the same period last year. Shop management seems to be going through the standard business practices rather than concentrating on the change process required at the front counter and in the bays. Covering up a business problem by continuing to borrow money thinking that you are in a short term problem is wrong. When surgery is required, Band-Aid’s don’t work. In fact as in a Band-Aid situation when the wound is large enough, serious infections can still easily get in, only the business infection we are most nervous about is called bankruptcy.

This area of the Province appears to be the winner when comparing businesses to the rest of the Province, but the facts are, this area is starting to struggle as well. Shop loyalty to their Jobber has slipped from 83% in 2002 to 71.3% as at June this year. Dealer parts purchases have more than doubled. Shop management is spending more time in the bays (23% this year from 14% last year) yet total sales per hoist are down 8.4%.

Conclusion:

The independent sector of our industry must get on with the task at hand.

Shop owners must change their business measurement and business processes to deal with the increased quality of the vehicles, the changing service intervals of the vehicles, the uninformed consumer ignoring preventative maintenance, and dealing with how to increase his business by attracting the right customer/client base. Price/Service/Quality is how you run a shop–pick 2. Concentrate on Service and Quality to attract the right clientele. Shop owners must adopt discipline business practices or they will continue to see themselves in trouble and will NOT move their business and personal career forward.

Jobbers have to re-learn their entire business over again and focus on the quality of what parts they carry coupled with offering “value” services to shop management. The price issue is the main thought in the Jobber’s head, however quality and value is in the head of the better shop owner. Price/Right/Fast is how you run a Jobber business — pick 2. Concentrate on Right parts and Fast delivery to attract the best shop owners as first call loyalty.

Warehouse Distributors and Manufacturers must circumvent these Jobbers focussing on off-shore products and “flogging” the market screaming price and deals. Educate Jobbers and shop owners about product quality. Compare apples with apples. Compare quality and exact fit specifications. Now if you don’t match up, then don’t blame the shop owner for not demanding your products be stocked by his/her Jobber, however, I’m informed by my clientele that most name brand aftermarket parts are superior products but if the Jobber isn’t going to carry them, then dealers’ parts take over. That’s a losing proposition for Jobbers, WD’s and Manufacturers.

Finally, we had shop owners from other parts of the country sign on to participate in our survey. That is absolutely fantastic. Unfortunately there were not enough of you to give us the confidence in the numbers. If you were one of the shops that signed in, you will automatically be in for the next survey and will receive your questionnaire by late December, however, please talk with your peers and get more of them to sign up to participate. Once we have a decent base of shops participating then our E.K. Williams Management Institute will be able to provide your area with numbers to compare. In the meantime, I know from my travels across the country, the problems are very much the same as in Ontario. The individual numbers will be different, but the problems are the same, so heed the advice that has been given to Ontario.

Thanks to everyone who is supporting and participating in our secure Internet surveys. This is the way to do it, and the possibilities to provide comprehensive information to the Independent Sector of the industry is incredible.

CENTRAL CANADA REPORT: Statistics as of June 30, 2003