Standing Alone: An Examination of Industry Consolidation
From the north side of H Street, high atop the roof of the U.S. Chamber of Commerce Building, Clint Dudley could see the White House; Lafayette Square in front of it; the Jackson Memorial at the center of that, a formidable bronze statue of the seventh president and hero of the War of 1812 atop a bucking horse. In the distance: The Washington Monument rose straight up into the summer sky.
On that night last July, Dudley stood almost exactly 1,024 miles from the front door of his shop in Grimes, Iowa, and just feet from some of the most renowned business women and men in the world. CEOs of Fortune 500 companies, founders of flourishing startups, heads of leading capital investment firms—let’s just say that the welcome reception for the 2015 America’s Small Business Summit was well attended.
“Surreal” is how Dudley describes it, and the obvious symbolism wasn’t lost on him. At every glance, there was power, success and influence, whether represented by the 224-year-old home of our country’s leader or in the living, breathing, networking masters of commerce sharing that same rooftop patio.
“It’s a humbling experience. That’s for sure,” Dudley says. “Right away, it makes you wonder, ‘What am I doing here?’”
Of course, he doesn’t ask that literally. Dudley’s shop, Shade Tree Auto, would be honored the following afternoon as one of 100 small businesses in the country to receive the Chamber’s DREAM BIG Small Business of the Year award. More than 3 million businesses applied. Only one auto repair shop made the final cut. So, in a literal sense, Dudley surely belonged on that rooftop. Still, it was hard for him to grasp. He’d only started his business 10 years prior, and just five years ago, it was struggling; no different than thousands upon thousands of small businesses across the country, many of which fight an uphill battle against the larger corporations that now dominate their respective industries.
The big get bigger, and their collective weight works to squeeze margins and opportunity for those below them. That’s the perception. And many believe the auto service industry is, or at least will be, no different. Today, auto service is as difficult an industry as it ever has been, and competition is fierce. The country’s largest multiple shop operators (MSOs) are growing—many for good reasons, as their sophisticated systems and processes have allowed them to scale a customer service element formerly reserved for small, independent operations.
Dudley doesn’t let that concept bother him. Instead, he thinks about what he saw from that rooftop.
Power. Success. Influence.
It’s attainable. He wants to be proof.
In January, analysts touted the automotive industry’s complete recovery from the 2007 economic recession. Total vehicle sales reached an all-time, industry record of 17.5 million in 2015, surpassing the previous high of 17.3 million in 2000. It was roughly a 1 million vehicle jump from 2014, and a 75 percent increase from when the industry bottomed out in 2009 at just over 10 million vehicles sold. Automakers and analysts now forecast the industry to approach 18 million this year, and exceed that mark in 2017.
Meanwhile, improved vehicle design and additional technological breakthroughs have helped to increase the age of the average vehicle in America to 11.5 years, according to IHS Automotive.
So, let’s add this up: Take record vehicle sales, plus an increase in average vehicle life, which together lead to an ever-growing U.S. car park (estimated by IHS at 257.9 million vehicles in 2015, a 2.1 percent increase (roughly 5.3 million additional vehicles) from 2014), and that should equal a drastic increase in business for the industry tasked to service all those cars, right?
Well, not so much.
“Consolidation continues to reduce the number of service outlets at a slow, steady rate,” according the Auto Care Association (ACA) in its 2016 Digital Auto Care Factbook. Data used from the Bureau of Labor Statistics (BLS) backs that assertion. The total number of “general repair garages,” as the BLS labels them, remained relatively flat from 2006 to 2014 (the most recent year of BLS data) with just a 0.4 percent compounded annual growth rate (CAGR), from 77,094 to 79,317 shops, over that nine-year period.
Meanwhile, all other repair categories saw a decline. The number of specialty shops dropped dramatically at a CAGR of -4.1 percent to just 7,566 total facilities from 2006 to 2014, and oil and lube businesses saw a -0.6 percent CAGR over that same time. And that’s coupled with a modest increase in sales on the shop level. Since 2009, average sales for a single-location “general repair garage” have seen a CAGR of 2.6 percent, reaching $481,347 per facility in 2014. That sales increase only marginally covers average inflation rates.
Fewer shops and increased sales per shop, that signals a consolidating market, says Eric Renninger, executive vice president of Honest-1 Auto Care, one of the country’s fastest-growing franchise systems.
“It’s not necessarily as drastic or as apparent as it might be in other industries, like pharmacies or hardware stores, but consolidation is certainly there [in the aftermarket] and it goes beyond service,” he says. “You see it in our parts vendors, even the automakers. The big guys are consolidating for economy of scales. It’s what many industries are doing, and it’s no different now with the [auto service] side.”
On an anecdotal side, Renninger points to the Advance Auto Parts acquisition of Carquest and WORLDPAC in 2014, and Toyota closing plants in Kentucky to shift the bulk of its operations to Dallas.
As recently as April, a major acquisition from Driven Brands (which operates Meineke and a slew of other auto-related brands) saw the industry giant add the 65-location Take 5 Oil Change chain. Before that purchase, Driven Brands already had a $2.1 billion market share in the automotive industry, and CEO Jonathan Fitzpatrick said at the time that the company is “actively expanding [its] footprint.”
“This isn’t something that’s slowing down,” Renninger says.
Conscious and Conscientious Growth
Christian Brothers Automotive had been in business for 13 years before offering its first franchise option. Twenty years following that initial expansion implementation, the Texas-based company has 155 stores in 22 states.
As the company’s vice president of franchise and strategic development, Josh Wall has overseen that growth in recent years as it’s become more and more rapid.
“The idea was to grow the right way, even if that meant slowly but surely,” he explains. “We want to make a place for ourselves in the marketplace where we offer high-level customer service and make relationships that are lifelong in nature. We need to build that relationship and trust in every case.”
“Conscientious growth” is the way Wall puts it. That’s what makes the growth—and an increasingly large network of facilities—sustainable long term.
Scaling culture is the focus, Renninger says, speaking not just of Honest-1 but also the foundational principle that allows any MSO to flourish. Both Honest-1 and Christian Brothers have developed business models centered on a specific set of values: Honest-1 has an environmentally friendly focus; Christian Brothers, as its name suggests, has a “Golden Rule” mentality based on its founder’s Christian faith. Both aim to connect with customers on a personal level.
But this isn’t a new-age fad of modern MSOs looking for a niche. One of the longest-tenured automotive franchises in the country, AAMCO, utilizes a similar customer-first philosophy. Known traditionally for its transmission speciality, AAMCO strives to offer a “neighborhood shop” atmosphere and culture, senior vice president of operations Brian O’Donnell says.
At its most basic level, growth cannot occur without that customer-first, culture-centric mindset, O’Donnell says. Without it, well, that’s where all the negative perceptions of “chains” and large corporations come into play.
“A positive customer experience the first time will lead to them coming back—not just that one vehicle, but the entire household of vehicles,” he says. “In the end, it’s still that personal connection, and that comes down to [the culture] of the shop.”
When that foundation is in place, O’Donnell says, then the MSO advantages come into play: tried-and-true processes, buying power, group networking, training and education, brand recognition, and wide-scale marketing ability. [SEE: The MSO Model] “The [advantages] are pretty clear,” Renninger says. “Being part of a franchise and adopting those systems really helps. There’s no way around that.
“Do I think the industry will consolidate to a point where the mom-and-pops are gone? No. This isn’t going to be like pharmacies. The industry is too fragmented for that. The future will be driven by the consumer. There’s always room for quality operations—quality always wins out. That said, quality becomes harder to provide when you face the pressures of going at it alone. The industry is only getting more challenging.”
There are plaques on the wall—lots of plaques. One is from the Urbandale Chamber of Commerce, a 2015 Best in Class recognition. There’s the Angie’s List Super Service Award, the 2016 Torch Award from the Better Business Bureau of Iowa, and AAA’s Approved Auto Repair Top Shop Award (every year from 2012 through 2015). Dudley’s name is also etched on one for being named the 2016 NAPA/ASE Des Moines Technician of the Year.
And, of course, there’s the 2015 DREAM BIG Award from the U.S. Chamber—with ample space next to it for the 2016 version of the award. This year’s winners were announced in March, and Shade Tree Auto once again made the list.
Dudley will have plenty of room for displaying all his shop’s honors when it moves into its new $2.5 million, 13,000-square-foot, ground-up facility in September. It’ll be the first time in 10 years Dudley owned his own facility.
The last time? It was a shed in the backyard of his home.
“Ten years, from that shed to where we are now, sometimes I have a hard time believing it,” he says. “We started really small, like so many other [shops]. We struggled like so many other shops. And now we’re here.”
So, how’d he get there? Well, he started by making mistakes.
He moved into his first facility—a 2,400-square-foot suite in an industrial complex—after his father cosigned with him on a loan. He took business courses at night, all while he pushed his business to grow too rapidly. He took on a business partner, and rented out an additional 2,400 square feet next door.
“[My partner] and I didn’t see eye to eye on how to make the company successful,” Dudley says, noting that he wanted to find a sustainable path to growth rather than simply expanding before the shop was ready. “Luckily, after a few years, I was able to buy him out and sort of work on getting my feet more settled.”
This was around 2010, and Dudley began honing in on industry training events and learning more about key metrics and benchmarks. He also learned that developing a recognizable brand that connected with the community would be key.
“The only problem was that I had no money to do that,” he says. “I was brainstorming ideas and decided to try joining the Chamber of Commerce here. It was the most important decision I ever made.”
Suddenly, Dudley’s network of contacts grew exponentially. He became involved in community outreach programs, sponsorship opportunities and served on countless chamber boards and committees—all of which led to better recognition for his business and invaluable learning experience from other strong business owners in his area.
Combined with improved operations and a more sophisticated financial management approach, Shade Tree Auto began a string of year-over-year, double-digit growth, pushing sales above $1 million (with just three technicians) in 2015.
It’s been a whirlwind, Dudley says, but he feels it’s only beginning.
Every business will come to a crossroads at some point, he says. It can be easy to look at the landscape around you, to take in a reception like the one he attended last July, and be intimidated by the challenges that every business operator faces. Seemingly everywhere you look: power, success, influence. Dudley now chooses to only see the opportunity that provides him.
“You can be successful in this industry. You can grow. You can improve,” he says. “You can sit back and look at big chains or companies and think that we’re all in trouble, or you can trust in what you’re doing and push ahead. We still feel like we have a long way to go, and we’re not stopping.”
Shade Tree Auto : The Small Shop Advantage
Yes, large corporations and MSOs hold some significant advantages over smaller, independent businesses. But don’t underestimate your business’s strengths, Dudley says. While he could rattle off a long list of attributes that allow most small shops to thrive, Dudley says there are three key reasons why every independent holds an advantage over its larger competitors.
You built this business. You grew it. You are connected to it in a way that very few operators at larger companies can relate to. Dudley says that’s a key advantage, and, if you’ve built up relationship equity in your community, your customers will share a similar connection to your business. Bottom line: Don’t underestimate the importance of being there and representing your business. People do business with people, Dudley says, not a logo on a shirt.
The industry and the needs of its customers have changed rapidly in recent years. Being an independent business, Dudley says he’s able to adapt much quicker to these changes than a company that might need high-level approval and a long action plan for implementation. An example: He noticed his customers transitioning to their mobile devices for the majority of communication. More and more preferred email and text updates to phone calls. So, Dudley invested in a digital inspection and electronic communication tool for the shop, allowing him to reach customers the way they desired. From start to finish, Dudley had the new system implemented into his daily operations in a few short weeks.
No two customers are the same, and all should be treated as individuals with individual needs, Dudley says. Being an independent shop operator allows him to cater to each customer much more than if he had to follow strict policy on every interaction. He personally can give customers rides or drop off their vehicles. He can work for more flexible scheduling. He and his team can offer customers more one-on-one care.