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Standing Alone: An Examination of Industry Consolidation

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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.


Consolidating Numbers

American Dream  Clint Dudley grew his business from a backyard shed to a 4,800-square-foot, $1 million auto care operation in Grimes, Iowa. A new 13,000-square-foot facility opens in September. 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.”

The MSO Model


AAMCO, Honest-1 and Christian Brothers are three leading, rapidly growing MSOs, all of which incorporate modern, sophisticated business processes and philosophies into day-to-day operations. Many similarities exist between the three that allow them to thrive, but each separates itself with unique solutions to problems facing all shops, regardless of size.

*Reflects total facility count at end of 2015

AAMCO Transmissions

Store Count: 651*
Target 2016 Growth: 30 net facilities
Single-Unit Annual Revenue: $650,000
Key Differentiators:

Tech Experts
AAMCO senior vice president of operations Brian O’Donnell says the company’s long-standing transmission focus has helped its reputation as it converts its business model to more of a total-car-care focus. Today, the company’s work mix is roughly 70 percent transmission and 30 percent general service. The goal, O’Donnell says, is to get to a 50-50 split. And capturing that general work has been simpler than many might think: “We view it as we’re swimming downstream, while others have to swim upstream,” he says. “If you’ve trusted us for 55 years to do the most difficult jobs, then certainly you’re going to trust us to do your brakes and oil changes, too. We’re not being challenged by consumers on this.”

Transmission Plant
One innovation that made that total-car-care transition possible is AAMCO’s 200,000-square-foot transmission remanufacturing plant in Georgia. Taking complete rebuilds out of shops allows technicians to move away from the bench and on to more profitable work.

AAMCO University
Training is not only the foundation to success in every role in a repair facility, O’Donnell says, but it’s also the key to presenting clear career paths to team members. That in turn improves both recruiting and retention. Opened in 2015, AAMCO University offers training to every shop role, broken down into specific schools: School of Franchise Support; School of Franchise Ownership; School of Management; and School of Technical Excellence. Its brick-and-mortar facility is located in Georgia, but there are also more than 300 online courses—all free of charge to AAMCO team members.

Christian Brothers Automotive

Store Count: 155*
Target 2016 Growth: 10-11 additional facilities
Single-Unit Annual Revenue: $1.4 million
Key Differentiators:

 

NPS Tracking
How do you measure your word-of-mouth referrals and community representation? Christian Brothers executive Josh Wall says it comes down to three letters: NPS, your net promoter score. This simple metric analyzes your customers’ willingness to recommend your services to their peers. (Although it varies, NPS is often measured using a one-question survey; i.e., “On a scale of 1 to 10, how likely are you to refer this facility to family and friends based on your experience?” The results are then turned into a percentage.) Christian Brothers, across all 152 stores, averaged 81 percent in 2015, a number that’s more than 10 percent higher than most industry benchmarks.

Clear Career Path
Wall says that Christian Brothers is working to aggressively “attack the issue of employee turnover.” One of the larger initiatives the company has made is in terms of career development programs. In 2015, the company launched its Technician Ambassador Program, which identifies a technician “leader” in each shop who attends monthly training from Christian Brothers to then pass along to the rest of the team. A similar program also exists for management training, called the Future Franchise Academy. In this two-year management training program, a participant (who has to be referred by his or her current franchisee and go through an application process) receives training on everything from HR issues and hiring to shop performance and marketing. Completion of the programs qualifies the team member to become a general manager of a Christian Brothers location, or have the opportunity to open his or her own location as a franchisee (with financial aid).

Honest Auto Care

REPEATABLE, SUSTAINABLE: AAMCO Transmissions, Christian Brothers Automotive and Honest-1 Auto Care are examples of value-driven shops that provide consistency across all aspects of business. Store Count: 58*
Target 2016 Growth: 15-20 additional locations
Single-Unit Annual Revenue: $922,000
Key Differentiators:

 

Face of the Franchise
The transition to shop owner is often a difficult one for many in the industry. At Honest-1, franchisees receive an in-depth onboarding training program, and the vast majority tend to have business management backgrounds, says Eric Renninger, the company’s executive vice president. “The industry is so difficult today that without that background and business knowledge, there’s just too steep a learning curve,” he says. “Our franchisees all have track records of success, and that allows them to find success in their shops very quickly.” Renninger says it’s also a focus to utilize those franchisees as assets for igniting growth of the company, as more than 40 percent of the company’s franchisees own multiple locations.

A Greater Cause
Too many businesses—particularly large, national brands—are often criticized for focusing on the bottom line at the expense of its clients and others in its marketplace. Honest-1, Renninger says, tries to reverse that stereotype through its various green initiatives as an environmentally friendly company. It uses green automotive products, builds responsible and sustainable facilities and works with local charities on other initiatives. Standing for something more than your shop’s bottom line is important, Renninger says. It not only separates you from competition, but it also creates a tighter bond and appreciation with customers.

Reputation
Most national or super-regional brands in auto repair are known for a specialty, Renninger says. “Midas, Meineke, Firestone—they all have that niche,” he says. “What separates us is that we want to be that one-stop shop. No one goes to the butcher for meat, the bakery for bread, the dairy for milk, etc., anymore. They go to the supermarket. Auto repair has to be the same way.”

 

Standing Out

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.

Never Satisfied Shade Tree Auto owner Clint Dudley maintains a positive outlook for independent auto care businesses and continues to push his business forward. 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 : Secrets to Better Hiring

Three technicians accounted for $1 million in work in 2015. The shop’s manager wrote nearly all those orders, with Dudley chipping in when he could. Efficiency is key to Shade Tree Auto’s success. While systems, processes and remaining on the forefront of shop technology have played a role, Dudley credits the shop’s success to its team. “They are incredible,” he says. “Right now, we have the best staff I’ve ever worked with anywhere.”

When his shop moves into a larger facility in the fall, he’ll add to his team (up to four more full-time staffers), and he will look to hire people who fit his team’s culture and meet a high standard of excellence.

“We have a type we look for, and we won’t compromise on that,” he says.

Here are Dudley’s three keys to finding the right fit:


SECRET #1:

Find people who are better than you.

That’s one of Dudley’s firm rules of hiring. If he’s looking for a tech, he wants that person to be more skilled than he is. If he’s looking for a service advisor, he wants someone who has superior sales skills to his own.

“Surround yourself with great people,” he says. “You need to be able to play to people’s strengths, and they need to be in the positions that fit their skillsets in the best possible way.”


SECRET #2

Consider your Customers

Part of Dudley’s role as a shop operator is interacting with and understanding his customers. You should know what your customers expect and want out of the repair experience, he says. Find people that meet those needs.


SECRET #3

Look for Passion and Education

Everyone wants long-term team members. There are a lot of factors that come into play with retaining top talent, but generally speaking, people who stick around, Dudley says, share a passion for their work and are dedicated to the industry and their careers. But how do you qualify that in a hiring process?

“It’s fairly simple, actually,” Dudley says. “Look at the training they’ve done, the certifications they have. A high ASE certification indicates a lot of time put into their work. They’re dedicated to their careers.”

For determining passion, he says, ask them about difficult work days—times they’ve had to put in extra hours or go above and beyond their regular roles. If they have ample examples, those are people who are willing to do the same for you and your business.

GRADUAL GROWTH: Shade Tree Auto will leave its three-bay location in September for a facility that is triple the size. Owner Clint Dudley was careful not to expand until growth was sustained.

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.


Personal Connection.

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.


Reaction Time.

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.


Flexibility.

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.

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