Friday, 31 August 2001 10:00

Those damn refrigerator magnets

Written by Tom Slear

Uh oh, I feel the urge coming on, that compelling need to predict. All this talk about insurance companies owning body shops and no one answering the salient question: What will Allstate's purchase of Sterling lead to? What will be the outcome in five or 10 years? 

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In my opinion, nothing, which I will explain in a minute, along will several other predictions. But first let me say that I know the danger. Years ago an editor told me that prophesying writers end up looking foolish, undone by refrigerator magnets. Readers save the article on their refrigerators with the help of inch-square magnets and later inundate the publication with letters that begin, "That ace reporter of yours was wrong 99 percent of the time..."

The theory has two flaws, however. One, it doesn't take into account the windbags on television. The magnets can't hold up videocassettes.

And two, the magnets are too much in demand to waste on articles. There are coupons to store, baby pictures to view, fifth grade essays to display, and phone numbers of that great American institution- pizza shops that deliver--to have handy.

So, I think I'm safe. Here goes…

Insurance companies won't stay in the body shop industry. Granted, Allstate has a toehold now that it purchased Sterling, but at the time of the sale, Sterling owned 39 shops. How many thousands of shops are there in the United States? The Allstate/Sterling experiment is a snowflake in a snowbank. It will have absolutely no impact.

"Hold on," you say, "Allstate will grow the Sterling business. Fifty shops will soon become 100 shops, 200 shops."

Perhaps, but if Allstate eventually owns hundreds of shops, it will no longer be just an insurance company, it will be a body shop chain. Company executives will have to distract themselves from the business of insurance to keep an eye on the collision industry. Can you imagine that clash of cultures? Wingtips dealing with steel tips. It won't be pretty. Allstate executives will quickly come to realize that their core business is paying claims, not fixing cars, and they should no more be in the collision repair business than they should be in the contracting business to cover homeowners' claims.

Other insurance companies know this already. That's why State Farm didn't react to Allstate's purchase of Sterling with a neutral, perfunctory comment, something like, "We have chosen not to go that route at this time. However, we are always looking for business opportunities that will enhance service to our policy holders." Instead, company spokesperson Dave Hurst said, "We have no plans to buy body shops. It is not something we even have under consideration."

My guess is that in five or six years Allstate will be ready to unload the Sterling albatross and there will be a willing buyer standing by.

The car manufacturers will jump into the collision repair business big time. Ford owns a majority interest in Collision Team of America. Correction. Ford admits to owning just 49 percent of CTA, but the CTA shops have been painted Ford blue and white. Who do you think is pulling the strings?

Early this year, General Motors announced the Goodwrench Auto Body Center Program for the express purpose, the company said, of establishing "a nationally recognized, highly capable, value-added collision repair network that meets both customer and insurance industry expectations. In case anyone missed the point, the company added, "The goal of these centers is to establish GABCs as the consumer's first choice for body and paint repair."

Could there be a pattern here? The manufacturers already know that there's real money to be made not only with the sale of cars, but with their maintenance and resale as well. The $23 billion collision repair industry is an irresistible target. Unlike the insurance companies, the car manufacturers know a thing or two about car care. And they know how to market car service to consumers.

Ford Collision Repair will sound very comforting to a car owner who has been in an accident for the first time in five years and can't name a single independent body shop. Ford Collision Repair will also sound comforting to insurance company executives. People like to deal with their own kind. In this case, suits will be dealing with suits to work out discounts in return for volume. It will be a tidy business arrangement. Whether it will be profitable will be determined by how independent shops react to this sea change.

DRPs will become pervasive. It's inevitable. Insurance companies will grow less and less tolerant of the labor costs involved with supervising repairs. I'll bet my first born that every major insurance company has up front in their business plans the goal of expanding DRP arrangements. I don't like to see this trend, not as a consumer, but I'm not sure there is much that can be done to stop it.

Of course, there are anti-steering laws on the books in many states, but state departments of insurance and states' attorneys are notoriously reticent about enforcing them. Why bother? Steering has never been an important issue for consumers. In fact, it's never been an issue at all.

The anti-steering laws are props, concessions to shop owners. Even if regulators got serious about enforcing them, adjusters would do what they have always done and tip toe around the laws with a wink and a nod.

My last prediction: The summit days of OEM crash parts are coming to an end.

This might sound off-the-wall in light of the verdict against State Farm, but a lot has happened within the crash parts industry the last couple years besides a jury verdict in Illinois. Most important, CAPA certified parts have begun to hold their own against their OEM counterparts at the CIC fit and finish tests. The tests have shown that OEM crash parts are far from perfect, and that aftermarket parts are benefiting from CAPA's Vehicle Test Fit initiatives.

Four years ago I interviewed Karl Krug, an automotive analyst with the marketing research firm of Frost & Sullivan. Krug had just spent five months researching the replacement crash parts industry before writing a lengthy report. He told me that quality had been a problem for aftermarket parts right from the beginning. They were pushed prematurely into the marketplace by insurance companies concerned only with price. This became the ethos of aftermarket crash part manufacturers over the ensuing years: low quality, low price.

Krug foresaw radical change. Aftermarket parts distributors, such as Keystone, would consolidate the market. Once in the cat bird seat, they would demand quality in an effort to chip away the OEMs' dominate market share. Keystone and others would become like NAPA on the mechanical parts side, Krug said. NAPA isn't interested in parts that merely match OEM standards; NAPA wants parts that are better. There would be small steps in that direction for a while, Krug predicted, but nothing obvious until 2005.

This all still sounds right to me, though with CAPA's recent push for better fit, Krug's estimate might prove to be a bit conservative, the verdict against State Farm and, by extension, aftermarket parts notwithstanding.