Body shops have taken a bashing and their future does not look promising, according to an industry-wide independent survey.
Trend Tracker's new report - The Future of the Car Body Repair Market
in the UK 2010-2015 - shows how the recession has hit bodyshops,
accelerating the gradual shrinkage of the crash repair market. The
winter freeze came just in time to save some of the survivors from
going out of business, but the medium term promises no relief for a
hard-pressed sector.
Since the onset of the financial crisis in the banking system in 2007,
which was followed by a ‘credit crunch' in 2008 culminating in a severe
recession, the number of car body repairs has fallen by 7pc. The
largest decline has been in the relatively profitable small repairs
paid for directly by motorists and used car traders - down 10pc,
2007/2009. Repairs on fleet and company cars have changed little since
2007, but insurance-funded car body repairs on private cars have fallen
9pc.
Compounding the problems of falling numbers of repairs, the average
cost of a car body repairs has risen by less than one per cent since
2007. In real terms, therefore, average repair cost has actually fallen
by 5pc, 2007/2009, when inflation is taken into account. More than
anything this is as a result of the downward pressure on accident
repair costs exerted by insurance companies, which pay for the vast
majority of repairs in the market.
Combining declining numbers of repairs and real-terms falls in average
repair cost, the UK car body repair market fell by 11pc in real terms
between 2007 and 2009.
Shutting up shop
In a market that is shrinking in real terms, bodyshop businesses are
under considerable financial pressure. And clearly bodyshops are not
immune from the more general fall-out of the recession and the credit
crunch. It is therefore not surprising that 335 primary bodyshops have
shut up shop, 2007/2009. Indeed in the last decade, over 2,000 primary
bodyshops have fallen by the wayside.
Meanwhile, advances in car technology are posing problems for
non-specialist, all-makes repairers who cannot afford to invest in new
repair techniques and training, threatening further attrition of
bodyshop numbers after the recession. Complex repairs also increase the
rate of un-repairable total losses. Furthermore, insurers and used car
dealers increasingly use SMART (Small to Medium Area Repair Techniques)
practitioners rather than bodyshops for small repairs.
Basket case sector?
Falling numbers of bodyshops - even against a background of declining
repair volumes - mean that repair capacity has decreased from a small
surplus of 3pc in 2006 to just 1pc in 2009 - and that was wiped out by
demand resulting from this winter's snow and ice. Further declines in
the number of bodyshops will see capacity falling below demand, at
least at times of seasonal peak demand. Trend Tracker's forecast for the car body repair market is that the
volume of repairs will fall by 5pc from 2009 levels by 2015, thanks to
a weak economic recovery, a sustained high total loss rate as a result
of weak residual values and income-constrained consumers avoiding or
deferring discretionary repair costs.
Trend Tracker forecasts that the number of primary bodyshops will
decline by 18pc between 2009 and 2015, to 3,155 outlets. The
profitability of repairs will continue to be constrained by low-margin
insurance contracts and a rising proportion of the least profitable
large repairs. Repair capacity will fall to a 9pc deficit by 2015 -
compared to demand - which equates to a shortfall of nearly 0.5 million
repairs. Quite possibly SMART repairers might be able to make up some
of this shortfall. These trends are well-established, and have been detailed in previous
biennial editions of Trend Tracker's UK car body repair market studies
- but there has been little or no strategic response from the players
in this continuing war of attrition.
Insurers, whose own average
profitability has been hit by increasingly tough competition and
declining returns from investments and underwriting losses, have been
unprepared to help their approved repairers maintain capacity,
preferring instead to wait for repairs and spend on variable costs
(courtesy cars) in seasonal peaks.
Suppliers to the UK body repair sector obtain higher prices than in
some other European markets, whereas UK repair labour charges tend to
be lower. Paint and materials has historically been the area of fastest
growth in the UK body repair market, but it has seen reduced
expenditure in three of the last four years. Bodyshops' margins on
paint almost equal their margins on labour, so any reduction in paint
margins would hit them hard.
Few bodyshops have moved to grow their business as consolidator groups,
and the evidence is that size has been no guarantor of survival. Much
potential revenue has been lost to SMART repairers, but their business
model is better suited to trade used car refurbishment than most retail
or insurance repairs.
Trend Tracker's latest analysis shows average gross repair margins for
insurance jobs vary between 35.3pc and 43.0pc according to the make of
vehicle being repaired. But with bodyshops still only achieving net
profits of between 0pc and 3pc, the net per-repair figures don't
generate sufficient revenue to justify investment, or, for many,
withstand the stress of a weak economy. Bodyshops are in a highly
seasonal business which depends on scarce skills, and cannot improve
efficiency during the months of slack demand by adjusting temporary
staff numbers.
Key points in brief
From 2007 to 2009:
• Privately-funded and insurance repairs are down 10pc and 9pc respectively
• After inflation, average body repair costs have fallen 5pc
• The value of the UK collision repair market dropped by 11pc
• 350 primary bodyshops closed - and over 2,000 in the past decade
Trend Tracker forecasts that by 2015 there will be:
• A 5pc decline in repair volumes
• An 18pc decline in primary bodyshop numbers to 3,155.
• A 9pc repair capacity shortfall
Trend Tracker's report advises:
• No further efficiencies are available to bodyshops
• No improvement to generally inadequate bodyshop margins is in sight
• Investors and suppliers should beware weak or non-existent returns, and scarce opportunities for consolidators
• The few who may invest in specialized repairs and/or makes of car may benefit from the failure of the weaker majority
• Further decline of the sector will ultimately disadvantage consumers
and insurance companies, and erode the skills base needed to repair
tomorrow's cars and assure their continued safety.
One day, a tipping point should come in supply and
demand, where the scarcity of UK body repair capacity triggers an
improvement in bodyshops' ability to retrieve stronger margins, which
are unlikely to be available from further efficiencies. But even with
today's slimmed-down sector, there's no sign of that in sight.
Trend Tracker director Chris Oakham comments, "In the medium term,
insurers should be concerned that they will find it increasingly
difficult to satisfy their customers with rapid and convenient repairs,
with so many bodyshops likely to cease trading when their owners retire
- if not before, due to financial problems."
Oakham also cautions investors and lenders in the sector. "Investors in
the car body repair sector should beware of generally weak or
non-existent returns, and consider that few consolidation opportunities
remain in a sector offering few advantages for the very few larger
players in the market.
"For existing operators, one of the few opportunities available to
improve market share and margins will be in becoming specialised - in
particular makes, and in particular repair techniques. As others fail
to invest, those few that do may prosper from their rivals' weakness."
For the sector as a whole, Oakham expects further decline, to the
ultimate disadvantage of consumers and insurance companies, and the
gradual erosion of the skills base needed to repair tomorrow's cars to
assure their continued safety.
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