By Sheila Loftus
October 2007

My friend Diane is smart. But even the smartest people in the auto collision repair industry—and Diane is one of them—find it tough to overcome this grim statistic: The average profit for body shops in the United States is three percent.

How little is three percent?

My seven-year-old granddaughter is planning to open a bank account with all the quarters, dimes, nickels, and pennies in her piggybank, and that’s the kind of profit she’ll see after a year.

Fortunately, my granddaughter’s well-being doesn’t depend on the interest her pennies earn.

Unfortunately, if you’re in the collision repair business, your well-being does hinge on three percent.

Who is ensuring that body shops see only a three percent profit?

Insurers, of course.

“Insurance companies demanded that we get in-house frame machines,” says Diane, who owns a shop and has a Master of Management degree, as well as degrees in nursing and economics. “Why? Because insurers could control the cost.

“We spend upwards of $30,000 for a frame machine plus $25,000 on a measuring system to work on the frame rack, add an extra bay to put it in, and spend money to train a technician to work on it. Then what happens? An insurance adjuster comes into the shop and says, ‘You don’t need that much frame time.’”

In this scenario, there is a clear winner and a clear loser.

Winner: The insurance company, which has its insured’s work done faster. “There isn’t as much payout for the rental car,” Diane says.

Loser: The body shop. “It used to be that we would sublet the frame work and mark it up by 10 percent,” Diane says. “We were able to keep the $55,000 we would have spent on a frame rack and a measuring system in the bank at four percent interest.”

Diane says collision repairers were too naive to know that the above scenario would cost them twice: once for the machine and again for the short sheets the insurance carriers wrote for frame time.

“It has been an across the board loss for me,” Diane says. “We have sold ourselves short.”

Shops would be cruel to look to increase their profit margins by reducing what they pay their employees. Collision repair technicians are already grossly underpaid.

“Why would a new technician want to come into this profession when he can make $16 an hour working as a plumber?” Diane asks. “I talked to one technician and he was making $10 an hour if you included the benefits. His set rate was $9. That’s what happens when you keep the labor rate low.”

Adds Diane: “When I started as a nurse in the ’70s, I was making $6.75 an hour. My friend was a bodyman doubling his flat rate and making $20 an hour. The nursing workforce was all female. They were underpaid. Betty Friedan came out with her book (The Feminine Mystique), and women started making other choices. Suddenly there was a nursing shortage. This is what is going to happen in the collision repair industry. It is labor economics. These technicians have choices.”

Perhaps as troubling as the low pay body men receive is how the financial constraints on shop owners limit how much training they can give their employees.

“When you keep the labor rate artificially low,” Diane says, “you don’t have any money to spend on training.”

A three-percent profit margin doesn’t exactly encourage a shop owner to send a body man off to a weeklong, or even a weekend, training course. And yet the complexity of today’s automobiles is such that continual training is essential.

Are insurers willing to entrust their insureds’ state-of-the-art vehicles to technicians who haven’t updated their skill sets in years?

“Our net profit is three percent,” Diane says. “This means, you don’t train anyone and can’t buy equipment.”

How much longer before collision repair shops return to that old standby—the tree in the front yard—to help with alignments?

It’s safe to say that a large number of collision repair shop owners are in desperate financial circumstances. How desperate?

“I have to make a 45 percent profit on parts,” Diane says. “Unless I make that, I can’t meet my overhead. When repairers give 10 percent off on parts, they can’t pay for the overhead. What they have been doing is stealing from the technicians to meet the shortfall.”

There is a difference between markup and profit, Diane says. To get a 20 percent profit, a shop owner has to markup the item 25 percent.

In the short term, insurers are gobbling up huge amounts of profit from collision repair shops. “Insurance companies sell a product that is mandated by every state in the United States, but they cannot service this product,” Diane says. “Remember: Insurance companies are for-profit entities. Their goal is to add value to stockholders and not pay out on claims.”

In the long run, insurers risk leaving shop owners broke and having body men flee to other industries.

And when that happens, who will fix the cars?

© 2007 Sheila’s Information Network Inc.

Sheila Loftus (sheilaloftus@yahoo.com), past publisher of the CRASH Network, has written about the auto collision repair industry for 32 years. She lives in Washington, D.C.