Car-Repair Rollup Stresses Cost Containment, Keeping Policyholders Happy
Caliber Collision Centers started out to be the McDonald’s of car repair. But after some hard lessons and a new business plan, it’s starting to look more like the HMO of the industry.
Caliber has bought back franchises to centralize management and tighten up on quality control, switching to an acquisition strategy for growth. And it has partnered with the insurance industry to control costs and attract referrals.
“To some extent, we do follow that model,” said Chairman and CEO Matthew Ohrnstein of the HMO analogy, quickly adding, “but not on the service side.”
Caliber tries to take the hassle out of repairs for customers, Ohrnstein said. The company not only makes repairs, it also provides car-rental services and handles the insurance claims. All a customer has to do is pay the deductible.
Cost-Control Focus
But the key for Caliber Collision is to help the insurance industry control the costs of repairs.
“It’s typical (in the car-repair industry) to have a car in the shop for two weeks. We strive to get the car out in seven days,” Ohrnstein said. That saves the insurance companies rental-car expenses.
Caliber also provides its own estimators so insurance companies don’t have to send one out to the site. Its estimators have electronic systems that will order parts immediately. Product delivery is timely so workers aren’t idly sitting around. Up to four employees work on each car, rather than the industry norm of one employee per car. The company has an agreement with Enterprise Rental Car Agency to provide rental cars at each center.
What this all means is that claims and repairs are processed more quickly, which leads to more satisfied customers.
“If claims are paid quickly, customers have a higher propensity to renew their premiums. Our job is to make sure the insurer looks really good,” Ohrnstein said.
The firm is winning kudos from insurance industry execs.
“We think very highly of Caliber Collision,” said Ray Trevethan, group manager for physical damage claims for the Auto Club of Southern California, the largest auto insurance carrier in Southern California.
He said Caliber Collision Centers is a “strategic partner” with the Auto Club and provides high-quality and quick repairs.
“They are extremely professional, creative and innovative,” said Trevethan.
Since Ohrnstein bought the company in 1993, along with San Francisco-based venture capital investor David Roberts, the firm has gone from annual revenue of $20 million to last year’s $130 million. In the past three years, it has nearly doubled its number of centers, to 36 repair shops in California and Texas, mostly through acquisitions. In the past year alone, its company-wide employee count has doubled to 1,100, with a quarter of those in OC, where the company has four centers.
And it has gotten the backing of a couple of high-profile investors: Robert M. Bass, whom Fortune once called the “business titan” of the four famous Bass Brothers, and Zurich Centre Investments, a subsidiary of the Zurich Group financial powerhouse.
During the initial funding round, Bass didn’t come out to the Caliber headquarters to kick the tires, so to speak, leaving that to his subordinates. But that doesn’t mean Bass wasn’t involved.
“The day that the deal closed, Robert and I had a long conversation on the telephone about being new partners,” Ohrnstein said. “Bob Bass is intimately involved in every one of his deals.”
Adam Mizel, a managing director of Zurich Centre Investments, said at the time of its initial investment, “The collision repair industry is experiencing a shift from mom-and-pop businesses to sophisticated, corporate-owned chains. … We believe this management team’s blend of expertise in both the collision repair and insurance industries is unparalleled.”
Caliber Collision Centers began in 1991 when seven owners of Southern California collision repair shops got together. Their aim was to create a franchise system. And they could pool their resources together for more leverage in bulk purchases of paint and auto parts. By 1994, Caliber had grown to 20 franchised centers.
Ohrnstein, an insurance-industry veteran who was president and CEO of Specialty Insurance Service, heard about the company and knew that it could fill a niche.
While the largest insurance companies can dominate the setting of auto insurance premiums, it’s difficult for them to control repair costs among so many small, independent operators.
“I realized the void that existed on that side of auto insurance. They were so inefficient on how they settled claims because of the fragmentation of the industry,” he said.
Franchise Model Rusty
But when Ohrnstein took over, he ran into critical problems. The franchise system was showing some rust. It was difficult to control the quality of the services at the franchises. Insurance companies didn’t want to deal with many different franchise owners, but rather with a management team in corporate headquarters.
“It took about a year to figure out it wouldn’t work and another year and a half to exit the franchises and raise our initial capital and start acquiring businesses,” said Ohrnstein.
The company bought out the franchise owners, with some staying on to run the centers. But there was a collision of mentalities. There were the well-educated MBAs who ran the corporate side of the business. And then there were the street-smart shop managers, who knew the nuts and bolts of the business, literally.
Ohrnstein, who has an MBA from Pepperdine, said the company was alienating its talented managers.
“They got their business experience one car at a time,” Ohrnstein said. “They might not have finished high school, but they can sit here and debate any MBA because they understand the numbers. They understand the business. They understand what motivates the technician or the painter or the estimator.”
Ohrnstein credited president and COO Bill Lawrence, who joined the company in 1998, with changing Caliber’s corporate mentality to support managers in the field. The Irvine office even stopped being known as corporate headquarters and became known as Client Services and Center Support.
“If everyone from corporate went away, we would still have a business because our operating leadership in the field can drive the business,” Ohrnstein said. “But if my operating people went away, I don’t have people here in CSCS who can go in and do the job.”
Insurance Industry Targeted
Caliber Collision targeted the insurance industry, figuring it would be anxious to cut costs. But at first, the industry was slow to jump onboard.
“It was uncertain whether the auto insurance industry would embrace a company like us and would change their business practices to work with us. It took us almost two years to break through,” he said.
Ohrnstein won’t reveal exactly which insurance companies are his biggest clients. But he did note that the Zurich Group, parent company of Caliber’s key investor, in 1997 bought the L.A.-based Farmers Insurance Group, one of the largest insurance carriers in the United States.
Caliber is one of the three largest such repair operations in the U.S., with the other two in the East and the Midwest. Auto repair nationwide is a $25 billion annual industry, $1.5 billion of which is in Southern California. Caliber’s goal is to get a 20% market share in the areas where it operates.
“We need to get to $300 million just in the Southern California market to get a 20% share,” Ohrnstein noted. “We’re on our way to doing that. It will take a number of years.”
One of the obstacles to growth in the car-repair industry is a blessing for society,there are fewer accidents. A car owner has an accident every seven years on average, a number that has remained flat for several years. And the annual increases in repair prices generally stay pretty close to the inflation rate.
On the horizon is the emerging accident avoidance technology being built into new cars. Ohrnstein expects to see most U.S. cars have this technology in the next 20 to 30 years.
Market Share Important
All this means that Caliber Collision must grow by grabbing market share. It’s doing so primarily by buying the top shops in an area. It has a staff of four full-time M & A; professionals.
In the past two years, its pickups in Texas have included the Fort Worth-based Body Shops of America, San Antonio-based Sanders-Fisher Auto Body, and the three-shop Slim’s Paint and Body operation. In California, it has acquired or opened new facilities in Brea, Chino Valley, Mission Viejo and San Bernardino, among other locations.
“I love the deal stuff,” Ohrnstein said. “We’re constantly in the middle of seven or eight deals. It’s exciting to look at a market and map it out.”
This year, Ohrnstein expects to grow revenue by 60% and add another 400 employees. Caliber will concentrate on opening centers in the Southwest and the West. It soon will move its corporate headquarters to a larger, 17,000-square-foot facility in Irvine.
But along the way, the growth has caused pains. Ohrnstein said he’s been surprised at how much he has to think about what the organization will look like from the perspective of not only managers, but also customers.
“I’m thinking right now what the structure of the company needs to look like as a $200 million company, versus right now when it’s a $130 million company. What you do today won’t work when you’re 50% larger. That 50% larger will be within six to nine months.”
He said the company began turning a profit last year. It’s becoming what Ohrnstein called “IPO-ready,” possibly next year. That depends on avoiding a collision with the current market reality.
“We’ll go public if the market embraces brick-and-mortar companies,” he said. “That’s a big question mark.” n
