Editor’s Log: The consolidation storm before the calm

Toronto, Ontario– If a leading theory about industries going through periods of consolidation is true, the collision repair sector might be at the tail end of the storm before a long period of calm.

First described in a 2002 article for the Harvard Business Review, the basic idea of the consolidation curve is that consolidation strikes in four phases—opening, growth, focus and balance.

Its ability to predict trends in the collision sector has already been shown to work.

In mid-2018, Brad Mewes used the theory in his analysis of the collision sector. At the time, Mewes suggested the industry was transitioning from the growth stage, where major players begin to turn their size advantage towards swallowing smaller competitors en masse, to the focus stage, in which established industry behemoths focus on merging with other ‘great powers’.

Cut to a year and a half later: the industry is no longer consolidating as quickly as it was. Where once individual shops were being rebranded on a regular basis, smaller networks are even being absorbed by larger ones.

In Canada, the network-builders are focused on acquiring new businesses, not new shops.

That’s not to say that new shops haven’t been picked up.

Since breaking ground on its 600th North American shop in the summer of 2018, Carstar has added 150 new locations to the network. In fact, 2019 was a record-breaking year in terms of franchise growth. Alongside this shop-level growth, however, was a new emphasis on acquiring other networks in the automotive aftermarket.

In the middle of the year, Carstar acquired ABRA stores. Then, toward the end of the year, it acquired 241 Uniban locations and absorbed Canada’s largest glass distributor, PH Vitres.

Fix Auto World, now the country’s largest network, may have 726 stores, but this store-by-store growth has mostly occurred overseas.  Today, Fix operates in 12 countries, including Turkey, South Africa and China.

On the national level, its growth has, largely, been the result of the acquisition of the Carrossier Pro-Color network in the Autumn.

In the past 18 months, every major collision network–franchised and corporate– has made significant forays into standardizing training and operations.

Again, the Fix Auto Network provides the example-of-note.

Just after acquiring the Carrossier ProColor network, it officially opened a training centre in Milton, Ontario–one that will serve the FixAuto, NOVUS Glass and SpeedyAutoService brands.

In short, Mewes and the consolidation curve were spot on. The industry consolidators are now, firmly, focused on large-scale acquisitions.

So what does the consolidation curve suggest will happen to the industry next?

Balance. Eventually.

Once the current period of operational streamlining and network-to-network absorptions comes to an end, the next stage in any consolidated market should be one where the remaining networks have reached a point of basic stability.

Without too much room for expansion, and having already shed poor performing locations, the remaining businesses will retrench themselves.

Investors will trade unpredictable, but often beneficial share value changes for high dividend yields. Everything will be relatively calm until the industry is entirely disrupted.

It might look something like the soda market, which has been dominated by Coca-Cola and Pepsi since the 1930s.

The first lesson taught to economics students is that one can’t predict a business’s future success on past successes is a mistake. Whether this lesson extends to economic theories about entire industries, however, remains an open question.

 

*A previous version of this article incorrectly stated that Carstar had only acquired about 50 store locations since the opening of its 600th North American location. The correct number is 150. 

 

Crib Notes: The Industry Consolidation Life Cycle 

In 2002, economists Graeme K. Deans, Fritz Kroeger and Stefan Zeisel wrote ‘The Consolidation Curve’ for the Harvard Business Review. It suggested that consolidation occurs in a predictable four-step pattern, each of which are described below.

Stage 1: Opening. In this stage, the status quo of the market abruptly ends—often after the collapse of a monopoly, or a game-changing technological shift. As businesses more able to thrive in the new market conditions arise, they must secure growth by aggressively buying-out competitors. Rather than pursue profits, their focus is on revenue growth.

Stage 2: Scale. With the major players already carving out huge chunks of the market, they compete with one another to buy out the minor players. Consolidation is ferocious, and the profitability relative profitability of selling pushes many smaller firms out of the market.

Stage 3: Focus. Saddled by the costs of rapid expansion, the big companies turn away from the increasingly expensive process of buying out smaller competitors. Now, they turn inwards, streamlining their businesses and refocusing on debt reduction and capital growth. Here, the cost of inefficiency weans out over-leveraged behemoths, allowing them to be bought out in so-called mega buyouts.

Stage 4: Balance. With the market heavily dominated by only a few companies, efforts at significant growth are eschewed for efforts to encourage market predictability. While the rise of Stage 4 businesses was fueled by their judicious growth, their fall comes from complacency. Investor interest is typically secured through dividends, and internal development is focused on continuous adaptation to the slightest shifts in the market, lest a sudden change break the well-established foundations of the business.

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