September/October  2003

NAGS Notes
Catherine Howard    
hot topics

nags@mitchell.com

Is It Time for a Change?

by Catherine Howard

Editor’s Note: Following is a letter sent to columnist Catherine Howard following her July/August 2003 column. Howard’s response follows.

For more letters regarding NAGS Notes, turn to page 6. In addition, turn to page 10 for a look at the future of NAGS pricing strategies.


Dear AGRR,
I just read Catherine Howard’s July/August 2003 article in AGRR (see page 6) and, I must say, I do sympathize with her dilemma. However, I would also like to point out that NAGS’s “death march” strategy is working here in the Northeast. Since the last flat pricing movement in May, we have experienced some trouble. 

Along with taking it on the chin with lower pricing, we have the “R” part issues of which she speaks. In our company, I looked at 30 different “R” part pricing issues and found that 50 percent of the “R” parts were resold to the customer at prices within $2 (plus or minus) of what we paid for the glass. Of course, I was not happy to find out we are losing money. 

I looked into why this happened and all I found was a lot of finger pointing; the managers say the suppliers did not alert them and the suppliers said they did. Now we are not only at odds with the network and insurance industry, but our own suppliers as well. In the end, the installer gets it again.

Howard also addresses manufacturers’ suggested retail prices (MSRPs). The problem I have with these is that when it comes to glass, you don’t have name-brand shoppers, so how would it work? 

So, NAGS, let a sleeping dog lie. I personally feel the acquisition cost should not be a concern of NAGS. That should be between the industry and its customers. If NAGS issues a $2000 list price and the acquisition cost is $700, who is harmed? No one.

As Howard said, “few retailers have the market power to negotiate discounts and labor,” and I agree. 

The problem with changing the way we price glass is that the weak will lose. 

The manufacturers will not lose money and the insurance companies will not pay any more. Thus, the glass shop will never grow in its profits.
 
If the networks really did want this change, they would have offered a fair labor rate and decreased the glass prices in May. Instead, they just jumped on the increased discount and held their labor rates. 

So, the next time you hear them complain that NAGS pricing is unreasonable, I hope you point out that this time it was not NAGS or the glass shops that didn’t do their part, but it was actually the networks and insurance companies. 
John Wisniewski
President
PayLess Auto Glass
Hartford, Conn.

Dear John,
I understand what you mean when you describe the “death march” in the Northeast in your letter. As you so astutely observed, the situation just keeps getting worse no matter what we do. The prices are going down (discounts rising) regardless of what happens with the movement in the NAGS pricing. The example you stated is clear; May was flat, yet Offer & Acceptance (O&A) discounting went up—obviously not driven by a reaction to NAGS. Something else is driving this. Some say it is the reaction of insurers to their surveys of the cash pricing in certain markets. Whatever the reasons, the effects are the same. Maybe it’s time for a change.

The issue relating to “R” parts is also clear. You are correct in that these exception parts are causing a serious problem. In reality, the retailer really can’t negotiate a better selling price for these (see related article on branding on page 34). And, even if they could, systems are not set up to manage them. Manufacturers and distributors are not going to sell at a loss—they don’t have to unless they have overstocks or highly competitive parts. Dealers aren’t much of an option, and yet we are forced to look at the published dealer list pricing in determining “R” parts for the aftermarket. It becomes a rather vicious game of musical chairs with the retailer getting stuck with no place to land.

The subject of fair labor is coming up more and more these days. You referred to a recent discussion regarding some companies being willing to pay higher labor rates as long as they are offset by lower margins on the glass. You are right about that, although we haven’t yet seen any evidence of this trend. We aren’t about to see it creep in as glass discounts creep up a point or two. It won’t happen until there is a radical shift from glass value to labor. That means the discounts will go substantially higher in order to provide for fair labor and per-quantity adhesive charges. There are insurers who understand the reasons for this and embrace it. They just can’t make the shift until glass service providers ask for it.

Retailers who submit invoices that reflect fair labor find them rejected because they do not comply with the O&A pricing. The O&A pricing structures can’t change because there is no market data to support anything other than high discounts plus flat labor plus flat kit charges.

Getting Out of the Hole
You are right about it being up to the networks and insurance companies to fix this problem. But we can’t lay the blame totally on their shoulders. I know of at least one insurance program manager who solicited offers from glass service providers the last time only to receive offers from large and small retailers alike with flat labor and discounts that were ridiculous given the Revaluation. Clearly, many retailers did not take the time to understand the change nor calculate its effect on their pricing.

You may be right about the MSRP and a lack of brand awareness in replacement auto glass. For this to be a successful pricing strategy for the manufacturers, it will require that they somehow create brand preference for their products. However, we have yet to see how successful those efforts will be. It has even been suggested to me that the retailers may wish to publish their own list pricing, which we could accommodate as well.

I will have to disagree with you, though, when it comes to your statement about letting sleeping dogs lie. Those dogs aren’t sleeping; they are nipping at our heels. The NAGS List Price must have some relevance to something, and it is much better that it be based on actual market acquisition costs than wishful thinking from the manufacturers compounded on an inflated base. When we can get rid of the smoke and mirrors and reflect the true movement of glass pricing, there will be less pressure to continue increasing discounts in an attempt to cancel out increases that never happened.

What Do We Need?
So what is it going to take to make this change to a more rational business environment? It will take a few insurance companies and their trading partners to prove the concept by agreeing to try a pilot program designed to shift the value from the glass (i.e., radically higher discounts on glass) in favor of fair, hourly labor rates applied to the published standard labor times with adhesive charges calculated according to the tube quantities indicated for the replacement, balanced to come out even overall (on a weighted average basis). And it just might happen. Several insurers are coming to understand the advantages of fair labor pricing as a business practice. It is much more defensible than trying to explain the same flat charge applied to a 1-hour job for a job that indicates a standard of 3.5 labor hours, not to mention trying to justify paying the same for adhesives, whether one or two tubes are required. Add to that the realization that insurers have been overpaying sales tax on all those material charges essentially when there really should have been more value on the labor side all along.

So, what is the advantage for the retailers? Wouldn’t it be good to know when you accept a job that you will at least cover your material AND labor costs on every job; that you won’t have to lie awake at night hoping for that one big job so you can cover all your losses on the others? Wouldn’t it make sense to you to get paid more for a job that takes more time and/or uses more adhesives?
 
The number of “R” parts in the latest NAGS Calculator released (September 2003) has been reduced substantially. There are 1,000 fewer “R” parts now than in May. We were able to reduce them in response to either increases in the published dealer pricing, reductions in the acquisition costs or both. All of this should help make the transition to a more balanced pricing model easier to manage. Ultimately, when we can reduce the overall list price level, we can eliminate “R” parts completely. That has to be good for everyone. 



Catherine Howard is the vice president/general manager of National Auto Glass Specifications in San Diego.

AGRR

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