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March/April 2004


A Phoenix Rising
Will the NAGS Rebalancing Fix What’s Wrong?

by Leslie Shaver

Tim Conklin, owner of Wholesale Glass Distri-butors in Greenville, S.C., swears he has seen this happen before. As he tells it, National Auto Glass Specifications International (NAGS) starts the cycle by deciding the prices of auto glass have gotten too high and the discounts have gone too far. The publisher decides to revalue the glass—that is, lower the price so that the discounts will come down. To compensate for its decreasing margins in glass, NAGS suggests glass shops make up for the price difference by getting more for labor and parts.

Conklin’s problem with this scenario is that insurance companies traditionally have not followed this train of thought, refusing to pay more for labor. Or maybe it’s the glass shops’ fault by refusing to demand more for labor. Either way, the nasty cycle begins again, with glass prices gradually rising and discounts following closely behind. But, these prices never seem to go as high as they had in the past, leaving glass shops with margins skimpier than some of Britney Spears’s outfits.

In the end, these earlier Revaluations left many in the industry fuming. People have accused NAGS of everything from being too close to the insurance industry to setting prices (and profit levels) for retailers, essentially driving some of them out of business.

“I don’t know when NAGS decided [it] would dictate what our industry would make for profits,” Conklin said.
NAGS complains its role is much different than Conklin describes, though.

“NAGS does not attempt to, nor could we even if we wanted to, dictate the profit level for any of the parties involved in the glass supply chain,” said Jesse Herrera, the new head of NAGS, “Our role is to provide a benchmark for the industry to work from. Manufacturers, distributors, retailers and carriers independently arrive at mutually agreeable price points.”

Still, it was no surprise that when NAGS announced its third Revaluation (this time, called a rebalancing) in 2003—following ones in 1989 and 1999—there were a lot of disgusted retail and wholesale glass businesses. With shrinking margins, glass shops not only expressed concern about whether the rebalancing would actually be a charm, but also whether insurance companies would follow NAGS and provide labor. Some even wondered if the pricing system would encourage glass manufacturers to bypass wholesalers and even retail shops in the distribution chain.

Will It Work This Time?
As Catherine Howard, the former vice president/general manager of NAGS who is now serving as a consultant to the company (see January/February 2004 AGRR, page 14, for related story), knows from the times she has presented the publisher’s new plan to the industry, there is a lot of opposition and even more questions. She said owners of most shops express fear and uncertainty, wondering whether the rebalancing, scheduled to hit in the fall of this year, will further cut into their profits.

However, Herrera is hopeful that by delaying the rebalancing from its originally scheduled date of May to the fall and by holding some pilot programs and extending more communication to shops and insurers alike, the new pricing method will be a success.

“I think there is still a significant communication challenge that lies ahead for NAGS, but also for the industry as a whole,” Herrera said. “I think everyone needs to be fully aware what the changes will be and when they will occur and what they need to do to prepare for that change.”

Likewise, Herrera said several unnamed insurance companies are piloting the rebalancing currently with their largest auto glass customers.

““First and foremost, we want to provide [these insurers] with the opportunity to complete the entire pilot process and document and validate the experience,” he added. 

In addition, delaying the rebalancing from May until September will give Herrera an opportunity to settle in at NAGS before undertaking such an overwhelming task.

“I will be going through the benchmark pricing process for the first time this spring so, from my perspective, I’ll be in a much better position with subsequent releases to make sure the right changes are implemented,” he said.

To assuage shops’ concerns, NAGS is working to explain the new system to shops before it comes about. 

Herrera said communication to shops and the other aspects of the industry will be one of his most important concentrations in the coming months—and, if the communication needs more time, then it will be pushed back from September as well.

“It’s reasonable to expect that in 2004, [the rebalancing is] going to happen,” he said. “I’d like to try for the September time frame, but it’s contingent on everyone in the industry realizing that the rules of engagement are changing and to understand the new system.”

While NAGS has educated shops in the past and still left the industry feeling discouraged at times, Herrera said he thinks this time will be different.

“What will be different this time is that we’ll make a concerted effort to make people understand that people have gone through the process and we’ve made an effort to make sure it will work,” he said.

Howard added that unlike past benchmarks, this one is not based on truckload pricing. Instead, it’s based on the prices that small glass shops pay for glass. NAGS also wants to put an accurate cost out there, which means lowering or devaluing the cost of the glass.

“The price is going to be unbundled,” Howard said. “Right now, there needs to be a high profit in the cost of the glass for retailers to be able to install it for little or no labor. We are trying to unbundle that and show a reasonable cost for the glass.”

Still, glass shop owners, such as Cindy Ketcherside of JC’s Glass in Phoenix, would like more explanation of how NAGS computes the cost.

“We still don’t understand how they are getting their benchmark[s],” she said. “Before we, as an industry, can have any kind of confidence in something, they have to be willing to say how they do it. Until they do, I don’t believe there is trust in those numbers.”

New NAGS Head Prepares for Rebalancing Act
by Penny Beverage

As National Auto Glass Specifications International (NAGS) approaches its next “rebalancing,” it is also getting accustomed to a change in corporate structure. In early January, the subsidiary of San Diego-based Mitchell International was moved under the umbrella of a new special business unit, along with Mitchell’s AutoCheX business. In addition, NAGS announced that long-time NAGS vice president and general manager Catherine Howard was moving to consultant status and Jesse Herrera, former director of corporate development, was taking over the new unit. However, Herrera says he is no newcomer to the automotive services industry.

Herrera, 32, spent the early part of his career with GE Capital Fleet Services in Minneapolis, working in a variety of aspects of fleet management. After that, he served as an independent consultant for a number of companies in different industries.

“I was focused on developing various strategies and operational improvement projects for clients—looking at helping them with internal call centers, fund-raising initiatives, etc.,” he said. “[Leading NAGS] is no different than my past assignments in that we have a variety of problems we need to address as an organization and an industry—and I have a history of helping solve problems.”

However, with just a short month under his belt, Herrera is learning quickly that glass is a different ballgame.

“I’m learning each day as I’m meeting folks about the industry’s players, dynamics and the challenges I’m facing,” he said. “In most industries, even other automotive industries, you don’t see the same level of integration and interdependence as you see in the glass industry.”

Of course, Herrera is also aware that he is stepping into a tough role, as there has been much discussion in the industry in recent months about the relevance of NAGS.

“I certainly understand [shops’] frustration and their concern about the role that NAGS has played traditionally and how it has evolved over time,” he said, “but I personally think NAGS is essential to the industry given the way it has become accustomed to doing business.”

There are also concerns that with the restructuring of Mitchell and with NAGS being placed in a unit with AutoCheX, the glass industry focus may be lost.

Herrera attempted to allay such fears, though.

“Quite honestly, I think of the reorganization as an effort to increase the level of focus to face the needs of the industry,” he said. “Now [NAGS is] a more significant portion of Mitchell’s overall revenue base now and it’s a primary area of focus for our executive management team.”

Herrera added that he’s anxious to get out to some events and meet NAGS’ customers.

“So far all the people I’ve met have all been very excited and supportive from an industry perspective,” he said. 

“I look forward to meeting as many of them as I can in the coming months … I also think NAGS will have a renewed sense of focus and energy in helping the industry solve the issues it is facing.”

Herrera and his wife, Phuong, reside in San Diego with their 2 ½-year-old daughter, Jasmine.

The specific numbers Ketcherside wonders about are the purchasing prices that NAGS will use. She wants to know what retailers NAGS has surveyed for the buying price, when it did this and how many shops it talked to. 

“Until they get past this mystique of how it’s done and calculated, I think we will end up with the same problems we have always had,” she said.

Other shops have expressed different reservations about how NAGS will come up with a purchasing price.

“They are assuming that we are all paying the same price for glass,” said Ira Turner, vice president of Syosset Glass in Syosset, N.Y.

The argument from Turner and others is that many factors, such as size, location and supplier relationships, go into computing a glass price. Because of this, it will be difficult for the publisher to set a price on which to base its numbers.

Conklin, who sells to shops of varying sizes may explain it best.

“I don’t know how they will do it,” he said. “Do they go to California, do they go to Abbeyville, S.C., or do they go to New York City? The acquisition cost is different in each place.”

Even in Conklin’s market, acquisition costs vary.

“I have guys in downtown Greenville who will go through 20 windshields in four hours,” he said. “I can get my driver over and back in an hour and a half. That’s one price. Then I have a guy in Asheville, N.C.—that’s a two-hour drive. It takes my driver half a day to go there and they don’t even have the volume. The costs [to sell to these two shops] just aren’t the same.”

Retailers also think there are price differences from shop to shop.

“I can guarantee you the bigger shops are getting better prices than we are,” said Kris Davis, co-owner of Evergreen Auto Glass, a one-shop business in Redmond, Wash. “Some businesses move 50 to 100 windshields a day. It’s a huge difference.”

That being said, Davis admitted she gets a good deal on her glass because of a long-established relationship with her supplier. Without this relationship, she said she would not be able to buy as well.

But Howard disagreed.

“Quite frankly, there is not a big discrepancy in the price of glass,” she said.

Labor Woes
Regardless of whether it is a retailer, wholesaler or even NAGS speaking about the new system, everyone realizes that its ultimate survival depends on one thing: whether or not insurance companies will increase the rates they pay for labor and parts in an installation. In fact, Herrera says the success of the rebalancing depends on whether all the industry’s participants will subscribe to it.

“I’ve talked to manufacturers, retailers and insurers and I think the industry is eager for this to stick and actually work this time,” Herrera said. “At the end of the day, it comes upon the industry to change the way in which they do business.”

However, the last time NAGS separated glass and labor, insurers decided to just pay a flat rate for labor—rendering the Revaluation unhelpful to retailers.

In a perfect world, shops may get compensated like their peers in the auto body world, where a set amount of hours for each process is published. Then, the shop applies its own rate to this number of hours. Others even point to auto mechanics as a model for the industry.

“We should be able to get what mechanics at the dealerships get [for labor],” said Beverly Donner of Glass Cutters in Taylorville, Ill. “They have to take classes and get training just like we do. If we could get labor, then we would not be complaining about NAGS.”

But, after watching two Revalu-ations fail, glass shops are concerned that insurance companies still won’t pay for labor after the rebalancing.

“The concept is good, as far as having a realistic price for glass, although it’s been tried twice,” said Tim Taylor of Thru-Way Auto Glass Distributors, a company that also serves as a retailer in Syracuse, N.Y. “It did not work in 1989 and 1999 and I don’t see insurance companies jumping aboard again.”

Others agreed.

“Everything is being driven by the insurance companies and I don’t see how they are going to deal with it,” said Bob Lilly of Banner Glass in Silver Spring, Md. “I see it as a hard battle. I agree that trying to get labor is the ideal way to go, but we have been so beat up by the insurance companies that I don’t think we will get it.”

In reality, no one knows how insurance companies will react this time. They can only go by past experience.

“I don’t have any feel for how the insurance companies have adopted these changes,” said Tim Smale, chief executive officer for the Independent Glass Associa-tion. “It will be very important to see some support by the insurance industry for the independents.”

The insurance industry itself doesn’t even know how it will react right now (or at least does not want to say publicly). State Farm of Bloomington, Ill., is waiting until the pricing changes occur to determine how it will react. 

“We expect to continue to pay a fair and competitive price for glass repair and replacement,” said Bob Bischoff of State Farm. 

An executive for another major insurance company, who did not want to be identified for this story, also said he did not know how his company would adjust pricing after the changes came out. But he had no problem with the changes as long as everything was evened out.

“If, at the end of the day, it is simply rebalancing the materials and the labor and the total cost stays the same, I have no problem with it,” he said.

Wholesale Woes
Retailers are not the only ones concerned about being able to hang on after the NAGS rebalancing. Some distributors are also up in arms about the publisher’s move. By lowering the prices for these pieces of glass, they see NAGS taking out some of the necessary markup in the glass they sell.

“Warehousing glass is not just a clean step in the chain,” Conklin said. “Someone has to foot the bill there.”

There is some speculation that NAGS’ decision to base its glass price on a retailer’s buying price could also cut wholesalers out of the glass chain. With the NAGS price now established by how retailers buy instead of how wholesalers buy, it may be easier for manufacturers to send their glass directly to shops, or the scenario could turn out even worse for shops with insurance companies making glass purchases and subcontracting the installations to shops.

But there are problems with both of these scenarios.

For starters, the manufacturers would need distribution points to reach each glass shop.

While some glass producers, such as PPG, do have distribution points, it is doubtful they can reach each retailer out there, especially those in more remote locations.

“The distribution is too complicated to do that,” Lilly said. “The service level would deteriorate and it would not work.”

Others agreed.

“Somebody still has to get the glass to the customer,” Conklin said. ”

Howard said the second option—manufacturers selling directly to insurers—has been discussed. But there are still issues with distribution.

“There is always the possibility that manufacturers will sell direct,” she said, “but it won’t be to the shops. It will be to the insurance companies. Carlite is trying to do that, but even if they are able to do it, they will have to deal with distribution issues.”

Once distribution issues are solved, there are other problems, namely disgruntled glass shops.

“If the manufacturer does it [sells directly to insurance companies], it has to realize that retail shops could abandon them,” said Dick Karbon of Klein Dickert Co. in Green Bay, Wis. “They are putting all of their eggs in one basket.”
Even if the manufacturers and insurance companies worked out this deal, Karbon thinks it may be difficult for insurers to find someone to install the glass. And, if they do, they will have to pay a fair labor price to get the work done, which would be the ultimate irony. To finally get their coveted labor rates, glass shops would have to give up all control of glass and the markups they can get from it.

Into the Crystal Ball
While no one is predicting that all glass will eventually go through the insurance companies, many in the industry are worried that the new NAGS plan could be the breaking point after a long, slow decline in profitability for the industry.

“I am very concerned about the health of the auto glass industry,” Karbon said. “Very few companies are healthy and most are hanging on by their fingernails. And I think we have now stretched the rubber band as far as we can before it’s going to break.”

Unfortunately, the only thing most shops think can keep the rubber band from breaking under the NAGS system are beefed-up labor rates.

“Insurance companies don’t want to drive glass shops out of business,” Howard said. “They do recognize a fair labor rate needs to be paid, but they don’t want to pay more overall and the glass shops don’t want to pay less overall. So it’s important that when the change is made, it’s equitable on both sides.”

This puts the onus back on the shops to realize the value of the labor they provide and charge a fair price. If they do, NAGS changes could work out for them. But if they don’t, the rubber band may finally break. 

AGRR

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