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The Outsider
An Independent Business Executive Takes a Long, Hard Look at the Auto Glass Industry
by Frank Baitman

Editor’s Note: AGRR magazine recently sent an independent business expert into the depths of the auto glass industry. Read on for an excerpt of his report.

As I stepped into the auto glass industry as an independent observer, I quickly realized that the auto glass replacement (AGR) industry is undergoing structural changes that are fundamentally changing its competitive dynamics. Like many other industries, some of these changes are due to globalization and technological innovations. Although these changes might appear to be the distant machinations of Big Business, they are reshaping the way that consumers buy auto glass; who they choose to install it; and whether those installers will make a profit from their services and expertise.

How did I reach my conclusions? I listened. I occasionally poked, provoked and prodded. I explored and learned about the history of the industry. I developed some commonsense observations, I focused on the big picture, but, mostly, I listened.

It quickly became apparent that the AGRR industry is made up of three distinct groups. Everyone with whom I spoke fit into one of three categories:
• The Old Timers—these focus on past greatness who are zealous about repairing injustices;
• The MBAs—their focus is on reinventing the business locally; and
• The Cynics—these live with the mindset of, “Everything’s been tried, and it won’t work this time.”

Independent retailers also fall in these three categories. They seem to have three specific resonating problems/complaints about the industry today:
• Many believe one large problem is Chinese and Brazilian glass and that domestic glass is better than foreign glass;
• Many independent shops believe they do a better job of installing than the large chains; and
• Many independents believe the large chains’ practices have hurt them.

Simple and Profitable
In addition to these issues, the auto glass industry hasn’t gone unaffected by changes in the global economy.

In the past, skilled labor, auto industry logistics and plentiful supplies of natural gas have guaranteed the position of Toledo, Ohio, as Glass City, and have created a profitable business model for the auto glass industry. When Albert George Ballert wrote his university dissertation in 1947, he predicted that Toledo’s leadership would remain unchallenged: “Continued prominence in the glass industry appears to be assured for Toledo, both from the standpoint of production and administration.” But globalization and technology have upended the glass industry and every part of the supply chain from manufacturing to installation is being re-shaped.

There have been other changes, too. Low-cost sourcing of laminated and tempered auto glass from such regions as China and Brazil has changed some of the world’s largest glass manufacturers. Some have adjusted, while others have merged or gone out of business. The new economics of auto glass manufacturing is driven as much by technological improvements enabling high-quality, short runs of custom pieces, as it is by lower labor costs in developing nations. This new economy has implications that extend well beyond the cost of glass to installers.

Dealing with “Big Boxes”
Over the past 20 years, those industries that serve consumers have undergone a major upheaval that has favored large businesses able to exploit economics of scale. In general, product-centered businesses have found their path to success by rapidly developing large numbers of big-box chain stores.

Office supply and home improvement retailers, for example, have used their enormous buying power to negotiate dramatically reduced prices from their vendors; as they pass these savings along to consumers, they cut into the business of local independent retailers. As independent retailers are forced out of business, big-box retailers emerge as the only game in town, thereby enabling them to raise their prices while pressuring their vendors to reduce theirs. It is a vicious cycle that is supported by the globalization of the supply chain and technology to manage complex logistics and just-in-time inventory.

Insurance Issues
Of course, auto glass replacement is not completely at the mercy and globalization of technology. Like the healthcare industry, the auto glass replacement industry has become dependent upon third-party insurance payments—and, like healthcare, it seems that costs have been poorly managed and pricing has been erratic. As a result, the insurance industry has taken actions to reduce its outlay and improve its profits. In healthcare, these actions have treated diseases as commodities, negatively impacting the provider and the patient. In the AGR business, insurance companies have treated auto glass as a commodity, disregarding installers’ skills, steering work toward retail discounters, and ignoring the unique challenges that a particular replacement might require.

Many retailers are addicted to insurance dollars, and this perverts the market. Falling demand is seen by many installers as the result of unfair competition. That’s certainly a problem, but it hasn’t driven installers to look for lower priced goods, to reduce their prices, or to do anything to make their shops more desirable or convenient to cash customers.

However, a small number of dealers are basing their businesses on auto glass replacement sales to consumers; these dealers estimated that only 20 to 40 percent of their revenues are made up of comprehensive insurance claims.

Interestingly, there were significant differences in the “average cost of a windshield job” when dealers were separated by the prevalence of insurance payments. Retailers who focused on the consumer business estimated their average windshield replacement at $200 to $225, while retailers who were dependent upon insurance estimated their average replacement between $325 and $350.

The dealers that focused on direct sales to consumers shared a different outlook on trends in the auto glass replacement business; these shop owners were more likely to talk about retail amenities, business location and low-cost sourcing.

The majority of dealers who remain dependent upon insurance claims were more likely to discuss industry practices that reduce revenues or undercut margins, including steering, unmarked glass imports and what they see as “irrational estimates by NAGS.”

Pricing Woes
While dealing with all of these issues—big-boxes, insurers and a changing economy—managing the purchase of glass and other supplies also comes into play. Indeed, there is a prevalent view among retailers that distributors and manufacturers have already been squeezed on pricing, and there isn’t much margin left for auto glass wholesalers.

Interestingly, most dealers shared their average windshield prices with me, and those averages varied by 300 percent, even when delivery costs were accounted for separately. “[Independent retailers] have been indoctrinated to believe that they’re already getting the best possible prices,” said one distributor with whom I spoke. “It’s not true.”

While low-volume and rural shops must pay more for their raw materials, the variance from this unscientific survey suggests that some auto glass distributors are charging inflated prices.

Although limited in number, a few retailers strongly disagreed with the view that distributors are pricing their auto glass aggressively. Those retailers who held this view believed that they were paying substantially lower prices than their peers because they had independently developed a supply network that circumvented their regional distributors. One retailer told me, “If I have a choice, I won’t purchase from distributors.”

Import Importance
On top of pricing issues, the issue of imported materials—especially glass—came up frequently. Fully one-half the independent dealers interviewed expressed reservations about the quality of glass from China.

Many of the independent dealers who expressed reservations also acknowledged that they are buying imported glass; indeed, estimates show that 40 to 60 percent of the auto glass sold in the United States is manufactured in China, and nearly 20 percent comes from Central or South America. No dealers were aware of a specific instance where imported glass failed due to poor manufacturing.

Independent retailers that are already directly sourcing their glass from overseas manufacturers provided unit prices that were 20 to 50 percent lower than those dealers who purchase through distribution. Challenges associated with importing glass include: up-front payment for containers; ordering a representative mix appropriate to each shop’s business; and warehousing and inventorying glass shipments.

Conclusions
In conclusion, interestingly, globalization and technology have reshaped the auto glass industry, but these two factors also might prove to be the independent dealers’ salvation. It’s obvious the industry is not static, and this evolution will continue. n

Frank Baitman of Baitman & Associates has more than 20 years’ experience researching and developing strategies in numerous industries and spent many years with IBM in the company’s corporate strategy department. Mr. Baitman’s opinions are his own and not necessarily those of this magazine.

“The auto glass replacement industry has become dependent upon third-party insurance payments—and,like healthcare, it seems that costs have been
poorly managed and pricing has been erratic.”

AGRR
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No reproduction of any type without expressed written permission.