Automotive Franchising – May Feature Article

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Driving To Success with an Automotive Franchise

America is a car culture. From the earliest models to the fins of the ‘50s to today’s hybrid highway haulers, we’ve always been amorous for our automobiles. Some people consider them their babies, while others take the more mundane view that they’re merely a means of transportation.

But, whatever the relationship, the fact is that millions of Americans rely on their vehicles and that means maintenance, which can mean a lucrative franchising opportunity for the entrepreneurial minded.

The Automotive Aftermarket Industry Association (AAIA), says the industry “encompasses all products and services purchased for light, medium and heavy duty vehicles after the original sale including replacement parts, accessories, lubricants, appearance products, tires, collision repairs as well as the tools and equipment necessary to make the repair.”

Mechanical repair makes up approximately 50 percent of the industry’s revenue; collision repair, makes up 30 percent of its revenue; car washing, makes up 10 percent and oil change and lube, also make up 10 percent. Window tinting, any other type of car maintenance or customizing or car rentals and sales are also important players in the automotive franchising industry.

Investments

Vehicle maintenance is a great market to get into now because it’s needed now more than ever. The AAIA says people are keeping their cars longer and driving them further than they did in the past. In fact, the average car currently on the road is about 10 years old, a result of improved manufacturing practices. “In 2011, the average car owner was keeping their car about 10.8 years. The reason being is cars are being made much, much better than they had in the past, as well as the cost of new cars has increased quite significantly,” Chip Baranowski of Honest-1 Auto Care said in a Franchise Direct article. “So our consumers that we’re dealing with on a daily basis in our facilities are people who are treating their cars as more of an investment.”

This mentality of keeping our cars longer also has to do with the last recession changing our thinking as a society. We’re now more prone to fix something if it’s broken rather than dispose of it. Results  from the 2012 Aftermarket Consumer Outlook Study, which was done by market research company NPD, show that nine percent of people purchase the least expensive aftermarket products for vehicle maintenance, while 40 percent of the people surveyed said they purchased what they believed to be the highest quality products regardless of the price of those products.

Quality was also the highest rated attribute that consumers said they looked for in regards to aftermarket automotive products. What consumers seem to be saying is that they are treating their  vehicles more as investments now than something they plan to replace in a few years and they are willing to put the money into those investments to keep them running.

Trusted Professionals

Maintenance is being entrusted to professionals because cars are continually becoming more technologically advanced, meaning it’s not as easy nowadays as in the past to perform maintenance at  home. It’s not even enough to be known as a mechanic nowadays, as vehicles have become rolling computers. Now, most operations are done by a technician, belying the high tech direction of the  industry.

“There are fewer and fewer consumers that have the ‘do-it-myself, do-it-yourself’ mentality,” says Ralph Yarusso of Grease Monkey, an oil change franchise. “It’s really a ‘do-it-for-me’-type mentality. They really are dependent on finding good, quality care facilities and maintenance providers to take care of their vehicles.”

Industry Growth

Numbers from the International Franchise Association reveal that roughly 30,000 automotive franchises are established each year in the US and that number has been rising steadily since 2010 after having  taken a slight dip due to the recession.

In 2012, the AAIA pegged sales in the automotive aftermarket segment at $307.7 billion with over four million people employed in the area. That was a 3.5 percent uptick from 2011 sales. There seems to be plenty of room for everyone to get in on those sales numbers, as the fragmented nature of the market means the 50 largest companies generate less than 10 percent of the total revenue.

The Franchise Business Economic Outlook for 2013, prepared for the International Franchise Association (IFA), says automotive franchise businesses grew by almost two percent in economic output over 2012, plus it also grew just under one percent in total establishments over that same time period.

The reason that franchising numbers show growth is not only because of the brand recognition that franchises bring to the table, but also the ability of franchisors to more easily keep up with technological advancements within the automotive industry. The ability of franchises to more easily access these new and ever-changing resources is an advantage for them over their independent counterparts.

“[Independent shop owners] don’t have the scale or resources to meet the standards of many of the major insurers,” David Byers, CEO of CARSTAR Auto Body Repair Experts, says. “The economics of insurance-paid repairs can put significant margin pressure on an independent owner.”

By using a franchise model, Byers adds, owners can retain some independence while delivering centralized billing and repair management to the insurance partners, releasing them from that particular burden.

Business Format vs. Product Franchising

The automotive aftermarket industry typically sees two different types of franchising available: business format franchising and product franchising.

With business format franchising, the franchisor licences their brand to the franchisee. This usually comes with a particular format for doing business and because of this, the franchisee can expect extensive support from the franchisor.

On the other hand, a product franchise model sees the franchisor granting permission to franchisees to sell a product using their logo, trademark and trade name with typically limited operational support.

The fee structure between these two different types of franchises is usually different. Some franchisors require a franchise fee, plus royalty fees while others will waive the royalty fees, but  will require the franchisee to purchase proprietary products to use in the franchise. Others will not require franchise or royalty fees, but will require franchisees to make minimal inventory purchases.

Getting Started

To open a franchise in the automotive industry, you don’t need direct experience in the specific business that you want to get into. For example, if you are looking to open a tire and lube shop, it’s not necessary for you to have had hands-on experience performing oil changes or tire rotations.

You can always hire people to do that. Your business sense and motivation are more important to franchisors. A passion for cars helps, of course, but franchisors want to see that you have the initiative to succeed.

Territory

In the highly competitive automotive franchising industry, you can’t expect exclusive territory rights like you can in other franchise industries. It does happen with certain franchise systems, but it is a rarity.

Often, franchise agreements will grant franchisees the right to operate their business at a certain location, but with no exclusive territorial rights. If an exclusive territory right is granted, the size of that territory will depend on the size of the neighborhood, both natural and manmade boundaries (a major road, for example) and the number of potential customers in the area. Mobile businesses like product franchises or distributorships will usually feature a defined territory.

Cost

It’s difficult to put a dollar figure on the initial startup costs of an automotive franchise, as there are so many different types of businesses and even individual franchisors will sometimes have a variety of franchise models that require different levels of investment based on the physical size of the building or the size of the territory the franchise is to cover.

You can expect to deal with the following costs when opening a franchise:

• franchise fee,

• training expenses,

• equipment,

• inventory,

• leasehold improvements,

• professional and licence fees.

The franchisor may take care of or help with some of these fees. But you will need to cover the minimum investment amount to be considered for a franchise. This can range from around $50,000 for a franchise that performs a single aspect of maintenance like auto glass to as much as $500,000 for a franchise that performs multiple aspects of maintenance and carries high brand name recognition.

Along with startup costs, there are also ongoing fees. An average franchise agreement will last for about 12 years and during that time, there will be royalty fees and marketing costs. These are what  the franchisee pays for the privilege of staying in the franchisor’s business system and reaping the benefits that come with the franchisor’s ongoing branding efforts. Royalty fees vary greatly between  franchises. Make sure you understand the fee structure before signing any agreements.

Each franchisor will have its own system of vetting potential franchisees. The respective franchisor websites are a good place to start with the process of inquiring about a franchise.

If there’s one thing that’s guaranteed about opening a franchise in the automotive industry, it’s that there will always be vehicles on the road (until we get our flying cars) and those vehicles will always need maintenance, meaning you’ll never run out of potential customers.

About the author
A former journalist, Rob Swystun, has been writing professionally since 2006 and now concentrates on freelance writing. He lives in Winnipeg and is currently an Athabasca University student studying for  a BA in Communications.