2018 Vertical Outlook

Jan. 1, 2018
As a year, 2017 was about big changes. There was a new resident in the White House in Washington, D.C., concerns that war could break out in Asia and a widening political and cultural divide across the country. Weather certainly was also in the news a lot in 2017 — from the mild winter with record temperatures in the northeast to the early year rains in California that ended in epic wildfires. Yet it was the late summer and early fall hurricanes that might be truly remembered most. These storms devastated parts of Texas, Florida and, of course, Puerto

As a year, 2017 was about big changes. There was a new resident in the White House in Washington, D.C., concerns that war could break out in Asia and a widening political and cultural divide across the country.

Weather certainly was also in the news a lot in 2017 — from the mild winter with record temperatures in the northeast to the early year rains in California that ended in epic wildfires. Yet it was the late summer and early fall hurricanes that might be truly remembered most. These storms devastated parts of Texas, Florida and, of course, Puerto Rico.

So bad were the storms that auto sales, notably light trucks, took a dip while gasoline prices spiked before each rebounded as the holiday season approached. For the auto service industry this weather meant some uncertainty that might not be so short-term. However, many quick lube operators agreed that overall the industry was headed in a good direction for 2018.

Mobility Services

As 2017 came to a close, the automotive industry faced what could be its biggest transition ever, as news about ride sharing services and autonomous vehicles continued to create buzz in Detroit and beyond.

In November, Bob Lutz, former vice chairman and head of product development at General Motors, as well as a veteran at Ford and Chrysler suggested in an op-ed piece that tech giants such as Google and Apple could develop self-driving vehicles which could soon drive the traditional car off the road.

However, even as Ford, GM, Toyota and others invest in the concept of “mobility” – meaning someone else (man or machine) could do the driving – many other industry insiders predict that car ownership is here to stay, and with it the need for vehicle servicing. Despite the long-term goals for automakers, those doing the service had more immediate plans and concerns.

Pros and Cons of Expansion

No year will — or even can — be perfect. The best-laid plans can often go off the rails, but being able to respond is what keeps a business on track. This is certainly true for those operators who opted to expand the business.

“No matter how you scrutinize the numbers, no matter the budget you have in mind, you have to consider the likelihood that you will go over budget,” admitted Bill Floyd of Evansville, Indiana-based Lucas Oil Center, which recently expanded to a second location.

“This isn’t unique to us of course,” Floyd said. “In our case, we tore down an old building and didn’t do core samples but we found that when we dug down 17 inches we hit rock. That was an $18,000 error that we found out the hard way.”

Even when construction wasn’t required, growing the business presented other challenges to some operators in 2017.

“In 2017, I opened four new stores that were either takeovers or build outs — each in a different market,” said Costa Kapothanasis of Costa Oils Inc. “The biggest drawback to leasing facilities and not being able to do new builds is you don’t have end-to-end control of the process and infrastructure, which means difficulties in uniformity in processes or even product.

“In addition to the actual facilities, having such large geographic discrepancies between stores has its own challenges. The Chicago market is different from the Cleveland market, and they are both different from the Dillsburg, Pennsylvania market. There are crossover shared values, of course, but it’s figuring out the small nuances between markets that can really turn around a floundering store.”

Other issues remain with expansion, especially if you can’t build from the ground up.

“The physical differences between some of my stores have created inherent challenges when it comes to having a streamlined process and set of procedures,” Kapothanasis added.

“I have also had difficulties with landlords in regards to changing building colors, which has prohibited me from rebranding all my stores and that, from a training standpoint, just means having to create double or triple of all the processes,” he noted. “I have been fortunate to not have much managerial turnover, so training has always been done at the manager level due to my physical presence being scarce.”

Good Help Remains Hard to Find

One of the biggest challenges for many operators in 2017 came down to filling positions. The overall economy continued to grow throughout the year across most of the country, and while many individuals might still be feeling lingering pains from the Great Recession of 2008 and economic dip in 2011, the fact is that the job market is strong. That means a more shallow labor pool.

“We certainly saw a lot of turnover in techs,” said Kerry Milne of Sandy Express Lube in Sandy, Utah. “We’ve had techs that friends referred, and while these individuals seemed trustworthy, there was a lack of experience.”

Experience is an issue that may only become worse as cars become more technical, but some operators are handling it accordingly.

“There is a limited availability of passionate car people in the labor pool right now, so we need to reach outside of that market,” Floyd said. “The fact that we are based on quick service means that people that have a dealership or general auto repair [experience] don’t always fill the need. Instead, we’re more like the fast food of the auto industry. So right now, we’re looking for those employees who can follow procedures and do the same task over and over. Those with correct knowledge of hand tools and who can do that sort of work are what we need.”

Even as the average vehicle is now 11 years old, there is the issue that cars are getting much more sophisticated.

“Our biggest challenge ahead is still going to be finding, training and, of course, retaining qualified employees,” said Mark Bochnowski of El Paso’s Lube ‘N Go and 2017 NOLN Operator of the Year. “Wages have also increased, and there are more places paying competitive wages. It is simply harder to retain employees that like to work on cars.”

This could remain an issue as many younger people aren’t buying cars, and thus aren’t even as interested in cars. Without that interest, the desire to work in automotive service is an issue, too.

“We have to admit that nobody wakes up each day and says, ‘I hope I can work at a lube shop,’“ Milne said. “Employees have to accept that it is hard work.”

For many operators, this could be a problem well into 2018, and as a result Milne is also watching more closely competitive wage compensation and benefits, which remain issues for all small business owners. Milne added that it can be a positive, too.

“We have to make sure we take excellent care of the crew that in turn takes excellent care of our customers,” he said.

Adding Products and Services

In addition to filling vacancies, some operators have also been able to add new services, but sometimes this has meant making changes.

“We have had to cover an oil bay to add in a lift, and we are awaiting delivery of the lift,” explained Tanner Wilkens of Kwik Kar Automotive in Kansas City, Missouri, who has plans to add a rotary lift in 2018.

“We moved a scissor lift to another bay that was on the previous bay; then allowing room for a rotary lift for more heavy work,” Wilkens said. “That will now have us set up with three rotary lifts, one scissor lift and one Hunter alignment machine.”

Wilkens noted that by lifting the car off the ground during service, it has significantly helped with the thorough inspection the shop offers with every oil change.

“This allowed the repairs to surge, and in October, we serviced 631 cars with a $194 ticket average,” Wilkens said. “We have updated our tire machine and also our Pro Cut brake lath machine. This allows us to mount all types of tires and also match brake rotors to the hub of the car to prevent run out. We really expect to see higher intervals between services, but that could come with higher ticket averages, too.”

As drivers are keeping their cars longer, this could lead to more opportunities for operators, especially as the intervals between oil changes is increasing.

“When I look at the crystal ball I have some concerns as today’s cars have longer drain intervals and more are running synthetic,” Floyd said. “At the same time, the products are getting more expensive, such as with more expensive canister oil filters.”

This increased cost of goods and lower return of customers is the reason why some operators like Floyd are expanding their services.

“We have to do more than lube, oil and filters these days,” Floyd said. “We are doing tire rotations, for example. We’re doing brake services and will continue to offer other services like wiper blades, tail lights and turn signals. All those services add up, and they keep the customer coming back.”

As a result, Floyd said his locations aren’t really lube shops but service centers. This does mean having to stock the shelves with not only oils and filters, but also more inventory. As Floyd noted, you can’t really wait for the parts shop to fill what you need if you have customers to serve.

However, additional services such as flushes, brakes and even differentials can help make up for — and offset — the declining car counts. At the same time, this can attract a whole market of customers who don’t know as much about their cars or what is involved in its maintenance.

“When the customer comes to our shops this is the time to do your 21-point inspection, and we offer recommendations to the customer,” Floyd added. “We want the customer to come back when they can afford to do the service, which isn’t how the dealer network typically operates. They force the owners to schedules that serve the dealer, not the customer.”

To this end, the customer may not come back as often, but the overall pool may increase. However, not everyone is going the full service route. Many operators say they are sticking to what they do best.

“I don’t want to overextend myself and my stores and get away from the core philosophy that created the industry in the first place,” Kapothansis said. “The whole business will revolve around the 10-minute oil change and the corresponding maintenance that comes with that.”

Instead, Kapothansis said he will ensure he is on top of current events in the industry, so when things such as GDI fuel system cleaners are required by manufacturers, he and his shops will always have those products available.

“When you don’t need to sell a product to sell it, that is the best, because that means the customer truly needs the product,” he explained.

This industry will likely remain about providing quality service to customers.

“We’re absolutely about service you can trust,” Bochnowski said. “For us, we’re going to drill down on our core services, but part of that is going to be educating the employees and the consumers about maintaining today’s newer vehicles.”

The Industry in 2018 and Beyond

The future for the auto service industry as a whole could certainly see changes in the coming year. While fuel standards may not be the hot-button issue of a few years ago, some states — notably California — are already pushing electric vehicles. Lawmakers in the Golden State have already debated a bill that would provide up to $3 billion in subsidies, ranging from $2,500 to $10,000, to new electric car buyers.

However, the price point of these vehicles will need to fall dramatically, while infrastructure including charging stations needs to be seriously ramped up before the all-electric car overtakes today’s internal combustion engine vehicles.

Another push from the automotive industry could push the driver out of the driver’s seat, as the auto industry as a whole is in high gear to develop autonomous, or self-driving, vehicle technology. Self-driving vehicles won’t be on the road in 2018, or likely even in everyday use before 2020, but this should serve as a portent that the car could be undergoing the biggest change in decades.

“We’re expecting to see more hybrid and electric cars, and there could be an opportunity to service those in the future,” Wilkins said.

“The state of the industry is changing all the time,” Floyd added. “It is going to require that those who want to keep up will have to invest in the new car technology, but more importantly they’re going to have to understand that technology.”

For 2018 however, the changes may be more subtle.

“I see either a reversion to the original model that made the quick lube industry the quick lube industry, or I see someone innovating it out of existence,” Kapothansis said.

The auto industry has certainly seen its fair share of disrupters affect existing business models in very big ways.

“Black car services snickered at Uber, and hotels laughed at AirBNB, but all it takes is someone in our industry to have the combination of the ambition and technical know-how to create a delivery-based app that combines retail with professional,” Kapothansis said. “At the end of the day, people value their health, their family, their time and their money and people pay a premium to get their time back.”

Kapothansis addressed that Uber’s model is to provide timely service, but this isn’t always the case.

“You’ll see people have seven Yellow Cabs drive by them while waiting for their Uber. It doesn’t even sell time; it sells the perception of time,” he said.

With that in mind, operators may be best to ensure speedy service that keeps drivers happy. Or as Kapothansis summed it up, “At the end of the day it is about knowing yourself and having the self awareness to stay in your lane.”