The "D" Word
Is Discounting Destroying Auto Glass Retailers?
by Leslie Shaver
Just recently, Shawn Herman bought his new businessa glass shop called The Glass Peddler. But shortly after his purchase, his optimism was tainted by one sad bit of realismits tough to make money in the auto glass business.
At the root of his angst is a process of which more seasoned glass shop owners are well awarediscounting. Discounting happens when auto glass shops discount prices off of the retail price of the glass. Since the mark-up of glass is one of the primary ways shops make money, increased discounts can cut into a shops profits. This has shop owners like Herman concerned about their future.
Where It Began
Discounts have been around for as long as many in the industry can remember. The practice became so prevalent by the late 1980s that San Diego-based National Auto Glass Specifications (NAGS), which publishes truckload glass prices, lowered its truckload prices in line with the actual prices shops were paying for glass in 1989. (This was its first Revaluation).
However, as the 1990s progressed, discounts began creeping skyward once again. By 1999 discounts had gone up to 85 and 90 percent off the original cost of glass in some cases. Overall, prices had risen 68 percent from 1995 to 1999, according to NAGS. These discounts were hurting the industrys credibility with both insurance and cash customers.
In response, NAGS had another Revaluation in 1999. With this Revaluation, the publisher hoped that its new Benchmark Prices for glass would be more realistic and that these large discounts would not be needed.
In theory, it was a good idea.
The new Benchmark prices were good because they gave an accurate idea of how much glass was, said Wayne Turner, owner of Glass Technologies in Many, La.
The Revaluation needed to happen, said Bob Steben, owner of Ed Steben Glass Co. of South Windsor, Conn. The percentages off were just getting so high.
While NAGS prices did rise at a slower rate after the Revaluation, the discounts insurance companies were asking for did not, according to figures from the Independent Glass Association. The associations figures say that NAGS increases rose 38 percent from 1998 to 2000 (the Revaluation occurred in January 1999), while State Farm reduced its offer part of its Offer & Acceptance Program 47 percent. According to these figures, glass shops had their margins squeezed by 9 percent between 1998 and 2000.
1999 was a bad year for the retail glass industry and, according to a number of shops, the Revaluation was one of the reasons behind this.
This threw us for a loop that we are still trying to recover from, said Norm Harris, chief executive officer of Diamond-Triumph Auto Glass. It came at a particularly difficult time because 1999 was not a good year for windshield replacement.
It probably whacked all of us in 1999, said Walter Krause of Michigan Mobile Glass and Trim in Southgate, Mich. The prices used to be certain and all of a sudden things changed. It took a year to figure out what the percentage off equaled when you were cutting everything in half. Everybody had to try to figure what they needed to make for that 50 percent in price. Most people did not know how they did until the year was over.
We used the revalued prices for two months, said one glass shop owner. We got our clock cleaned so we had to go back to the old structure. It has been devastating. When the majority of the marketplace brought discounts back, we were back where we began.
While glass shops lost money on the price of glass they were supposed to recoup some in increased labor costs, which would be tabulated hourly instead of at a flat rate.
The rationale was that by reducing the price of glass, there would be an increase in labor prices, said Catherine Howard, vice president and general manager for NAGS.
But the insurance industry kept labor at a devalued rate, meaning that glass shops did not make up the money they lost on the price of glass.
As NAGS has slowly raised prices for glass since the Revaluation, the insurance companies have generally been around to raise the amount they ask for in discounts.
Whenever you get a NAGS increase, the insurance companies come back wanting to raise their discounts, said a New York glass shop owner who preferred not to be identified for this article. They dont want to absorb the price increase. They just raise their discount schedule.
NAGS raises the prices, but the insurance companies then cut prices across the board by 1 or 2 percent, Herman said. The margins get narrower and narrower each time. I only do a few insurance jobs a week; it really hurts to do any more.
If NAGS goes up 4 percent and insurance companies take off 10 percent, it prevents the glass industry from healing, said Dick Karbon, executive vice president of Klein-Dickert Co. in Green Bay, Wis. Whenever NAGS goes up, there is a massive demand for price cuts.
And this has done nothing to help auto glass retailers.
Perhaps it [the Revaluation] was justified, but it has not done what it was designed to do, Karbon said.
The Blame Game
While most people in the auto glass industry agree that the Revaluation did not do what it was expected to do, the question still remainswho is responsible for the large discounts in the industry?
To many, this question just raises more problems. Some in the industry think NAGS shares some blame in the discounts, others point fingers at the usual suspectsnetworks, insurance companies and other glass shops. In the long run, all of these entities combine to extend the discounting problem.
Those who point the finger at NAGS think the publisher has let the insurance industry too far inside the world of auto glass by publishing prices.
NAGS educated the insurance companies about our industry to a fault, said Cindy Minon-Ketcherside, owner of J.C. National Glass in Phoenix. Benchmark prices did not change our pricing structure, it was how deeply NAGS brought the insurance companies in our industry that changed our pricing structure.
Howard defends her companys strategy of bringing the insurance industry into the fold, saying that lack of insurance participation doomed the 1989 Revaluation.
Another auto glass shop owner, who preferred not to be identified for this article, disagreed, saying NAGSs Benchmark pricing was at the root of the discounting problems. The problem is not discounting, its Benchmark pricing, he said.
Yet, underneath this shop owners point is essentially the same as Minon-Ketchersides. Since Benchmark prices are essentially out there for all the world to see, there is little room for glass shops owners to run their businesses as retail stores in other industries do.
Benchmark pricing takes the inventiveness out of merchandising, he said. As long as there is Benchmark pricing, there will be price discounting. Benchmark pricing makes the industry very cut-throat.
Beyond Benchmark Pricing
But Benchmark pricing alone does not make the industry cut-throat. After all, it is the retail glass shops that compete for this business by giving discounts to the insurance companies/networks that ask for them.
NAGS determines a common reference point, said Chris Umble, director of sales and market development for LYNX Services of Pittsburgh. The marketplace determines what the competitive price may be.
At its core, the issue of discounting is one of competition. Glass shops perceive customers to be scarce, so they compete for each job.
Higher discounts are the result of competition, Umble said. It is a highly competitive marketplace. The same competitive forces that drove discounts before the 1999 NAGS Revaluation have not gone away.
Glass industry giant Safelite agrees.
The auto glass industry is competitive, with limited growth, and serves customers who constantly seek a better value, said Beth Wolszon, senior vice president of marketing and strategic planning of Safelite. As such, our industry faces pricing and margin pressures similar to those being felt in virtually all industries today. Competitors use price discounts to gain market share in a low-growth environment. Each of us sees that competitive activity daily in every segment of the business. Its normal competition that is the driver of higher discounts.
Howard said her company tried to educate shop owners at trade shows and in trade publications about the changes, but few paid attention at the time.
We tried to help independents understand and accept it [the Revaluation], she said.
But some glass shops still gave huge discounts, even though the price of glass was lower than it had been. Others soon followed and margins became razor-thin.
If you reduce the list price by 68 percent, you cant discount 75 percent, Howard said.
A glass shop manager in Virginia, who preferred not to be identified for this article, said that the discounts will not stop until shops quit giving these discounts.
Until shops figure out who is running their businesses, the buyer [networks] will continue the terms. The glass industry has to clean up its own act, he said.
Other shops, primarily in metropolitan areas, see it differently. The glass shop owner in New York City said competition for business in the countrys largest market makes it imperative that he offer discounts.
Its hard to pass up work if things are slow, he said. If I say no, I wont get jobs. In the New York area, you will have 12 other guys that can do the job cheaper.
While inflation has continued, discounting has also increased--a fact that many say could be destroying shops.
In Come the Networks
However, glass shops are not alone to blame.
Its a group effort, said the New York City glass shop owner. The industry itself is partially responsible because we accept their pricing. But you also have big networks making deals with insurance companies. They pass these deals onto the independent shops.
These deals with insurance companies require networks to ask for bigger discounts to be profitable, say many in the industry.
Discounts really became heated when networks entered the scene and competed for insurance business with bigger and bigger discounts, Howard said.
And this competition has gotten even worse of late.
Like all participants in this marketplace, at LYNX Services we face increasingly stiff competition in the form of discounts. And, as with any business, you must be competitive to be viable, Umble said.
While it used to ask glass shops for discounts, Safelite says it no longer does this under its SGC affliate network.
With the introduction of the SGC affiliate network, the type of relationship with network participants changed, Wolszon said. Under the new network agreement, the shop agrees to bill the insurance company through Safelite/SGC Network, at the price established by each individual insurance company. Shops can elect to participate in all or some programs administered by Safelite. Safelite is not asking shops for discounts the individual insurance or fleet companies ask shops to provide market-competitive pricing. Shop feedback indicates that most shops prefer the affiliate relationship to the subcontracting arrangement.
For its part, the insurance industry and networks see glass shops offering even bigger discounts for cash customers off the street and wonder what all the complaints are about.
Insurers recognize that many in the industry who complain about discounts in the insurance segment are the same ones who quote even higher discounts for cash customers, Umble said.
David Williams, the national glass manager for State Farm of Bloomington, Ill., agreed. If a vendor says our offers are too tight, then why would he go and offer a $150 cash discount for a customer off of the street?, he asked.
Many blame the 1999 NAGS Revaluation for the discounting problem.
Insurance companies and auto glass shops may have to come to an agreement to end the discounting problem.
Meeting in the Middle
With price pressures from networks and insurance companies, its little wonder that glass shops are singing the blues. Yet, instead of continuing to throw stones, many in the industry would like to see increased communication with their network and insurance partners.
I dont know if there is a winner in this, Karbon said. We are all sitting back and snipping at each other. We have to appreciate each others problems.
Steben agreed, If the insurance companies and the industry could come to the table, things might happen.
Once they come to the table, Steben says the industry must show insurance companies that all glass companies are not created equal. Some install glass better than others and they should be compensated as such. To make a profit in a climate of rising discounts, shops often have to cut corners, which could mean increased risks for the common customer of both the glass shop and the insurance companythe claim holder.
Pricing should reflect the quality of the work, Steben said.
If that does not happen, problems could be on the horizon.
There are a lot of good, small glass companies that will take it in the teeth, Karbon said. This is a shame because they have done nothing wrong.
Leslie Shaver is a contributing editor for AGRR magazine.
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