Repair Franchises Race Indies But Will They Be Able To Build Customer Loyalty?

CHICAGO (Monday, September 13, 2004) - Motorists who need mechanics have plenty of options, with more than 1,200 telephone listings for auto repair shops in the Chicago area. But despite the numbers and independents’ claim of their lock on customer loyalty, some entrepreneurs see plenty of opportunity in auto repair franchises.

Midlothian-based Moran Industries Inc. started out as a family-run local independent transmission repair and rebuilding company, but has transformed itself into a franchiser with 200 locations. In 1989, Moran bought the Mr. Transmission franchise company of Nashville, Tenn., which was in Chapter 11 bankruptcy reorganization, then purchased another transmission company, a tune-up and brake franchise company and a window tinting and auto alarm franchise company.

Moran aims to open 20 to 25 new locations a year and to boost annual revenue for its franchisee system from its current $86 million to $150 million over the next two years, says Barbara Moran, president and CEO of Moran Industries.

Leonard Perry recently opened a new Mr. Transmission shop in Bolingbrook. His father owned an independent shop in Chicago, and Mr. Perry worked there intermittently, as well as at other shops. But when it was time for him to take over his father’s business, the younger Mr. Perry opted for a franchise. His father ended up selling his ship, so Mr. Perry was able to bring some customers to the franchise.

Mr. Perry thought there was value in the Bolingbrook location and in the promise of business, technical and marketing support. “The benefits outweigh the franchise fee you have to pay,” he says.

He paid Moran a franchise fee of $27,500 and also pays a 7% royalty on is sales. He says his sales were about $30,000 his first month, slightly better than he expected. Investment in the shop was minimal because Moran owned the property, which it leases to him for $5,000 per month.

“I just felt that having a big name, in the long run, would help me attract customers,” says Mr. Perry. He hopes the franchise will give him leverage against the legions of independents.

It’s a crowded field. There were almost 80,000 independent auto repair shops in the U.S. as of December 2003, according to Auto Inc. magazine. That’s an estimated 10 times the number of franchised shops, based on reports from top auto franchise companies.

Indeed, some repair shop owners think the market is already too jammed for more players—franchised or independent.

“I don’t think there is a need for more ships,” says Joan Koebernick, who, with her husband, owns Dakota-K Auto Repair and Tire Center, an independent shop in Arlington Heights. The Koebernicks opened a second shop nearby a few years ago, only to encounter sluggish business there, although their main shop is doing fine.

Ms. Koebernick says customers feel more attached to independents. “We have (customers’) kids and grandkids coming here. When people move away, many of them come back to get their cars fixed.”

Nevertheless, franchisers have seen value in specialized auto repair shops that offer uniform branding and marketing. Among the oldest and largest franchisers is Midas Inc., with more than 2,700 locations nationally and internationally. Aamco Transmission Inc., a pioneer in auto transmission repairs, has expanded to 700 locations over the past 40 years, and its lines now include oil changes, tune-ups and body repair.

Even advocates of independent ownership concede that franchises add value. They provide an extra boost with market research, business planning, technical guidance, advertising and buying power, says Ron Pyle, president of the Automotive Service Asssn. In Bedford, Texas, a trade association for independent shop owners.

But those services come with a royalty fee of 4% to 7% on top of an initial franchise fee that typically runs $25,000 to $30,000. Many auto repair owners balk at the extra expense, Mr. Pyle says.

What a franchise can’t guarantee is customer loyalty, Mr. Pyle says. Customers often have a personal relationship with their cars, and would rather have them fixed by a neighborhood mechanic they know rather than by someone they don’t know who’s part of a national chain, he adds.

“Neighborhood businesses that establish a reputation for good customer service still get the majority of auto repairs,” Mr. Pyle says. For general auto repairs, independents get as much as 65% of the business. “A lot of that has to do with the feeling that (customers) are getting personal attention.”

But loyalty has limits, he says. “If you are a shop that is still living in the ‘60s and thinking that a dirty facility with some girlie calendars in the bays and a grease monkey talking directly to the customer are going to work in today’s market, you are wrong,” he says.

Franchises also struggle to maintain standards, though. The top issue for repair franchisers is upgrading the quality of their franchisees, says Mary-Beth Kellenberger, a Toronto-based consultant with Frost & Sullivan Inc. who tracks the automotive service industry.

“Franchises are in state of turmoil, cleaning house,” Ms. Kellenberger says. “They are exercising their franchise agreement right to get rid of under-performers.”

But Mr. Transmission franchise owner Mr. Perry is a believer in franchising—at least, so far. “We kind of started off with a band,” Mr. Perry says. “We generated a lot of interest. I don’t know if it would have been the same reaction if it would have been ‘Lenny’s Transmission Shop.”

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