Repair Shop in Need of Tuneup

Japanese Auto Center Inc. is an automobile service center remarkable mostly for its size. Instead of the three or four repair bays that most privately owned auto shops have, Japanese Auto Center boasts 24 bays and a full, on-site auto parts center on 3 1/2 acres in Torrance.

Daniel Schrier has owned the company since 1986, when his father, who had owned a restaurant on the property, set him up in business as a 21-year-old. Although business is brisk, the company has an active marketing plan and a loyal customer base and is known for providing high quality service in an efficient manner, Schrier wrote The Times requesting a Small Business Make-Over for one important reason:

After 11 years in business, with annual revenue of $800,000 and 13 employees, Japanese Auto Center has yet to turn a profit. “It has been a break-even or lose situation for us every year,” Schrier said.

Hard to believe? The situation is much more common than many would think, according to UCLA entrepreneurship professor and consultant William M. Cockrum. “I see it all the time. It’s not at all unusual.”

While a company may make a decent living for its owner and provide employment to several people, it is still fundamentally missing the mark if it does not generate a profit. After all, an entrepreneur can earn a steady salary working for someone else and avoid all the extra work and headaches that go along with being a small-business owner.

Cockrum took a hard look at the company’s financial data hoping to discover what was wrong with Schrier’s operation. Revenue has fluctuated between $650,000 and $800,000 for the last three years, he noted. “There really has not been a big revenue movement,” Cockrum said.

Then he took a look at the company’s expenses. “Operating expenses are running in good relation to revenue. He’s doing a nice job with that, so there’s no problem there,” Cockrum concluded. But Cockrum noticed that Schrier’s cost of labor had gone from 17% to 30% of total expenses over the last three years--a hefty increase.

And, Cockrum discovered, Japanese Auto Center’s gross profit margin had declined every year from 1994 through the first half of 1997. “Including the data from this year, his gross margin has declined a total of 20%,” Cockrum said. What caught his eye was that his cost of labor--one single item--accounted for more than half of that 20% drop.

Given his flat revenue and his increasing labor costs, both in absolute dollars and as a percentage of total costs, Cockrum asked Schrier a simple question: “Have you raised prices in line with the wage increases that you’ve been paying your people?”

No, Schrier had to admit, he had not. In fact, he said, he had held back on price increases for at least three years. For instance, he currently charges $33 for a smog check. Six years ago, he charged $32, and only raised the price by a dollar when the price of the smog certificate itself went up.

Yet, with the increasing complexity of car engines and the increasing specialization of mechanics, the service has gotten much more expensive to provide. “These mechanics are real specialists and there’s a high premium on them. A lot of them are making $1,000 a week just doing smog checks,” he said. Then, too, his equipment costs have risen: “We had to purchase a $20,000 or $30,000 machine to do these smog checks and soon we will have to purchase a new diagnostic machine that’s going to cost me around $45,000 or $50,000,” he said.

Time to raise prices?

Definitely, Cockrum said. “I suggest that you go through your products and services one by one and look at where you could raise the prices selectively, especially to keep pace with rising labor costs,” he said.

In the past, Schrier said, he did a price survey of his competition and updated his price list every two or three years: “I guess I just got lazy and put off doing it. I can keep a lot of my prices competitive--like oil changes--and raise the per-hour rate I charge for larger jobs just to keep myself current with the competition.”

Schrier’s reluctance to implement a price increase is not atypical, Cockrum said. Small-business owners, whether they be consultants, publishers, service providers or manufacturers, are almost always afraid to raise prices. “Typically, small-business people fear they will lose customers if they raise their prices. But most of the time, they’re wrong,” Cockrum said.

He believes that price increases do little to drive away longtime, satisfied customers. “You have to really see the complaint level become noticeable before you’ll ever see erosion on your sales rate” from a price increase, Cockrum said.

The next area Cockrum looked at was Schrier’s customer mix: Half are individuals who drive in for repairs and service--his retail customers--and half are dealerships and rental car companies that have fleet contracts. That means they pay him a wholesale rate to service, do smog checks and perform safety checks on their vehicles so they can be sold on the used-car market. His largest wholesale client is Enterprise Rent-A-Car, which has contracted with him for seven years.

He charges his retail clients $50 an hour, but earns only $32 on the wholesale jobs.

And, in fact, for the last several years Enterprise has squeezed him further and further on his hourly rate.

“We used to charge Enterprise $45 an hour, then we dropped to $38 and now to $32. They keep renegotiating because they know they’re going to hand me a regular check every month that pays my bills. They pay me $25,000 to $30,000 each month--it’s hard to give that up,” Schrier said.

Despite the temptation to keep a sure thing going, Cockrum said, Schrier needs to break down his figures and analyze just how profitable those large, wholesale contracts are.

“If nearly 50% of your business comes from a single client, you need to ask yourself if that is wise,” Cockrum said. “I have a feeling those contracts are likely to be unprofitable. And because you’re concentrating so much business on them, you are not giving your retail customers the full attention they need. In some cases they may even be turned away because you have to fulfill the contract with Enterprise.”

Yet it is just those retail customers who tend to have bigger jobs and produce more profit for Japanese Auto Center, Schrier said.

One way of dealing with the discrepancy is to assign his higher-priced, more experienced mechanics to work on the retail jobs and put his lower-paid, lesser-trained people on the fleet jobs--which tend to be routine anyway. His top mechanics earn $17 an hour, while he pays $8 an hour to the less-experienced employees.

But Schrier said that even though he tries to do that, the day-to-day reality of his business often does not permit it. He is a stickler for getting cars in and out of the repair bays within 24 hours, a policy that makes him popular with his retail customers, but may have hurt his profitability in the long run.

“My philosophy here is to get cars done the same day they are brought in. I hate waiting and I would never think of putting a client off for days. I get very upset when cars are sitting around and the mechanics are not working on them,” he said.

When the retail operation is running slow, Schrier has a hard time telling his high-paid mechanics to wait around for jobs while the fleet cars are stacking up. “I’ve always told them to get the car done, no matter whose it is, fleet or no fleet,” he said. But that means he often has higher-priced mechanics working on Enterprise cars and then when a crunch of retail customers comes in, they are all busy.

A change in customer orientation may be in order, Cockrum advised. “You need to pay your mechanics according to the level of work flow and determine truly how profitable the large contracts are. If you are not making money on them, you should get rid of them.”

Cancel a sure thing? Schrier admitted it would be difficult to give up something he’s relied on for many years.

Yet Cockrum pointed out that Schrier does not seem to have a problem getting retail clients. In fact, he is a AAA-certified service center and has a high level of customer referrals. And he has innovative and successful marketing programs already in place.

“After we complete a job, we send out thank-you cards. We also call the customer back a few days later just to see how everything is going. We try to call them at work, because they are usually so impressed with the phone call that they hang up and tell their co-workers,” Schrier said.

Schrier also has a unique marketing tool that has worked well over the years. He purchases 500 large chocolate chip cookies every week and has them packaged in the takeout boxes used by Chinese restaurants. His salesman visits 50 accounts a week and drops off fliers with a box of cookies, embossed with Japanese Auto Center’s logo, address and phone number. The sweets have made their mark.

“People come in here and say they know us because we’re the cookie guys,” Schrier said. “They’ve even called asking if they could buy cookies from us.”

Schrier said he planned to keep busy over the next few months evaluating and implementing Cockrum’s advice. “He pinpointed two or three things I was already thinking about. I was glad to hear that my fixed assets and expenses are in line. The main things I’ll be concentrating on are employee and job mixes.”

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Meet the Consultant

William M. Cockrum is a management consultant and faculty member of the Anderson Graduate School of Management at UCLA, where he teaches finance, ethics, investment management, strategy and entrepreneurship. He consults with chief executives concerning corporate strategy and organization and formerly served as vice chairman and director of Becker Paribas Inc., a firm that was sold in 1984 to Merrill Lynch. Cockrum was voted UCLA’s outstanding faculty member in 1993 and was noted as the No. 1 teacher of entrepreneurship in the United States in December 1996, both by BusinessWeek. He earned his MBA from the Harvard Graduate School of Business Administration

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This Week’s Company Make-Over

Name: Japanese Auto Center Inc.

Type of business: Auto repairs and auto parts sales

Owner: Daniel Schrier

Annual revenue: $800,000

Location: Torrance

Founded: July 1986

Employees: 13

Start-up financing: $250,000 in family funds

Owner’s salary: $40,000 annually

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Main Business Problem

Despite growth in the business, it has been a break-even or loss operation for 11 years.

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Goal

Turn the business into a consistent profit-maker and increase revenue to $1.2 million annually.

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Recommendations

Reevaluate pricing structure and survey similar local businesses to determine fair market price.

Raise prices selectively, on a product-by-product basis, to keep pace with rising labor costs.

Break down monthly data and analyze how much profit is generated by large fleet contracts. A computer program could aggregate the necessary data by invoice.

Renegotiate or reject large contracts if they are unprofitable.

Change customer orientation. Concentrate on developing the retail side of the business and then devote the balance of company’s time to the large contract jobs, not the other way around.