Brad Mewes, principal, Supplement - who writes the Supplementary column in Paint & Panel magazine told IBIS Global Summit 2018 delegates that consolidation has reached a new phase and mega deals are now a real potential in North America.
Mewes provided delegates with an insight into the past, present and future of consolidation and how the industry is now in a new phase. Brad referred to his presentation at IBIS 2016 and highlighted how 2015 saw lots of activity with private equity investment entering the sector and how predictions of consolidation had been quite ambitious. The major players were growing rapidly with growth rates of 33% and said ‘at that stage the ambitious targets did not seem out of reach’. He continued, ‘it was an intense period of growth and opportunity.’
Fast forward to 2018 and the ‘big four’ in North America have continued to grow but at a slower rate of 26% CAGR – ‘growth is now far more strategic’ said Mewes. However, asking what had changed in the space, Brad pointed to the continued growth of the two major franchise operators – Carstar and Fix Auto – who he classed as ‘very active in the market and have grown aggressively’.
‘So,’ Mewes asked ‘is consolidation dead?’ His response was that it is not dead but it had entered a new stage of a far more selective, disciplined approach. Highlighting the consolidation curve, Brad said, ‘Industries evolve in a very predicted way over time,’ and highlighted the four stages of consolidation that can help to track this development.
‘In 2015, we were in stage two. Today, it is closer to stage three,’ said Mewes delving a little deeper into the North American market. You can read about the different stages here. This, suggested Mewes, was the period of mega deals and greenfield site development where the strategy was based on profitability and scale. According to Harvard Business Review, 'After the ferocious consolidation of stage 2, stage 3 companies focus on expanding their core business and continuing to aggressively outgrow the competition. The top three industry players will now control between 35% and 70% of the market. By this time, there are still generally five to 12 major players. This is a period of megadeals and large-scale consolidation plays; the goal is to emerge as one of a small number of global industry power-houses.'
Despite the slowdown, Mewes pointed to the ‘unprecedented amount of capital and dry powder in the market today,’ suggesting there was $1.7tn of dry powder investment capital available. He said this was being invested in horizontal acquisitions and integration of businesses.
Focusing on private equity and what will happen next in this area, Mewes pointed to a period of ‘de-leveraging’ where organisations are looking to strengthen their balance sheets and reduce debt.
Looking ahead, Brad highlighted how ADAS could impact the sector but he said there was no indication that it would decrease collision volumes anytime soon. He pointed to how humans are increasingly distracted by smartphone technology which, in the short term, could have the opposite effect.
In closing, Mewes suggested there is still a lot to target within the space and the potential for cross border consolidation is certainly evident but such a ‘mega deal’ would greatly depend on the opportunity available.