Trucking industry up-shift boosts tire sales, say dealers: But raw material costs, gray market tires, low-cost imports remain challenges
You would be hard-pressed to find four individuals who have their fingers on the pulse of the domestic medium truck tire market more intently than Jerry Bauer, Dennis Dickson, Jim McCurdy and Jim Stankiewicz.
* Bauer (in photo) is president of Durand, Wis.-based Bauer Built Inc., the sixth largest independent commercial tire dealership in the United States, according to Modern Tire Dealer statistics. Bauer Built's annual medium truck tire sales total approximately $60 million.
* Dickson owns Indianapolis, Ind.-based Indy Tire Centers Inc., one of the Midwest's most successful tire dealerships. It has a strong commercial tire presence.
* McCurdy, vice president of sales for Maine Commercial Tire Inc. in Bangor, Maine, has been selling truck tires for nearly 15 years. Truck tires comprise 90% of Maine Commercial Tire's total sales.
* Stankiewicz is president of Charleroi, Pa.-based Valley Tire Co. Inc., which generates $16 million in medium truck tire sales a year. Valley Tire also is the nation's 15th largest independent commercial tire dealership.
The dealers recently took some time to share their thoughts on the domestic medium truck tire market with Commercial Tire Dealer. From the increasing sophistication of fleet owners and the trickle-down impact of rising raw material costs to the proliferation of gray market tires and other significant issues, they pull no punches in delivering the straight scoop.
CTD: What is the most significant issue facing independent medium truck tire dealers today?
Bauer: Doing business profitably. With the escalating costs we are faced with in all areas including payroll, insurance, fuel, taxes, etc., and the downward pressures on margins from our customers and competition, it is very difficult to maintain, let alone improve, our bottom line.
Dickson: Finding and keeping good personnel at all levels of our company.
McCurdy: Escalating operating expenses without offsetting gains in profitability. For years, the truck tire market has been a war zone driven by dealer egos and new tire manufacturers' marketing plans. Very little consideration has been given to the dealership's profitability. Many dealers are content to reap a 2% or 3% net at the end of the year. Tires are sold at low grosses and labor is given away just to steal the customer from the competition.
The effect on the "winning" dealer's culture is a downward pressure on his profitability. The manufacturer gains wheel positions, the fleet buys tires a little cheaper, and the dealer's profit base drops another notch. Let's not forget that the capitalization for this service comes from the dealer's pocket. The majority of equipment investment and payroll expense in a truck tire operation are directly related to servicing the customer. There should be an opportunity to make a profit on this service component, as well as the tire sale. The discipline of profitability is a stranger to a lot of dealer principals. Dealership owners accept price levels that their outside salesmen generate without trying to create an organization that attracts and validates higher prices and profits. A truck tire dealer's biggest challenge today is not simply maintaining profit levels, but creating profit from existing procedures.
Stankiewicz: The increase in overall operating costs, including insurance, fuel, equipment and trucks. This makes it especially difficult to make a profit when the customer is faced with same problems and will not let you pass it on to them.
CTD: The American Trucking Association claims that the trucking industry is improving. The Rubber Manufacturers Association is predicting substantial truck tire shipment growth over the next few years. Are you seeing an increase in activity among your trucking customers?
Bauer: It's a mixed bag, depending on whom you are talking with. We find that good operators have plenty of business opportunities. The problem many of them face, however, is filling the seats of their trucks with drivers.
Dickson: Yes. Fleet customers this year have been doing more work. This translates into needing more tires and services.
McCurdy: I've been in the truck tire business for 35 years. The most noticeable change in that time has been the shakeout of the marginal regional fleets. The remaining operations are much better managed and are vastly more capable of competing on a national scale. Here in Maine, our domiciled fleets are not large but they compete favorably with mega fleets by picking their niches. Our fleet and construction customers are growing this year and our business is showing the result of that growth.
Stankiewicz: We're seeing an increase in our customers' freight activity. It seems their problem is getting enough drivers to handle the influx.
CTD: The overall sophistication of trucking fleets seems to be increasing. What do fleets want from tire dealers today that didn't concern them 10 years ago?
Bauer: They are looking for cost containment or reduction in cost. They are starting to understand that to achieve this, they are going to have to partner with a tire dealer who can do more than offer a tire for a price, like tire asset management, mounted programs, lot checks, data collection and analysis of data. The more sophisticated customer understands the total cost, including the benefit of services provided.
Dickson: More and more fleets are trying to get out of the tire business. They also are looking for information to help drive down their costs. Ten years ago, the fleet was only interested in the price of the tire, not the cost.
McCurdy: Ten years ago, fleet tire programs were more proprietary than today. There was usually a "gatekeeper" in the maintenance department whose sole reason for existence was to find ways to minimize profit opportunities for tire dealers. In the present day, fleet principals realize that a successful business relationship is based on mutual profitability. They look for dealers who are willing to provide value to that relationship. I once called on the president of a large regional fleet. He wanted to know how much my retreads were going to cost him compared to his current retreads. I asked him why he cared what each tire cost him when he should be concerned about total tire cost at the end of the year. He challenged me to share in any increase in his retreading expense at year end, and I accepted. This willingness to create a win-win relationship with this fleet got him reduced tire expenses and brought us a tremendous increase in profitability.
In my earlier years in the truck tire business, it was not unusual to call on fleets and find hundreds of tires under their roof with a number of employees spending all day moving and servicing tires. That is very rare today. Today, fleets would like to manage their core business and trust vendors to provide support services. Fleets in our area are interested in everything we can provide to cut down their tire costs. It goes beyond fleet inspections. We recommend and track the performance of new tire designs, and we store a casing bank and provide just-in-time delivery of new tires and retreads. In addition, our proximity to these fleets provides an opportunity to participate in other services related to fleet readiness.
Stankiewicz: Trucking companies are realizing they make money on hauling freight, not by trying to save money handling their own tires. We are asked more and more to relieve them of the burden of changing, mounting and airing up their tires. They know trucking; we know tires. Together we can lower their operating costs.
CTD: Skyrocketing raw material costs are having a tremendous impact on truck tire manufacturers. How have raw material prices affected you as an independent truck tire dealer?
Bauer: In the past, passing on the tire manufacturer's price increase provided enough additional gross profit to cover the tire dealer's operating cost. This isn't true today. Our costs are going up fast. This means we have to be more efficient in maintaining profit or increasing our selling prices at a higher percent than our cost increases. If you don't do this, your profits are squeezed.
Dickson: High raw material pricing means higher prices from tire manufacturers; hopefully, we can pass these on to our customers.
McCurdy: Tire price increases are really a non-event for us as a reseller. As long as all the manufacturers announce (increases) during the same period, I see no advantage or disadvantage. However, a raw materials issue that does have an impact on us is the price of fuel.
As a customer service-based truck tire distributor, we travel thousands of miles every month doing fleet inspections, road service and sales runs. Our vendors have no problem tacking on a "fuel surcharge" when we buy shop supplies, but we have a real problem charging our trucking customers the same way. I feel a fuel surcharge would cost us some fleet business. The issue is directly related to the question about significant issues facing dealers.
In some industries, key events force changes in the way businesses are managed. I believe the extreme fuel and insurance expense increases are forcing small to medium-size tire dealers to look harder at available profits in the medium truck tire market. Tire dealers who are not totally committed to the truck tire market seem to have disappeared when faced with the increased financial commitment of providing service techs, service trucks, training, fuel and insurance.
Stankiewicz: As of now, the rising costs of raw materials are only affecting the user. These increased costs must be passed on. What concerns me is the national account business that we do. We do not receive any extra compensation on our delivery commission and consequently our margins continue to erode.
CTD: The proliferation of gray market tries and third and fourth tier imports are growing concerns. How are these issues impacting you and how are you dealing with them?
Bauer: The gray market continues to be a very serious problem for independent tire dealers. It robs our profit by either stealing the business or forcing gross profit margins down. We take every opportunity to express this concern to our suppliers and to expose any gray market activity we discover.
I believe increased (import) activity is in the fourth tier. That's the really cheap and lower quality stuff mostly coming out of China. As of today, they have not made any great inroads in our market. We believe that our retreads can effectively compete with the price and quality of the fourth tier market.
Dickson: Gray market tires are a big concern and need to be stopped to keep the integrity of the market. It is very hard to deal with a "price only" buyer if we are not on a level playing field. We do not sell third and fourth tier because they do not retread, and that's a large part of our business.
McCurdy: Whether (gray market) tires are leaked from OE, shuffled from another region or have had a phony export scam applied to them, the problem has to be addressed by manufacturers. The opportunity for true gray market tire purchases has been created by manufacturers not controlling final distribution of the product. When this happens, trust between dealer and manufacturer is sorely tested. When we can buy the same brand that we are an "authorized dealer" for at $80 less from a wholesaler who's not a brand specific dealer, there is something rotten in the distribution plans of the manufacturer.
We stay away from purchasing gray market tires, but I can understand the temptation. How do we deal with unrealistically priced tires? I go back to the point that a truck tire dealer has to make himself part of the truck fleet maintenance chain. Supply tires and services that customers come to rely on as part of their fleet support network. The price of an individual tire will begin to fade in significance if a dealer can reduce a fleet's total tire costs.
I think fourth tier tires appeal to a different type of tire dealer who specializes in tailgate deliveries and wholesale relationships. My gut tells me that the dealer with a retread shop, multiple service vehicles and well-trained service techs gravitates away from low-priced, obscure brand tires. The commercial tire dealers who seem to be expanding their markets and growing revenues are marketing their company name as a brand. These dealers can't afford to supply their customers with anything but first-class new tires and retreads.
Stankiewicz: Gray market tires and lower-tier new tire lines have me, as a retreader, concerned for the future. In most cases, gray market tires are major lines, first tier products. Allowing these tires to enter the market at below our dealer buying price is unacceptable. The major rubber companies must put a stop to it or allow us to buy at the same price. As far as lower-tier tires, it is up to us servicing dealers to control the effect.
CTD: Describe the health of the domestic medium truck tire market as you see it one year from now.
Bauer: After a couple of relatively flat years, it seems to be strong right now and all indications are that it will remain strong for awhile. I think we will see continued improvement throughout 2004 and anticipate the market will be better one year from now.
Dickson: As I look forward I can only hope for a strong future, with freight shipments up and the economy strengthening.
Stankiewicz: I see our market being as strong for servicing dealers. To stay healthy and profitable, we will need to constantly upgrade our equipment and people. We will continually need to offer the best products and services to help our customers reduce their operating costs.