They’ve been kicked around, undercut and beaten up, but independent tire dealerships remain the dominant domestic replacement passenger tire distribution channel with an estimated 58.5% share of sales, according to Modern Tire Dealer’s 2004 Facts Issue.
Mass merchandisers and chains make up 16% of distribution while warehouse clubs comprise 9%. Tire manufacturer-owned stores have 8%, service stations make up 4% and auto dealerships comprise 3%.
Miscellaneous operations like quick service and muffler shops make up the remainder. That number is expected to grow as more operations add tires and related services like mounting, balancing and tire repair to their menus. A number of heavy-hitters like Midas Inc., Meineke Car Care Centers Inc., Monro Muffler Brake Inc. and Car-X Auto Service already do these things profitably.
“Businesses are looking for profit opportunities and the ability to increase their dollar amounts per bay hour,” says Tony Koles, president of Montvale Tire Co. in Melrose, Mass. “You put mufflers in once every 10 years. These companies aren’t going to sell drapes. They have to look at other areas of the automotive industry.”
Two quick service operations, Precision Tune Auto Care Inc. and Monro Muffler Brake Inc., recently have increased their involvement in tire retailing, but in very different ways.
New to tires
Leesburg, Va.-based Precision Tune Auto Care (PTAC) began selling tires through select franchise locations in late 2003 after signing a tire supply deal with Pep Boys -- Manny, Moe & Jack. The agreement gives it access to Futura brand passenger, performance and light truck tires on a just-in-time basis.
PTAC then forged a similar supply agreement with TBC Corp. in February that lets it buy tires from TBC’s Tire Kingdom and National Tire & Battery Inc. (NTB) outlets. “They have 150-plus locations that match up with our locations,” says John Weigand, PTAC senior vice president of operational programs. PTAC has access to TBC’s complete line-up.
PTAC has 340 franchise locations throughout the United States, plus three in Canada and more than 90 overseas; 35 to 40 outlets sell tires. Wiegand predicts 150 to 175 PTAC stores will add tires within a year. “We also believe that the (stores) that are now selling tires will probably sell a minimum of 80 units per month.”
PTAC has always promoted its diagnostic capabilities, dating back to its inception in 1977. In the late 1990s, the company began pushing auto repairs in an effort to market itself as a more well-rounded service provider. Adding tires was merely an extension of that strategy, according to Wiegand. “We average 150 cars a week per location. We certainly have a lot of opportunities to inspect vehicles and make customers aware of our tire services.”
‘Pleased with results’
Prior to launching its tire program, PTAC franchisees normally directed tire buyers to independent tire dealerships and national chain stores like NTB. About a half-dozen franchisees expressed an interest in selling tires in late 2002 and asked PTAC to set up a test program.
PTAC agreed, but asked participants to track various data from month to month. “We wanted to find out the cost of goods, the cost of labor, what front end services tires led to, etc. We discovered you could maintain a gross profit of 50% or better selling tires and associated services (like front-end work).”
A year later, PTAC made tires available to its members on a voluntary basis. The company has set special terms to encourage shops to carry the products. “We have a royalty rate -- traditionally 7% -- that’s paid to the corporate office,” says Wiegand. “It can get as low as 6% based on volume and sales thresholds.
“Margins on tires are traditionally low. We wanted to make tires profitable for (franchisees) because of acquisition and equipment costs.” So PTAC dropped its royalty rate on tires to 2.5%.
PTAC stores are moving more units than originally projected and are very pleased with early results, according to Wiegand. PTAC franchisees price tires “competitively” and don’t use them as loss leaders. “Our position is not to compete with the discount tire outlets. We don’t want to be known as a discount provider.”
PTAC classifies “anyone who offers what we do” as competitors in the tire arena, including independents and tire company-owned outlets. Fellow quick service chains like Midas and Meineke are viewed as strong rivals. However, Wiegand considers car dealerships to be the company’s biggest threat. “Customers perceive them as the experts.”
PTAC officials are looking at other potential tire suppliers, but the situation has to be right geographically, he says. “A lot of our supply agreements are set up to where the supplier has to be able to actually deliver product to our locations. We’re not matched up in every market with tire suppliers.”
PTAC has not ruled out the option of “forging regional alliances, so franchises can focus on their own businesses and not worry about setting up their own supply agreements.”
Can’t beat them? Become them!
Monro Muffler wasn’t content just selling tires through its company-owned outlets. The Rochester, N.Y.-based chain has become a full-fledged tire dealership thanks to several acquisitions over the last two-and-a-half years!
In March 2002, Monro purchased Kimmel Automotive Inc., a 34-store dealership based in Baltimore, Md., that did business as Kimmel Tire & Auto in and around Baltimore and Tread Quarters in parts of Virginia. (Monro has kept both names.) The Kimmel acquisition gave Monro access to several tire brands that its existing muffler locations did not carry.
Monro bought 10 retail outlets from Sumter, S.C.-based Frasier Tire Service Inc. some 11 months later (the locations now operate under the Tread Quarters banner). And two months ago, the company completed its acquisition of 36 Mr. Tire Inc. stores in Maryland and Virginia.
The $29 million deal “represents an exciting opportunity to increase our market share in the mid-Atlantic region, particularly in the Baltimore market (where Mr. Tire is headquartered),” according to Monro CEO and President Robert Gross.
Monro has 435 Monro Muffler and 90 Speedy outlets; all of them sell Goodyear, Bridgestone and Firestone brand tires. In some markets, most notably Baltimore, a number of these outlets are located right across the street from Monro-owned tire shops. Gross doesn’t see any conflict in this arrangement. “Our strategy within any market is having a Monro store and a tire shop. It gives us huge economies of scale. And it’s a direct attack on market share.”
The average Monro Muffler shop is 90% service and 10% tires, he says. “A Monro store might have 100 to 150 tire SKUs on hand, where a tire store may have 1,500 SKUs. But a Monro shop would have 10 times the (auto) parts of a typical tire store. We can share inventory between stores and eliminate out-buying.”
The approach also helps with advertising. “When you’re buying more lines in newspapers and doing more direct mail and radio, you get better pricing.”
Gross says Monro plans to acquire more tire dealerships in 2004, “as many as are in our markets and we can buy at the right price. There’s no limit.”
Deep pockets equal low prices
Henry Korbach, president of Cross Street Automotive & Tire Inc., a single-outlet dealership in inner-city Baltimore, believes Monro’s acquisition of Mr. Tire doesn’t bode well for smaller independents in the area.
Korbach says Monro’s pockets are so deep that it can low-ball tire prices, which is a practice he claims Mr. Tire and Kimmel engaged in long before they were bought out. “That’s how it’s always been. I blame them for most of the tires (in this market) being sold so cheaply. We’re lucky to make $10 to $15 on a passenger tire, maybe $20, tops.”
Monro also can afford to run expensive ads. (The Baltimore Sun, the city’s biggest paper, has charged up to $10,000 for a full-page, four color ad in its Sunday edition, according to Korbach.) “They advertise the lowest price. All the big guys do it around here.”
Cross Street Automotive derives 30% of its $750,000-a-year profit from tire sales and related services like mounting, balancing and repairs. It relies on automotive repairs to cover the rest. But even when it comes to ordering parts, “the big guys can buy direct from the manufacturers. I can’t!”
Despite his competitors’ superior buying power, Korbach refuses to drop his prices. “I don’t play the cheap game,” he says. “My oil change is $26. People say, ‘I can get it somewhere else for $14.’ I say, ‘Go!’ I tell my customers up front, ‘I’m not the cheapest guy in town nor do I want to be.’ I do OK, but there are some smaller shops who are really hurting.”
Baltimore tire market veteran Bill Conklin, who also runs Windsor Tire Co., a locally based importer, says attempts by quick service, lube and muffler chains to boost their tire business are smart moves. “Tire dealers, because of the longer lifecycle of radials, have had to diversify and go into more automotive service. It would be a logical thing for people in automotive service to diversify into tires.
“I’m always saddened to see another acquisition or merger. But the whole scene now is discount: ‘What’s your price?’”
To compete, Conklin says smaller dealers will have to work together “to get more muscle and parity with the national chains.” That includes joining local and regional buying groups. “There are still customers who like to deal with independents. They like to have a relationship with someone in management.”
Dealers: ‘Service still counts’
Montvale Tire’s Koles says there are eight to 10 quick service and lube shops within a two-mile radius of his store. He admits these operations have probably taken a chunk out of his tire sales. “But to what degree, who really knows?”
Koles believes the best way to compete is to “emphasize the expertise we have, which is in tires and the under-car business that comes with that: struts, shocks, wheel alignments, those things.”
Dealers in other parts of the country agree. Bud Good, president of Bud’s Tire Repair Service Inc., a single-store dealership in Coralville, Iowa, says a Midas store down the street from his outlet started selling Firestone tires last year. “But they don’t sell many.” In fact, Good claims that the inferior level of service at the shop has driven customers to his business. “They aren’t professionals in the tire business. They just sell tires; they don’t recommend what’s best for the customer.”
Fred Glass, owner of Factory Tire Outlet Inc. in Bradenton, Fla., says quick service outlets can be competitive, “but not like another independent tire dealership would be. They’re not going to hire the best people, so in that respect, they won’t be the toughest.”
“Anybody in the tire business is competition,” says Jerry Heggeness, owner of O.K. Tire Store Inc. in Fargo, N.D. “They’re going to take a certain percentage of business.” Much of that stems from the fact that consumers are strapped for time and make decisions based on convenience, not quality.
“Consumers these days need to be more on top of their purchases, whether it be tires, auto service or even cars. But if you can offer them good service at a fair price, you will survive. If your client base trusts you and the product you sell, your customers will be there.”
