'We need product!'
Holding a dealer forum is a little like mowing your lawn with a self-propelled lawn mower. Once you start it, all you have to do is guide it a bit. The lawn mower does all the work.
That's what happened when, during the International Tire Expo in Las Vegas, Nev., in November, we sat down with five veteran independent tire dealers to discuss business issues. Three of the dealers were strong wholesale distributors (more about that later) and two were large retailers. All five, however, sold tires through both channels to some extent. Our distinguished panelists included:
* Bob Dabrowski (right, in photo, with Ralph Garofolo). Dabrowski is president of Tire Warehouse Central Inc., Keene, N.H. (26 retail stores, 24 franchise locations).
* Ken Homann, president, Homann Tire Ltd., San Antonio, Texas (four retail stores); and Rick Anthis, director of wholesale operations, Homann Tire Wholesale.
* Brad Saunders, vice president, Fairmount Tire & Rubber Inc., Los Angeles, Calif. (one warehouse, one retail store, 25 associate dealers).
* Ralph Garofolo, president, Tirexchange Inc., Scottsdale, Ariz. (17 wholesale/retail stores, one retail store).
We received one request from the participants: Don't ask what the future will bring. "No one can tell you what business in the future will be like. You will sell tires when the vehicles wear them out, and not before," said Dabrowski.
The dealers talked about supplier relationships, with specific tire companies addressed anonymously in most cases. They brought up the gray market on their own. And they discussed the changing landscape of wholesale distribution.
The open, free-wheeling discussion began with the following question:
MTD: What can your suppliers do to better serve you?
Bob Dabrowski: In our part of the country, the first thing they can do is ship the tires we order. We can't get tires. Some of our suppliers are shipping 50%. And this happens with the majority of our suppliers, and has for a considerable amount of time -- not just for weeks and months but for years.
Brad Saunders: The reps we see on a daily basis don't have the authority to make decisions. They come to see us, then go back to their home office. By the time you get a decision, three or four days have passed, maybe a week. It really hurts us because we need to be very market-driven.
Ken Homann: I think we can look at that question in two ways because we are both a customer and supplier. As far as buying directly from the manufacturers, we want to see a consistent program along with a consistent supply chain. We also feel our supplier has to have a strong relationship with us, where there's good communication and they fully understand our business needs. Our suppliers know what our business plan looks like for the next three years. And it's updated on a quarterly basis so they know what our intentions are in the future, so we can grow together.
I also think we have to answer that question from the perspective of a distributor toward the independent who isn't buying from the manufacturer but from a distributor like us. Rick?
Rick Anthis: From a wholesaling standpoint, the biggest thing we hear from the smaller dealers is that they need product -- the right product at the right time. They tell us, "If you can't get the product to me it doesn't matter what you price it at, it doesn't matter what kind of program you have, it's useless." You can't support them without the service capability of getting the tires to them, which kind of mimics what Bob was saying about getting the right product from the manufacturer.
If I could piggyback on Ken's comments, one of the things we need from suppliers is for them to get control of their distribution and manage pricing in the market. We buy product at "X" price, but a non-direct or non-relationship entity not only can get the product, number one, whether through the gray market or overseas or whatever, but also get it and sell it at a cheaper price.
Homann: I can buy tires from one of my major suppliers for less in the market even though I'm part of one of their best programs.
MTD: Is the gray market a problem?
Dabrowski: I don't think a lot of the pricing is a gray market problem. It comes from overbuilding tires for the OE vehicle manufacturers. When tire manufacturers build 10,000 of one size and need to get rid of some of them, they dump them off to a huge wholesaler and it wrecks the retail market.
Ralph Garofolo: I have a little difference of opinion on that. I've been in business 30 years as a dealer, and I have found that in most cases, most rubber companies still operate under the "favorite son" concept. They don't communicate very well with us.
When you get into the gray market, the gray market from Europe is obviously a strong issue. Rubber companies say how they keep on trying to control that, but they don't.
Today I'm very big into performance tires. Today I can buy some of my tires roughly anywhere from 15% to 20% cheaper than I did direct. It just shouldn't be that way. No matter what we do, the product pops up.
Homann: I can tell you what we don't need from the manufacturer and that's the three days at the end of the month.
MTD: Do each of you have those "panic calls" toward the end of the month or quarter built into your buying plans?
Dabrowski: We go looking for it. It's a fact of life. If a dealer is not big enough to be able to take 2,000,3,000, 4,000, 5,000 or 10,000 of one size, the rubber manufacturers have to get rid of them. We heard this year that as many as 400,000 of one size was piled away.
Could they put a man in charge and seek out all of the United States dealers and divide the excess tires up across the country equally? I bet they could do it if they wanted to. But instead they call a Reliable Tire or a Les Schwab and say, "We've got a half-million tires" and bang, off they go. With effort I think manufacturers could spread it around and deal it down to half a trailer load. That way, a smaller dealer could take advantage of it.
Homann: We do not build our programs or distribution around "panic buys." We want to stay consistent with our programs. Yes, there are specials that come out for the month that are within the written program, and we work within those. We do not get into the big panic buys, searching for ways to hold our inventory to the last three days of the month. But if an opportunity arises, we don't miss opportunities.
Saunders: We take advantage when the opportunity is there. Our business and network of stores emphasizes private and associate brands more than major brands, so we do not have as many issues in the gray market. And it's much easier for us to keep control of our inventory.
Dabrowski: We sell a lot of private brands, and he is right.
Garofolo: I am pretty consistent. My buying habits don't change. I am more major brand-oriented. I don't do 5% of my business in private label tires. If a manufacturer's deal pops up I take a look at it. If it's the right deal for my business and my different warehouses, I will take advantage of it. If it's not, I will take a pass. I do not look to solve their problems; I deal with my own.
MTD: Is it good or bad that many of the tire companies want to do business with fewer but larger dealers?
Homann: I think it's great. In our case, we can service the smaller dealer more efficiently than the manufacturer can. And they can buy one tire from us at the same price when they used to have to buy 200 tires directly from the manufacturer, and we will go to them three times a day if we have to. So I think for the smaller independent dealer, for the single-, two- or three-store operators, having the manufacturers go through more of a distribution network is going to be a big advantage for them. It is going to be more cost efficient for them.
Saunders: I totally agree the landscape has definitely changed. I don't think the manufacturers are going to have a choice in how they sell their tires. Delivering to the smaller dealers would take the resources away from where they really need to go -- to the larger dealers, who can sell them more efficiently. We have actually gone to manufacturers and told them they shouldn't visit anyone unless they are a million-dollar deal.
Dabrowski: I think the question is loaded. If I were a three-store dealer sitting here, I would have to challenge you guys because I would want to be direct and one of the crowd. It is evident we're all big dealers here.
The fact still remains manufacturers can't service the little guy any more. They like the huge chains like Wal-Mart, Kmart and Sears-Roebuck and those people. They are not going to drive down the highway with a tractor-trailer for four tires. It doesn't matter if it's better or worse, there is nothing you can do about it. It is called consolidation. The "bigness" is going to win and the wholesaler is going to take care of a lot of small guys in a territory.
But I think the time has passed for some of the big regional wholesalers. In our area, they used to ship way up into Maine and to us and way down south and all over the place, and that market is dried up. We have 50 stores and so does everybody else in our area, so we don't buy from them. We buy from the manufacturer, and we take care of the little guy.
Garofolo: I see this as a cycle, and right now we are in the cycle of the rubber companies cutting costs. They are trying to find ways to cut their shipping costs and their manufacturing costs. They have developed a lot of programs. Bridgestone/Firestone, Goodyear and Michelin have developed programs to sign mass wholesalers to distribute products to out-of-the-way dealers, so to speak. But I also know that each rubber company has programs that would interest me if I had only two or three retail locations. I might not be interested in buying from a wholesaler.
If you are a retailer you need a complete package. You need more than just price. You need marketing, you need identification, you need national comp programs, you need adjustment programs. The rubber companies are trying to feed those programs through different programs such as Bridgestone/Firestone's TireStarz. I saw the cycle about 20 years ago and it didn't work, it just goes around and around.
But there is a difference with today's wholesalers. The way these gentlemen with us today wholesale is different than traditional wholesalers. And I agree with Bob that the days of some of the traditional wholesalers are limited, because they dump merchandise.
Homann: You are right -- there are wholesalers, then there are distributors. All our associate dealers have full signage. We just took 18 associate dealers to a three-day class and taught them financial management principals, and did a complete three-year analysis of their financial statements.
We bring them in. We have a labor attorney sitting here teaching them how to write their employee manuals. There's a difference between wholesalers and distributors, and I think those things take place with distributors.
Anthis: They say that the key is to supervise that service. Michelin, Goodyear, Bridgestone/Firestone -- they are not in the distribution business. They can't get the product more efficiently to a smaller dealer from an economies of scale standpoint. That is just not their forte, and that is where we come in.
Our business is getting dealers the right product and the same programs they could get if they were direct. Manufacturers are cutting back their sale forces and cutting back their costs, and, of course, we like it because that is where we feel we can fill the niche. We can provide that level of service.
MTD: With this evolution of wholesaling and the need for more partnering, are your profit margins the same as they were five years ago?
Garofolo: It depends on the brand. There are certain rubber companies that sell tires you can't make any money on. There are a couple major brands I carry only because of the OE penetration. If they didn't have OE penetration, I wouldn't be selling their product because I can't make any money on it.
I'm not interested in making anywhere from eight to 12 points on a tire. Manufacturers do not control their pricing, they do not communicate with their dealers. It is wherever the price might go. You make it up on conversion. People do business with people. They don't do business with companies.
Again, I have been a retailer since 1973. My customers walk in the door and do business with Ralph, Jay, Gary -- whoever is there. That's where they forge the relationship -- they don't forge a relationship with "Deerfield Tire Co." People do business with people, and the rubber companies have a tendency to forget that.
And this is exactly the reason why our business runs in cycles when it comes to tire manufacturers selling through wholesale distributors and wholesalers. None of the big three are going to want to put all of their eggs in one basket and say this gentleman over here is going to represent me the way I need to be represented. But he's also got three other brands he can sell. So how do I know I'm getting my equal share? How do I know if I turn over 22% of my business to a manufacturer and his associate dealers that I am going to maintain that 22% penetration?
It is a risk factor, and it becomes cyclical. Right now, we are worrying about rolling costs and cutting costs. This is why Bridgestone/Firestone came up with the TireStarz program and other tire companies with their programs. And I predict that it will go back to the way it was not too long ago, with manufacturers working directly with small dealers.
MTD: Our statistics show that only 30% of the tire buyers ask for a specific brand when they come into your store. We call this the "70-30" rule. And, on average, only half of them end up buying that brand. So the dealer actually influences the purchase 85% of the time.
Garofolo: An old CEO I knew from a rubber company forgot we were in the tire business. We're not McDonald's. We're not General Motors. We're not a happy purchase. We're a necessary purchase. So if margins are being affected by what the rubber companies do, it's really difficult to -- I don't want to say "stay loyal," but if you can't make money on a product, it's hard to keep going that way. Unless that product can be used to your advantage to convert the customer to where you want that customer to be, where you can make money.
Dabrowski: Sure. You convert them to what you want.
MTD: It sounds like the service received by that single outlet or three-outlet individual has remained constant even as manufacturers have withdrawn from providing it.
Homann: I think the service to a single store guy has vastly improved. I know of a gentleman at this show last year who had been a direct dealer with MAST for 51 years and was being told he had to choose a distributor to buy through because his purchases weren't high enough. He went directly to Francois Michelin and asked why he was being cut off. One year later he will tell you that the best decision he had ever made was being shipped to a distributor.
Garofolo: There is no question that the distributor can service the smaller retailer better than a rubber company. The question becomes how many years is it going to take before the rubber company again decides that it does not like that program because the distributor also is carrying other brands and is not giving him enough coverage? It goes around and around.
Homann: I think they are trying to protect themselves by tailoring the programs to where your reward is for your market penetration. That is what Michelin has done. There are additional discounts not based on volume but based on product mix. So they are moving in that direction.
What I would be more concerned about is the manufacturer trying to sell more directly to the end user, the consumer. I think the best way for them to secure their market share is to get their product directly to them. They are really, really after the control, and in my opinion the best way for them to get control is to go directly to the consumer themselves.
Dabrowski: We forget one thing in the whole mix of things. Up until 20 years ago, you didn't have regional retailers. And now you have regional retailers with 25, 50, 100, 150 stores -- STS, Town Fair, VIP -- it changes the picture that wasn't there the previous 80 years.
MTD: You are all the principals of your businesses. What do you consider to be your job? How would you break down the time you spend on your daily duties?
Dabrowski: I worked two years on a new banking program so that my team under me, which is the most important part of our company, can do its job -- go out and build some stores, run the grand openings, get the marketing done. So I look at the reports to see how they are doing and to see if we are going to run out of the money side. I get involved in some of the marketing. I go to all the grand openings. I wear a trainee's badge when I go to the grand openings because I am always willing to learn.
Garofolo: I could break down my day pretty easily: 20% personnel, 20% marketing, 20% vendors, 20% finance and 20% putting out fires.
MTD: You're lucky that putting out fires represents only 20% of your time.
Garofolo: I know, and that goes back to personnel. The better your people, the fewer fires.
Homann: I spend time as the visionary of the company. And I spend another good part of my time making sure that all the key decision-makers are on the same page and that we are all working for the same common goal. I think that probably takes up most of my time. And analyzing and converting what I see in numbers and looking at the numbers and being able to see how the transactions fit in the real world.
We have what I think is a real unique management concept among tire dealerships. We have five directors working as one unit. Together, they make all major corporate decisions. So we have five gentlemen making decisions instead of one individual. The key for me is to make sure all five of us are on the same page and communicating with each other.
Saunders: Our business is also very different. We are going through a mini- transformation to change our infrastructure, and I've been working to make sure my time is not spent putting out fires as much. I feel that 20-25% of my time should be spent doing that; it used to be a lot more. I'm working more at adding value to my dealers, probably through marketing, and dealing with employee issues, financial issues the rest of the time.
MTD: I assume rising insurance costs take up a good portion of your financial issues.
Garofolo: Especially today the way rates for garage liability and workers' comp are going up.
Dabrowski: It's affecting the bottom line. Costs for garage liability haven't risen severely for us. We're the company that lets the consumer take the wheels off the car. A number of times we have had dealers come up and say, "How the heck do you do that? Your insurance must be so high you can't even afford it." Well, we must be able to afford it, because we have been doing it for over 30 years.
The fact of the matter is, when you jack a car up six inches off the ground to get to the tire off...
Garofolo: How much trouble could you find?
Dabrowski: Right. When I first started in 1973, the worst thing that happened the whole year was a guy spun the hand wrench -- we don't give them air guns -- and hit himself in the nose. He came in laughing. He said, "Do you have a paper towel? I just broke my nose!" He really didn't break it. It was just bloody.
We don't have lifts. I don't know if you have ever had troubles with a lift, with a car falling or slipping off. That can't happen with us unless somebody gets a little loose and lets a guy get under the car to check something. We convinced the insurance company about that 30 years ago. But the workers' comp and the health insurance -- that is a different story.
Homann: Health insurance for us is up about 20%. But benefits are down about 10%. We had to raise our deductibles a little bit and have our employees pay a little bit more. We are having to offset some of our cost by playing the game -- absorbing a little more of the cost ourselves and cutting back the benefits a little bit.
Dabrowski: How did your employees react when you did that? Were they understanding?
Homann: They were very understanding. What I do is hold town hall meetings. All the employees get together and get to submit all their questions anonymously. I then take them all to dinner. Then we get together with about 35 employees at a time and I sit and answer every one of those questions. They get it directly out of my mouth, and I explain to them the cold, hard facts. I told them we, as a company, absorbed $51,000 of the health insurance cost increases and they absorbed about $8,000. We just tell the truth. I get some great questions, and I get put on the hot seat. Sometimes I have to sit there and apologize. We have had some great changes within our organization that have come out of those quarterly town hall meetings. They make a big difference.
MTD: Thanks, everyone.
Brand awareness -- Here's what tire brands each of the participants in our dealer forum said they sell:
* Bob Dabrowski, Tire Warehouse Central Inc.: BFGoodrich, Continental, Dean, Firestone, Goodyear, Michelin, Uniroyal, Yokohama, General, Star, Pirelli, Medalist
* Ken Homann, Homann Tire Ltd.: Michelin, BFGoodrich, Uniroyal, Cavalier, Continental, General.
* Brad Saunders, Fairmount Tire & Rubber Inc.: Remington, Essenza, Summit (he's a SURE Tire stockholder), Kumho, Goodyear, Toyo, Pirelli, Woosung, TredTech, Compass, Vogue, Denman.
* Ralph Garofolo, Tirexchange Inc.: Bridgestone, Firestone, Michelin, BFGoodrich, Yokohama.