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The Future of Pricing: Are You Ready for New Business Models?

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Last month, I wrote about how commercial tire dealer profits can sometimes be lower, on average, than retail tire dealers’ profits. I boiled it down to the fact that whoever owns or controls the customer relationship has the power to call their own shots.

Retail tire dealers own and control their own relationship with their customers and therefore, in some cases, have more pricing autonomy, except for when working with national accounts. As a retail tire dealer, what happens if the mix of customers coming into your stores shifts more towards national account customers? I expect that your profits will erode.

Many commercial tire dealers didn’t land where they are overnight. It took decades of incremental changes in the nature of their customer base, their tire supply agreements, customer relationships and competitive challenges. 

What future changes might limit a retail tire dealer’s pricing power and profitability? There are so many variables, but I think:

 a) New disruptive business models will skew daily car count towards more national account customers, while;

 b) A simultaneous shift in the behavior of the driving population will decrease the traditional retail customer base.

New disruptive business models include shared vehicle models, fractional ownership, a shift towards electric vehicles, and the biggest disrupter in sight, autonomous vehicles. The staggering amount of venture capital investment flowing into these multi-trillion dollar market opportunities means that they will be making progress. 

Many of these models encourage “mobility-as-a-service” (MaaS), which will become more prevalent if and when autonomous vehicles can be summoned at any time. 

MaaS means “buying rides, not cars,” according to “No One at the Wheel” author Samuel Schwartz, who expects autonomous vehicles to become predominantly fleet-owned. 

Let’s face it. Most cars sit parked 95% of the time, and in a major city, that’s an expensive proposition. Surely, like Uber, Lyft and Amazon - the latter with its fleet of Mercedes sprinter vans - the operators of these new fleets will want to negotiate tire and service pricing that is consistent and low, plus service levels that are high, to bring down operating costs and keep fleets running continuously.

While disruptive business models come to fruition, we’ll continue to see changing consumer driving habits, best shown by who is driving and owning cars. Baby boomers born before 1960 love cars more than any demographic (my wife and I own four vehicles for two people), but boomers are getting older and are not renewing our licenses at previous rates. In fact, license renewals for boomers have been declining annually since 2008. 

As boomers age, we are prime targets for autonomous vehicles, which promise the continued freedom of mobility we have come to expect. 

Millennials (aged 20-36) have shown a preference for city dwelling and for not owning cars. The percentage of millennials with a driver’s license stands at 76%, down from 92% since 1983.

Generation Z are people between the ages of 16 and 23 and seem to be following the lead of millennials. Fewer than 70% have licenses and that’s the lowest rate since 1963. Many parents I know drive their Gen Z kids everywhere and don’t seem concerned about having them learn how to drive.

This mix shift of customers resulting from disruptive models and changing consumer behavior will have a negative impact on retail tire dealer’s pricing power and profitability. 

Pricing power - along with your product and service mix - is one of the most powerful tools in your arsenal for keeping up with inflation and growing your profits. When a customer becomes a national account customer, you lose control of the customer and the power of pricing.

Tire manufacturers have actively targeted the Uber, Lyft and Amazon fleets, just like they will seek relationships with other new business model owners. It’s impressive to hear of nationwide coverage with thousands of locations, the majority of which is made up of you, the independent tire dealer. 

Tire suppliers leverage your locations to appear larger and they sell off that to sign up national account customers. That’s how they negotiate the lower national account prices that you have to live with.

Reduced pricing power has implications on business value and that’s something we all should be concerned with. Your business is likely the most valuable asset you own. 

If a business is generating low profits,  then a multiple applied to its profit is often less than the value of depreciated equipment, inventory, and receivables. In other words, a business in this situation will sell for net asset value and little to no goodwill. 

Since retail tire dealers are the primary distribution and servicing arm for most tire manufacturers, you might need to organize better and start laying out a collective framework for how to deal with emerging business models. Take control of the price negotiating process. Band together. There's strength in numbers and tire manufacturers need you.

Michael McGregor is a partner at Focus Investment Banking (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information, contact him at michael.mcgregor@focusbankers.com.

 

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