Will Tire Dealership Acquisitions Slow Down in 2023?
Analyst John Healy Also Discusses Price Hikes, Tariffs
Will tire dealership mergers and acquisitions continue in 2023? Industry analyst John Healy offers his thoughts in part two of this exclusive MTD interview.
MTD: M&A activity continued in 2022, including several big acquisitions on the commercial tire dealership side. In the face of rising interest rates and with inflation at a 40-year high, do you expect to see more or fewer deals made next year? Why or why not?
Healy: The broader M&A environment on automotive retailing, service centers and the tire industry surprised me in 2022. Earlier in the year, I would have predicted a cooling of M&A given the intense pressure facing operators related to sourcing, costs and labor - resulting in operators focusing inward rather than on expansion. However, that was not the case.
Looking to 2023, it’s hard for me to not feel a similar way. We feel the combination of rising interest rates and healthy profits in recent years is likely to cause somewhat of an impasse in the expectation of prices to be paid by both buyers and sellers. With high prices in the industry and higher costs of capital, the return math for acquirers is likely to become a bit more difficult. This dynamic - as well as a consumer outlook that is likely more difficult to get excited about - makes us think that activity levels in the months ahead may abate relative to the speed and size M&A has shown in the last few years.
Given this, we look for more sanguine activity in 2023 as buyer and seller expectations align, leaving the door open for a pick-up in activity in 2024 once the parties can find common ground.
MTD: On the wholesale-distribution side, Amercian Tire Distributors Inc. (ATD) made a big move by selling its Canadian subsidiary, National Tire Distributors. And Monro Inc. sold its wholesale division - which operated under the Tires Now banner - to ATD, thereby exiting the wholesale-distribution business. What’s your take on ATD’s strategic direction? Do you expect to see more M&A activity in the wholesale channel?
Healy: We are not surprised by the ATD move or the Monro move this year. We feel wholesaling is a tough business right now. Product availability caused strains in the business in 2021. And 2022 was a year where product costs went up significantly. This dynamic is causing operators to invest more capital to stay the same size - something that is not always enjoyable.
Given the capital constraints and consumption of this business, we are not surprised that some entities are reexamining their role in the market and potentially looking to align their capacity and industry position in the niches of where they can add value and earn higher rates of return. That’s what we think happened with ATD and Monro in 2022 and we cannot argue that their decisions seem out of left field to us.
Will more of this happen in 2023? We think so. We look for the big to get bigger and believe the distribution business is a perfect business for this dynamic to continue to unfold. Dealers tell us that they want consistency, price transparency and good fill rates. We think being a bigger distributor allows for these and we look for those with size and commitment to the category to be the winners in 2023.
MTD: In 2021, nearly 45 separate price increases were publicly announced by tire manufacturers. Last year, there were fewer price hikes, but percent increases, as a rule, have been greater. What’s your take on all of this? Has the window for price hikes closed? Are manufacturers in less of a position to enact price increases now versus a year ago and if yes, why?
Healy: We would agree completely that the pace of price increases in 2022 slowed compared to 2021. That said, we have seen the magnitude of those hikes in 2022 steeper than the previous year.
Our expectation is that as raw materials go, so will price increases. Broadly speaking, we are hopeful that Fed actions and normalization of production schedules will result in moderating inflation rates, which hopefully keep raw materials manageable for manufacturers. Under this backdrop, we expect fewer price hikes in 2023.
We would not be surprised to see some price hikes in early-2023 with the change of the calendar year and raw material prices that are still above year-ago levels. That said, as we look to the second half of the year, we think raw material prices for manufacturers might be lower on a year-over-year basis, which theoretically may serve as a pause point for further hikes.
Separately, we believe manufacturers heard from dealers and distribution contacts that fewer and more full price hikes are more reasonable than monthly hikes. We think visibility into prices and ability to manage inventory is key for all retailers and wholesalers and is appreciated.
MTD: Several tire manufacturers that have plants in countries that were slammed with tariffs have reported that the impact of countervailing duties on their businesses was significantly less than expected. Others have developed effective work-arounds to mitigate the impact. What will be the ongoing impact of tariffs in 2023?
Healy: We believe with a global tire market from a demand standpoint, as well as from a manufacturing standpoint, the impact of tari# s has become harder to measure. We believe that global economies continue to look for ways to combat inflation and believe items such as tariffs - while protectionary to industries - likely work against the cost dynamic to the end consumer. Given this - and what we believe is a global effort to curb inflation - tariffs might be cast aside as a tool that is not right for the current environment in the short run.
Click here to read the first installment of MTD's exclusive interview with John Healy.
Stay tuned to www.moderntiredealer.com for more interview excerpts!
And click here to check out MTD Editor Mike Manges' full Q&A with John Healy in MTD's 2023 Facts Issue!