Skip to main content

Breaking News

Breaking News
Cooper expects JV plant in Vietnam to be producing truck tires by ‘early 2020'
Close
Sister Publication Links
  • Rubber & Plastics News
  • European Rubber Journal
tb-logo
Subscribe
  • Login
  • Register
  • Subscribe
  • News
    • AUTO INDUSTRY
    • BUSINESS/FINANCIAL
    • COMMERCIAL TIRE
    • FACTORY FIXES
    • GOVERNMENT & LAW
    • INTERNATIONAL
    • MOTOR SPORTS
    • NEW PRODUCTS
    • RETAIL TIRES
    • SERVICE ZONE
    • SEMA/AAPEX
    • SMALL BUSINESS
    • TIRE MAKERS
    • SPONSORED CONTENT
    • Many lessons learned — and some under way — on electric vehicle battery safety
      ETRMA backs revised EU tire labeling text
      Rancho introduces 3-inch suspension system for 2014-20 Ford F-150s
      Don't be fooled by VW's long-running fan
    • Trelleborg launches major restructuring program; tire/wheel business unaffected
      Pirelli to cut costs, contain investments in 2020-22 period
      USTMA raises 2019 shipment forecast slightly on expected aftermarket gains
      Hankook to supply German touring car series' DTM Trophy ‘feeder series'
    • USTMA raises 2019 shipment forecast slightly on expected aftermarket gains
      Kal Tire opens OTR tire retread plant in Mexico
      Aeolus, Onyx discussing TBR joint venture in Sri Lanka
      Cooper expects JV plant in Vietnam to be producing truck tires by ‘early 2020'
    • S.C. targeting illegal tire dumps via 'See it/Report it' campaign
      USTMA calls on all stakeholders to help raise scrap tire recovery rate
      NFIB holding webinar Dec. 4 on new federal overtime rule
      ETRMA backs revised EU tire labeling text
    • Nexen donates meals, tires to Cityzens Giving soccer program
      Trelleborg launches major restructuring program; tire/wheel business unaffected
      Pirelli to cut costs, contain investments in 2020-22 period
      Hankook to supply German touring car series' DTM Trophy ‘feeder series'
    • Hankook to supply German touring car series' DTM Trophy ‘feeder series'
      Americas Rallycross folds after 2 seasons
      Australia's Supercars series renews tire supply deal with Goodyear/Dunlop through 2024
      BKT extends Monster Truck sponsorship deal through 2026
    • Sentury custom Jeep highlights Landsail Rogueblazer tires
      Yokohama adds winter fitment to grader tire line
      Rancho introduces 3-inch suspension system for 2014-20 Ford F-150s
      Nexen targets growing CUV/SUV market segment with Roadian GTX
    • Auto Plus gifts Mustang GT to 'Performance Promotion' winner
      Akebono names AAPEX 'guess the number' winners
      TECH Tire Repairs launches new e-commerce site
      Jack Hone, former publisher of Tire Review, dies at age 81
    • Many lessons learned — and some under way — on electric vehicle battery safety
      Auto Plus gifts Mustang GT to 'Performance Promotion' winner
      Akebono names AAPEX 'guess the number' winners
      TECH Tire Repairs launches new e-commerce site
    • Sentury custom Jeep highlights Landsail Rogueblazer tires
      view gallery
      25 photos
      Photos: A look back at 2019 SEMA, APPEX Shows
      Detore: Assessing the glitz, glamour of SEMA
      AAPEX eyes tire service as part of Repair Shop HQ at 2020 show
    • NFIB holding webinar Dec. 4 on new federal overtime rule
      Tennessee couple named Milex franchisees of the year
      Fight the battles to win the war
      Industry challenges stubbornly persist decades later
    • Sentury custom Jeep highlights Landsail Rogueblazer tires
      USTMA calls on all stakeholders to help raise scrap tire recovery rate
      Apollo enters Saudi Arabian market via tie-in with local distributor
      Nexen expanding outreach to U.S. veterans with Purple Heart pledge
  • Opinion
  • Multimedia
    • VIDEOS
    • PHOTOS
    • PODCASTS
  • Events
    • LIVESTREAMS
    • WEBINARS
    • SEMA LIVESTREAMS
  • Data
    • DATA STORE
    • DIRECTORY
  • ADVERTISE
  • Classifieds
  • DIGITAL EDITION
MENU
Breadcrumb
  1. Home
  2. News
May 13, 1996 01:00 AM

BEWARE THE MIRAGE OF `FALSE' PROFITABILITY

Chuck Slaybaugh
  • Tweet
  • Share
  • Share
  • Email
  • More
    Print

    LOUISVILLE, Ky.-It's a mirage that has lured nearly every dealer off course at least once: Namely, the temptation to shave prices while hoping to generate enough increased volume to more than offset the lower margin on each sale. Although it's possible, the probability of that strategy's success is remote, said speaker John Zito, director of credit for Coop-er Tire & Rubber Co., during the recent World Tire Conference & Exhibition.

    ``Don't believe that a discount in your selling price is going to allow you to make it up in volume,'' he advised at an April 18 seminar, ``Understanding the Financial Puzzle.''

    A dealership would have to increase sales volume a whopping 66.7 percent in order to offset a modest, 10-percent reduction in its selling price, Mr. Zito pointed out.

    To illustrate, he explained that if a dealer's regular selling price for a tire is $100 and its cost is $75 dollars, the gross profit on each unit sold is $25 or 25 percent.

    Reducing prices by 10 percent will mean the same tire will sell for $90 rather than $100. Then, after subtracting the dealer's $75 cost from this lower selling price, the result is a $15 or 16.7-percent gross profit.

    And since $15 goes into the former $25 gross profit 1.667 times, it will be necessary for the business to increase its volume 166.7 percent in order to break even.

    The most effective way for most dealers to improve profitability is not by generating more sales volume-but by controlling existing expenses, Mr. Zito said. And any firm that could do two-thirds more volume without incurring overtime or other additional expenses is simply too fat, he added.

    Most expenses fit into one of three categories-payroll, fixed and controllable. Payroll is the largest of these three categories and therefore the most productive place to set about controlling costs, Mr. Zito advised.

    He said 22 years of experience have convinced him payroll and employee productivity is the most common factor in determining profitability-or the lack of it.

    Payroll should amount to about 50 per-percent of gross profit, he said. When such businesses are profitable, they're adding dollar value-two dollars or more for every dollar of payroll expense. And the more that dealers exceed this benchmark the more profit they make.

    Of the gross profit remaining, he said controllable expenses should account for about 30 percent and fixed expenses only 10 percent-leaving 10 percent or more for net profit. Therefore, particular attention should be focused on payroll and controllable expenses.

    ``When accounts receivable increase from $100,000 to $150,000, you are making a conscious decision to invest in your customers,'' he said. Allowing inventory to grow from $200,000 to $300,000 is a conscious decision to invest in inventory.

    One of the most important retailing innovations brought by the late Sam Walton, founder of the Wal-Mart and Sam's Club chains, was a unique new form of computerized inventory control, Mr. Zito explained.

    Atop every Wal-Mart and Sam's Club is a satellite dish by which data regarding how the store did that day is transmitted to company headquarters in Bentonville, Ark. There, employees put together a list of what each location will need the next day, then relay the data to regional distribution centers.

    By 5 a.m., trucks carrying the necessary merchandise begin leaving the distribution centers en route to each store.

    This way, by turning inventory every 16 days and collecting cash for merchandise on which it doesn't need to pay for 30 days, Wal-Mart has been able to operate on suppliers' money, which has helped fuel expansion.

    A cash flow statement is perhaps the most important piece of financial information an owner or manager of a business receives from the firm's accountant, he said. It shows the amount of cash the business is generating-and where it is going.

    ``You can be profitable, and if you are running a negative cash flow you will go out of business,'' he told dealers.

    ``Profits may be the heart of your business, but cash flow is its life blood.''

    One way of charting it is to total the average number of days products remain in inventory and the number of days that elapse from the time of sale to when the dealer actually collects his money.

    Industrywide, he said, the average number of days the product sits in inventory is 60, while the average number of days between the time of sale and when the dealer gets paid is 45. Thus, on average, it is 105 days from the time the dealer purchases the tire until he gets paid for it.

    So if his supplier is giving 90-day terms, the business's owner must be prepared to finance the remaining 15 days. Should the merchandise be allowed to remain in inventory for 90 days rather than 60, that 105-day waiting period increases to 145 days.

    ``It costs you 3 percent a month to carry inventory,'' he said. So if the merchandise you're considering doesn't sell for four months, it's going to cost you 12 percent to carry it for that period. Therefore, purchasing it may be worthwhile unless the supplier's discount is more than that amount.

    Dealers must decide ``what's in your best interest,'' he said, when it comes to accepting or turning down what suppliers offer.

    Mr. Zito cited a National Tire Dealers & Retreaders Association study showing that most dealers average $1.51 in assets for every dollar of current liabilities. This falls below the $1.65-to-$2 range most experts consider desirable, he said.

    Letter
    to the
    Editor

    Do you have an opinion about this story? Do you have some thoughts you'd like to share with our readers? Tire Business would love to hear from you. Email your letter to Editor Don Detore at [email protected].

    SIGN UP FOR FREE NEWSLETTERS
    EMAIL ADDRESS

    Please enter a valid email address.

    Please enter your email address.

    Please select at least one newsletter to subscribe.

    Newsletter Center

    Staying current is easy with Tire Business delivered straight to your inbox, free of charge.

    SUBSCRIBE TODAY

    Subscribe to Tire Business

    SUBSCRIBE
    Connect with Us
    • Facebook
    • LinkedIn
    • Twitter
    • RSS

    Our Mission

    Tire Business is an award-winning publication dedicated to providing the latest news, data and insights into the tire and automotive service industries.

    tb-logo
    Reader Services
    • Contact Us
    • About Us
    • Site Map
    • Industry Sites
    • Order Reprints
    • Customer Service: 877-320-1716
    Partner Sites
    • Rubber & Plastics News
    • European Rubber Journal
    • Automotive News
    • Autoweek
    • Plastics News
    • Plastics & Rubber World
    • Plastics News Europe
    • Plastics News China
    • Urethanes Technology
    • LSR World
    RESOURCES
    • Advertise
    • Classified
    • Wholesale Tire Directory
    • Privacy Policy
    • Terms of Service
    • Media Guide
    • Ad Rates/Specs
    • Editorial Calendar
    • Clasified Rates
    • List Rental
    • Digital Edition
    • Ad Choices Ad Choices
    Copyright © 1996-2019. Crain Communications, Inc. All Rights Reserved.
    • News
      • AUTO INDUSTRY
      • BUSINESS/FINANCIAL
      • COMMERCIAL TIRE
      • FACTORY FIXES
      • GOVERNMENT & LAW
      • INTERNATIONAL
      • MOTOR SPORTS
      • NEW PRODUCTS
      • RETAIL TIRES
      • SERVICE ZONE
      • SEMA/AAPEX
      • SMALL BUSINESS
      • TIRE MAKERS
      • SPONSORED CONTENT
    • Opinion
    • Multimedia
      • VIDEOS
      • PHOTOS
      • PODCASTS
    • Events
      • LIVESTREAMS
      • WEBINARS
      • SEMA LIVESTREAMS
    • Data
      • DATA STORE
      • DIRECTORY
    • ADVERTISE
    • Classifieds
    • DIGITAL EDITION