AKRON-Right now it's a small headache. Kind of like a little throbbing in the temples. Take a couple of aspirin and forget it. But within a few short years the nationalization of tire purchasing programs may become a major migraine for commercial tire dealers. So much so, that those who are heavily tied up in national accounts could risk losing their shirts, if not their businesses.
Having seen the handwriting on the wall, Bill Babek, owner of Babek Commercial Tire Services, in Avenel, N.J., raised the red flag at the recent World Tire Conference & Exhibition in Louisville, Ky., sponsored by the International Tire and Rubber Association. He warned dealers and retreaders of the growing trend toward national programs for commercial tire users.
What that means, the ITRA president said, is ``the local fleet you used to do business with may not exist anymore. They may be part of a national group''-such as a large truck-leasing corporation-that makes all the purchasing decisions for its counterparts.
Mr. Babek outlined a possible scenario during a recent interview:
A major national company-call it ``XYZ Trucking''-has terminals across the U.S. They examine their purchasing mechanism and realize they have five regional purchasing agents-with lots duplication of effort and differences in decisions-handling the firm's business.
Consolidating those efforts into a national account program, while perhaps less efficient in some cases regionally, is still substantially cheaper for the company, he said, than the duplication it now has.
And using one vendor nationwide rather than several in various locations eliminates inconsistencies in pricing, not to mention quality, he added, thus allowing XYZ Trucking to flex its muscles to negotiate a better price on the tires it buys for its entire system.
An operation of that type also provides consistency in the infor-mation XYZ Trucking needs on a national basis in order to streamline its purchasing as well as ascertain and cut its costs.
``To my understanding, more than half the vehicles sold-big trucks, single-axle and tandem tractors-are sold to national leasing companies which have such tremendous buying power,'' Mr. Babek said. ``They're (telling) a major tire manufacturer: We'll use all of your brand of tires throughout the U.S., but we want the best deal possible on them.''
The tire maker lands the account with a super-low bid, he said, then in turn gives a ``very, very low delivery commission'' to its distributors.
That's a headache a couple aspirin simply won't cure.
Another situation outlined by Mr. Babek likely is happening already in some dealers' markets.
Consider ``Mary's Produce,'' a hypothetical business with three trucks that goes to a nearby tire dealer to buy tires and service.
``It's only three trucks, but service is most important to her,'' Mr. Babek said, ``because if a truck breaks down with a load of produce, she's stuck.''
To cut costs, Mary eventually decides to lease her trucks from ``ABC Leasing Co.'' ABC has negotiated a national contract with a tire maker, which in turn contracts with a local dealer to supply tires and service to Mary's fleet at a pre-agreed-upon price.
``The tire dealer therefore gets much less commission than he would if he sold tires and services directly to Mary,'' he pointed out.
``It does not bode well for independent dealers.''
There has been a ``tremendous growth'' in very large customers as a percentage of the commercial tire market, Mr. Babek said.
Unfortunately, this has created another dilemma for dealers.
Before Mary's Produce began leasing its trucks, the dealer sold tires to Mary, who paid him in cash that he used to pay his bills. With a national account program, Mr. Babek said, the leasing company sends a check to the tire maker for services provided.
But the manufacturer does not pay the dealer in cash, instead providing a credit to buy more tires.
``The dealer ends up with an excess of credit. He needs to turn those tires into cash,'' Mr. Babek said, ``so he goes into the marketplace and dumps tires for cash-maybe taking a loss on them.''
As the number of local fleets declines and leasing firms grow, ``fewer buyers are paying cash for tires,'' he said. ``So a bigger percentage of the dealer's business is done by credit transactions.
``It becomes a vicious cycle.''
This trend began about 15 years ago, as national leasing and trucking companies began to flourish.
``If a commercial dealer has retail stores, he can turn to retail tire sales for cash,'' he said. ``But someone who's primarily commercial is going to have difficulty selling tires over the counter for cash,'' and thus could face a business-threatening cash shortage.
Hurt the most by this trend are small, independent commercial dealers-especially those who are not doing much retail business. They ``absolutely'' could go go out of business, Mr. Babek said, ``not from a profitability standpoint, but because of cash flow.''
Commercial dealerships' problems-and those of many retreaders as well-also have been compounded by the fact that, in many cases, a local leasing agent tied to a national trucking firm no longer makes buying decisions. He is told by his corporate office what products and services he can or can't purchase-and at what price-via a national account program.
``If you did all your business on national accounts,'' Mr. Babek said, ``you'd never get any cash out of the system. Therefore, you can't, for example, pay your employees or your bills.''
According to Mr. Babek, less than half of his business is in national accounts. Babek Commercial Tire Services, which operates 30 service trucks, primarily sells tires from Goodyear and Bridgestone/Firestone Inc.
``Realistically, what has to happen is the manufacturers need to pay dealers the same way they get paid, not not just give them credits toward additional purchases.''
``That's where the crux of the problem is,'' he added. ``If we go out and do a $100 night in road service, we get a credit-not cash-for (that amount) in additional product purchases from the major manufacturers. It gives them a captive market, because they know you're compelled to buy more product from them.''
At this point, Mr. Babek called the situation a ``moderate problem,'' but predicted that in the next few years ``it will become a moderate-to-high problem.''
How does a dealer in this seemingly bleak predicament survive?
``I wish I knew,'' he replied.