AKRON (Aug. 1, 2001)—It's a dilemma that just won't go away: making a profit in the tire business when margins on tires just keep staying low. What's a dealer to do?
Many tire dealers have turned to auto service as a means to help them make money, and auto parts have become just as critical to some dealers as tires. Some, like Hurley Cook, owner of Savannah Tire, Brake & Alignment Centers Inc. in Savannah, Ga., have gone a step further on the auto service side and have attempted to make auto parts a lucrative portion of their operations.
Eight years ago, Mr. Cook said he didn't know anything about the auto parts business, but knew he wanted to cut out the middle man in the distribution process and buy from a single supplier, if possible. He contacted Atlanta-based Mighty Distributing System of America Inc. to discuss a supply agreement. To his surprise, he found Mighty was willing to offer him a franchise in its distribution network.
“I'd never thought of that before,” Mr. Cook said. “It was not in our game plan when we contacted Mighty. But once we saw the potential of selling to other installers like ourselves, it made a lot of sense.”
At the time, Mr. Cook operated four retail stores in the Savannah area. He now operates eight stores and two Mighty franchise locations in Georgia and Hilton Head, S.C., servicing 65-70 customers around Savannah and 85 in the Spartanburg, S.C., area. Auto parts sales comprise 20 percent of his company's sales.
Since Mr. Cook first signed with Mighty in 1993, the parts supplier has offered franchises to several tire dealerships and currently has 11 under its umbrella, according to Ken Voelker, president and COO of Mighty. The company grants exclusive territorial rights to franchises in select markets and looks for tire dealerships that have anywhere from four to 30 stores, said Barry Teagle, vice president of franchise sales and development.
Mighty recognizes that auto service brings in better margins for dealers than tires and, thus, has an inventory management system that promotes cash flow to its customers, Mr. Teagle said.
“This is a system, it's not just a source for parts,” he explained. “Mighty is a distribution methodology that helps control the inventory of parts at the installer level. These tire organizations are accessing that and applying that at their stores to make their stores more efficient.”
Eleven of Mighty's 135 franchised distributors are tire dealers, Mr. Teagle said, noting that Mighty franchisees now cover two-thirds of the U.S. Franchisees must invest between $150,000 to $250,000 to open a franchise, depending on the size of the market, he explained.
Mr. Cook told Tire Business that while opening a Mighty warehouse was a deal compared with investing more than $1 million to open a new tire store, the business concept was an adjustment for him.
“It's different from the tire business. It's a different mindset of actually going out and wholesaling parts as opposed to…retailing tires,” Mr. Cook acknowledged, saying that he had to hire people with no retail experience to run his wholesale parts enterprise successfully.
The differences between selling tires and selling auto parts became glaringly obvious to Joe Tomarchio, executive vice president of Baltimore-based Mr. Tire Auto Service Centers, a 43-store chain.
A few years ago, Mr. Tire began dabbling in the auto parts distribution business by buying direct from manufacturers, but Mr. Tomarchio admitted his company didn't give it the same priority as tires. He soon discovered that the parts he bought weren't always finding their way to the shelves.
“We thought we had a very efficient system,” Mr. Tomarchio said. Visiting a store, he'd see parts bins lying around. “I opened them up, and lo and behold they were parts that were dropped off from our own truck. I'd look at the transfers and they'd been sitting there for two days.”
When he looked at the invoices, Mr. Tomarchio saw that he had purchased the same parts sitting in those bins from outside suppliers, which “infuriated” him.
“We would pay more buying them from the outside,” he said. “They're sitting there in a parts delivery bin. Our guys didn't check them off, didn't put them away as efficiently as they do with tires because it was like a stepchild.”
The dealership's parts inventory also turned over far less often than its tire inventory, he said, leading him to seek out a parts distributor, which turned out to be Mighty.
Though not a Mighty franchisee, Mr. Tire has reaped benefits from Mighty's system. Mighty reps visit Mr. Tire stores two to three times a week, scan inventory, then deliver needed parts that same day or the next, Mr. Tomarchio said. Credits for defective parts are issued immediately, and Mighty's employees stock the shelves for the dealership.
“For parts, you have to put shelving up, and it's just a real pain in the backside,” he said. “They're smaller items, they're easier to get mangled—especially when you're mixing them with tires—and they get misplaced and mis-shipped.”
He declined to discuss profits, but said that since becoming a Mighty customer a year and a half ago, his inventory turns on parts have increased, his need to purchase auto parts from outside suppliers has decreased and he has been able to eliminate parts inventory from his warehouse. Mr. Tire's bottom line has improved overall, as it has made sales it wouldn't have gained otherwise.
Mr. Tomarchio's “not saying (the parts business) is good for everybody. Maybe some tire dealers out there are better at distributing parts....” But he said that “very few of them that I've talked to are good at distributing parts.”