AKRON-The economy may be in recession, but tire dealers remain cautiously optimistic heading into 2002.
While most dealers interviewed for this report projected higher sales for their businesses next year, they also see some roadblocks on the horizon.
And several discounted the belief that the retail tire and automotive service business is immune from recessions, pointing out that some customers who keep their older vehicles will postpone buying tires in a tough economy until absolutely necessary while others will nix discretionary purchases for such things as custom wheels.
Dealers also cited rising costs as worrisome, especially skyrocketing insurance premiums. Jim Miller, president and CEO of Twin City Tire and Auto Inc. in Minneapolis, which operates two retail stores and a large wholesale tire business, raised some ominous points regarding insurance prices.
Through his chairmanship of the Universal Underwriters automotive council, which consists of 10 members from the collision, automotive repair and tire industries, Mr. Miller said he sees medical and liability insurance rising 10 to 30 percent in the coming year.
``This is a big concern to a lot of us,'' he said. ``Next to people, insurance is the next thing on the minds and hearts of tire dealers.''
Nick Hodel, president and CEO of Northwest Tire Factory in Portland, Ore., and past president of the Tire Association of North America, reinforced the insurance issue, pointing out that offering a strong benefits package is essential to keeping good employees.
Still, with insurance premiums ``going nuts,'' his company's health insurance agent noted ``you're really lucky if you're only going up 14 percent.''
For smaller independent tire dealerships, the on-going rise in insurance premiums is especially tough,'' said Mr. Hodel, who heads up the 151-store dealer buying/marketing cooperative. ``Five years ago you could get a very nice dental and health package that would cost $250 a month for a family,'' he said, offering an example. ``Now it costs at least $650 a month to match that.''
Jeffrey Litteer, owner of Demuth Tire Sales in Darien Center, N.Y., agreed about the impact of higher costs. He's looking to expand his one-bay, two-employee operation, but it may be cost-prohibitive.
``Where it hurts the most is, if I could see some reductions in some of these spiraling costs, I could actually afford to put somebody else on for times when I could use an extra person,'' he said. ``But it can't be done.''
Opinions about whether the tire industry is actually recession-proof varied among those interviewed. The theory emanates from the idea that in down economies, consumers will hang on to cars longer, repair rather than replace them and eventually need replacement tires.
``I've been in the business for 30 years, and I've seen recessions several times,'' Mr. Hodel said.
This is particularly true in wheels, where sales are off a bit this year at Northwest Tire Factory. Wheel sales, he noted, are more of a discretionary purchase than tires. Someone considering a tire and wheel package who is experiencing tough times or is concerned about the economy is more likely to buy just the tires and skip the wheels, he said.
Brett Moore of Moore Tire Inc. in Higginsville, Mo., also used to subscribe to the recession-proof theory, but now he's not so sure. In the current recession, he's heard that some repair shops in his area that at one time were relatively busy now are sending technicians home due to a lack of work.
And even if people do keep their cars longer rather than trading them in on newer models, their tires last longer, he said. ``Instead of selling a 30,000-mile tire like we did in the 1980s, we're now selling 80,000- to 100,000-mile tires. Thus, we're not going to see this customer very often for tires.''
Mr. Miller of Twin City Tire, on the other hand, believes that people keeping their cars longer prevents tire and auto service outlets from seeing lengthy dry spells. ``In the auto repair business, we find when there's a recessionary climate we actually do better,'' he said. For Twin City Tire, that means repairing vehicles 3-10 years old.
This year, Mr. Miller sees more people keeping their cars rather than trading them in for something new. This is true even with the 0-percent financing incentives now being offered by several auto makers. As a result, he's forecasting a 10-percent increase in his auto service business.
As for tires, he expects sales to be flat, noting that his dealership's wholesale customers aren't buying more than they need ``because they don't want to carry the inventory.'' Instead, they are keeping on hand more of the faster moving tires ``and getting deliveries from us on the others,'' he said.
Predicting the first half of 2002 will be soft before the economy picks up, Northwest Tire Factory's Mr. Hodel said he is proceeding cautiously when it comes to spending and won't ``good deal himself to death'' when buying tires.
With many companies carrying excess tire inventory, there are a lot of good deals on the street right how, he said. The problem with this ``is if you end up sitting on the tires for six months, it's not a good deal,'' he said. ``We're keeping close eyes on our inventory.''
As for 2002, he expects it to be a good-to-better year for his group. ``I'm expecting increases...because we're a growth company,'' he said.
At least one financial expert expects the economy to be stronger in 2002 than most people think. But in that very strength, he adds, is the seed of its weakening.
``The economy's going to be very strong next year,'' said George Dagnino, president of the Akron investment firm Peter Dag & Associates and former chief economist for Goodyear.
Leading indicators all point to this, Mr. Dagnino insisted. For example, the Federal Reserve has increased the money supply by 25 percent, which he said is ``like the stock market gaining 1,000 points a month.'' Also, because money is cheap and plentiful, there is a great deal of liquidity in the economy and a lot of credit available.
The problem, Mr. Dagnino said, is this scenario tends to be inflationary. ``Inflation will be much higher than most people think,'' he said. ``In fact, it's already close to 4 percent, not the 1.9 percent as reputed.''
This means that-not in 2002, but 2003-there will be sharp increases in the costs of commodities such as rubber and oil, meaning much higher prices for raw materials used to make tires and consequently higher prices for the tires themselves, he said.
``This will cause a very short expansion,'' Mr. Dagnino said. ``It will be very strong, but it will come down very soon.''
Mr. Dagnino's advice to tire dealers is ``to manage costs very tightly. Don't get too excited about strong business, but build some cash. If you plan to open or acquire new stores, or hire new people, be very careful. Don't believe what you see.''
At Moore Tire, Mr. Moore said he is preparing for the potential of a lengthy downturn. He has reduced his inventory and will keep it lower until ``business picks up or a heck of a deal comes up.''
He said he doesn't see why the economy wouldn't rebound-a feeling shared by other dealers. The common logic offered is that every historical economic downturn has been followed by an upswing.
Mr. Litteer of Demuth Tire said he hopes to actually take advantage of the current climate to expand his business. With mortgage rates at near-record lows, he sees the door open. ``It's very favorable in the long-term, if you have the courage to invest right now,'' he said.
One tire dealership chain flourishing in the current economy, and expects to continue to do so in 2002, is Baltimore-based Mr. Tire.
``We're projecting and budgeting it to be a pretty good year,'' said Joseph Tomarchio, the company's executive vice president. ``A lot of new cars were sold at 0-percent financing, but even with that, a lot of people hung onto their old cars, and they have to bring those cars to us. Also, a lot of people who would take short flights are driving instead. I know quite a few people who go to the Carolinas or Boston or Pittsburgh who are driving.''
The Firestone-Ford situation, according to Mr. Tomarchio, ``has created some negative baggage for our industry, but also some positive things'' as people become more concerned about tire safety.
The upshot is that Mr. Tire is continuing its ``very conservative, very methodical'' expansion, Mr. Tomarchio said. It added four stores in 2001, bringing its total to 44, all in Maryland except for one in Arlington, Va. ``There are no signed leases yet, but we're negotiating for two or three sites,'' he added.
Mr. Tire also is continuing its practice of adding new services ``that will give us a return on investment and complement what we're already doing,'' Mr. Tomarchio said. In 2002, that includes transmission services and the ability to do more alignments.
While there may be no way to avoid economic downturns, they don't mean the end of the world. Mark Zurcher of Zurcher Tire in Monroe, Ind., said the strategy he is taking is no strategy at all. Rather his dealership will stay the course, working a little harder along the way.
``There are so many reports and projections out there. What do you believe?'' he said. ``We're going to try very, very hard to do everything we can do as effectively and professional as we can do it. What else can you do?''
This report was compiled by Todd Stumpf, Miles Moore and Dave Zielasko.