Higher tire prices, higher operating costs, relative stability in consumer brand preference and increased service expectations from dealers are what several leading tire distributors see as key business issues in 2003.
Tire Business asked three of the industry's largest tire distribution companies-American Tire Distributors (formerly Heafner Tire Group), TBC Corp. and Treadways Corp.-to do a little prognosticating on the future, as well as outline several other issues that will have an impact on their businesses as the new year unfolds.
Their consensus: Higher raw materials prices will primarily drive increases in tire prices.
Larry Day, president and chief operating officer at TBC, said virtually all major tire makers as well as several smaller ones have announced price increases or intentions to raise prices for 2003. These increases, he said, follow on the heels of announced increases last year that were largely offset by promotions and market discounts.
``There may have been some pricing improvements,'' he said, ``but very little.'' He noted that Goodyear has announced a 5-percent across-the-board increase effective Jan. 1, while Cooper Tire & Rubber Co. hiked its prices by the same amount on Dec. 1.
Dan Wire, CEO at East Norriton, Pa.-based Treadways, predicts price increases for almost everybody in the range of 5 to 7 percent and that they will hold for the year.
``Prices will have to increase,'' he said. ``Raw materials costs are up. Manufacturers need price increases. Also, the impact of the TREAD Act will be felt through 2003.''
Mr. Wire said the TREAD Act is an issue of major concern. ``They (NHTSA) have gone way overboard to fix a perceived problem. I don't believe we have an issue with product quality, but the government has stepped in to fix something that was doing fine.''
Jason Shannon, director of marketing for American Tire Distributors, said he agrees that raw material cost increases will necessitate price increases at the retail level, but he chose not to speculate about how large yet-unannounced increases might be.
Whether price increases will tend to shift consumers away from flag brands is open to question. But all those surveyed said many tire buyers are becoming more price and value conscious.
``In 2000, the (Firestone tire) recall caused many consumers to move toward flag brands,'' Mr. Shannon said, although he did not see any noticeable shift at his company.
Mr. Wire said, ``Despite the `flight to quality,' our (brands) are up far more than any of the flag brands.''
Treadways distributes five private labels, as well as the Sumitomo brand manufactured by Japan's Sumitomo Rubber Industries Ltd., and since August it distributes the Goodyear and Dunlop brands under a G3 Xpress agreement with Goodyear. Sumitomo is Treadways' parent company.
``Consumers want quality, but they also want value, and private brands offer the best value. We are not seeing a flight to the major brands,'' Mr. Wire concluded.
Mr. Day at TBC-which distributes six private brands as well as lines from Michelin North America Inc.-agreed. ``There has been a shift to the outlet brands,'' he said, ``because of convenience and price. There was a false shift during the BFS recall program, but we will see a 50-50 mix that is more traditional.''
Of course, consumers are not alone in expecting more from the tire industry. They are joined by dealers as well. Tire distributors are finding that, among other things, their dealer customers want good fill rates, excellent delivery service and competitive pricing. More and more also are relying on e-commerce to serve their customers.
``Price is a given,'' said Treadways' Mr. Wire. ``But dealers also need service. With the rapid expansion of sizes and types of tires, their wholesalers have limited ability to stock everything. So, they need a way to get tires quickly, as well as at a competitive price.
``We've upgraded our computers to better access information and added a one-half-million-sq.-ft. warehouse in Mississippi to help us im-prove our fill rates.''
Mr. Wire added that fill rates from the manufacturers have been ``wonderful-in excess of 90 percent.''
Goodyear is Treadways' biggest private brand supplier, and he said the tire maker produces to the firm's orders.
The same story is told concerning fill rates-and Goodyear specifically-by Mr. Day at TBC.
``We buy direct from production based on our forecasts,'' he explained. ``We schedule months in advance and are in excess of 90 percent.''
At American Tire Distributors (ATD), Mr. Shannon's focus is on meeting dealer demands for more technology, and he said they're pushing for it.
``They want 24-hour access to be able to check inventories and order online,'' he said. ``Our Heafnet system allows them to do that.''
Mr. Shannon also stressed dealers want the convenience of one-stop shopping, allowing them to order tires, wheels, valve stems, tire shop equipment and supplies-virtually anything they need. About 6 percent of sales at ATD are attributable to tire shop equipment, Mr. Shannon said.
Representatives of all three companies agreed that insurance issues are of concern to them this year, but they offered somewhat different perspectives.
Mr. Day said liability rates have gone up for both retailers and wholesalers, as well as the manufacturers. ``We have indemnification from the manufacturers, but they pass along those costs. The insurance industry in general is recovering from 9/11 by raising rates, and there is not a dealer or wholesaler who is not impacted.''
``Insurance certainly is a problem,'' Mr. Wire said emphatically. ``We are a part of Sumitomo Group, but even so, we are not immune from insurance problems.''
Treadways took a hard look at insurance costs toward the end of this past year to see what could be done about them. However, Mr. Wire doesn't seem to be optimistic.
``As long as there is no tort reform, it will be a major problem,'' Mr. Wire said. ``The recall impact was minimal. (The problem) is a combination of an increasing number of lawsuits for everything imaginable....Out-of-control lawsuits is the biggest issue, and the consumer ends up paying for it.''
Mr. Shannon's concern about insurance costs at ATD relates more to the cost of providing health care insurance for that company's 1,900 employees.
``Managing distribution costs is an issue,'' he said. ``We are in a very competitive market. Our system is efficient and we have a strong delivery system, but costs will escalate.''
Why? Labor costs, he explained-especially the cost of providing insurance for employees. His view is that liability issues lie more with the manufacturers, with some of the burden falling on dealers as well.
Operating costs also are a concern for Mr. Wire.
``When margins go flat, it limits your ability to expand your sales and marketing efforts,'' he said.
So overall, how does 2003 look?
Mr. Day believes demand for replacement tires will be up from 2 to 4 percent this year.
Mr. Shannon is not so sure.
``We are about at the end of the recall cycle, and at the end of the fourth quarter, we will begin to replace the replacement tires,'' he explained. ``Add to that the current economic uncertainty, and forecasting the fourth quarter of this year and the first quarter of 2004 becomes an issue.''