PHILADELPHIA-Hoping to cash in on tire sales and repeat service work, Pep Boys-Manny, Moe & Jack plans to offer flag brand tires in its stores to complement its private labels.
The change is part of the firm's recent restructuring that also included closing several underperforming stores, assembling a new management team and paving the way for a new store design.
``Our goal is to be the category-dominant, one-stop shop for automotive maintenance and accessories,'' George Babich, Pep Boys' president and CFO, said at a Morgan Stanley analysts meeting in late September.
``What this means is we want to be the value alternative to the dealer for your maintenance and repair and a place to browse if you're a car lover.''
Mr. Babich did not say which brands would be involved in this plan, and a company spokesman said the information is considered proprietary for now. But company stores in Denver and Houston have been selling Goodyear, Dunlop, BFGoodrich and Michelin tires since late this summer as a test program.
The company also did not release its timetable for the program.
With tires and service work both expected to grow about 3 percent from 2003 to 2005-compared with growth of only 1 percent for retail products for do-it-yourselfers-Mr. Babich said Pep Boys wants to tap into that growth. Philadelphia-based Pep Boys operates 595 stores in 36 states and Puerto Rico, with more than 6,000 service bays.
While Pep Boys has offered private label tires in the past-most notably its Cornell and Futura brands-company officials expect flag brands will bring customers into their stores sooner after their original vehicle warranty expires. That means Pep Boys can establish a relationship to provide repeat services like brake work, oil changes, shocks and struts.
In addition, the retailer could tap into larger segments of the $16 billion U.S. consumer replacement tire market, which Pep Boys estimates is 19 percent house brands, 23 percent private labels and 58 percent flag brands. Cooper Tire & Rubber Co. makes the bulk of Pep Boys' Cornell and Futura tires.
Tires accounted for 16 percent of Pep Boys' 2002 annual sales, or $347.3 million. The chain generated another $415.8 million in automotive service-related sales last year, according to company financial documents.
During a market test in Houston and Denver, Pep Boys found that vehicles were 9 years old on average when the owners bought private label tires. When the stores added BFGoodrich, Goodyear and other brands, the average vehicle age fell to 5 years-leading Pep Boys to conclude it previously lost out on those four years of a vehicle's non-warranty service life by offering only private labels.
``This is a huge opportunity for us,'' Mr. Babich said. ``We're going to pull forward and establish earlier the relationships in the post-warranty market by offering branded tires and playing in that 80 percent of the market where (branded) tires are demanded by consumers.''
Also, Pep Boys found that its tire sales in low-income neighborhoods-where people are more receptive to less expensive private brands-are 30 percent higher than tire sales in high-income neighborhoods.
``Just closing that 30-percent gap-and we think we can do it by offering branded tires to the high income customers who're looking for the quality product-would increase our overall comp sales for the entire company by 3 percent annually,'' Mr. Babich said.
Joe Flynn, president of Flynn's Tire Co. in Mercer, Pa., said he expects some impact on his business when Pep Boys adds branded tires. Flynn's Tire sells Kelly, Goodyear and Dunlop brands in eastern Ohio and western Pennsylvania. Pep Boys operates 42 stores in Pennsylvania and 12 in Ohio.
``A lot of those (flag) brands, everybody and their brother's got them anyway,'' he said, adding some independent dealers try to do the same thing by adding private labels.
Chris Wyborny, vice president of Ramona Tire Inc. in Hemet, Calif., said Pep Boys' influence on the market would come not so much from competition but from its effect on pricing. Pep Boys operates 122 outlets in California, and Ramona Tire runs 14, selling Bridgestone, Firestone, BFGoodrich, Continental, General, Hankook, Kumho, Michelin and Yokohama brands.
``They really take the price positions and take a lot of the margins out of the brands we've been able to make some money with,'' Mr. Wyborny told Tire Business.
While most independent dealers rely on their superior service to distinguish themselves from the national chains, Pep Boys hopes to make a dent there as well. Mr. Babich-who acknowledged the chain ranked ``very low'' in customer service surveys compared with the competition-said Pep Boys will establish a customer service index to quarterly monitor customer satisfaction and base managers' bonuses on it.
In fact, in J.D. Power and Associates' latest Replacement Tire Buyer Behavior and Satisfaction Study released in October, Pep Boys ranked dead last among tire retailers with a satisfaction score of 680, compared with the top score of 858, won by Les Schwab Tire Centers Inc. The lowest score next to Pep Boys' was 737 by Tires Plus, which is operated by Bridgestone/Firestone.
No matter how many changes Pep Boys makes, Mr. Wyborny believes some customers will always go to the independent dealers for quality service. ``There's a certain customer that's going to be price-driven. But once they find out they're not getting the same level or quality of service, they're going to be back in our bays,'' he said.