Based on the business conditions tire distributors were expecting in 2003, you might want to hold a mirror to last year's predictions because apparently not much is expected to change for the new year.
Higher costs, higher prices, pricing pressure from offshore producers and relative stability in consumer brand preference is what five distributors either hope for or expect for 2004.
Perhaps the only relatively new wrinkles from last year are the opportunities presented by the rapid proliferation of tire sizes and the accelerating growth in sales for high-performance and ultra-high-performance tires. So say officials of five tire distributors in interviews with Tire Business.
Responding to questions about prospects for 2004 were: Gene Bova, president of Motostar Tire and Auto Products in Manchester, N.H.; Ron Thrasher, vice president of Burggraf Tire Corp. in Quapaw, Okla.; Mel Shook, owner of Big State Tire Supply in Lubbock, Texas; Ron Sinclair of American Tire Distributors (ATD) Inc. in Huntersville, N.C.; and Dan Wire, CEO of Treadways Corp., based in East Norriton, Pa.
All agreed that rising costs continue to be of major concern for the industry-and leading the way are those for insurance. Mr. Bova sees an increase of around 30 percent for health insurance, workers' compensation and commercial business insurance.
He attributes increases in the latter to a ``litigious society'' and the willingness of insurance companies to settle claims rather than defend them.
Mr. Thrasher agreed, noting ``business insurance costs are going up just because of the potential of lawsuits.'' He added that Burggraf has outsourced some of its staffing to cut down on workers' compensation costs, but insurance costs generally are not a controllable expense. In 2004, the company is passing its increases in medical insurance premiums on to employees.
Mr. Shook at Big State Tire tells much the same story. ``I am facing a 25-percent increase in medical costs,'' he told Tire Business. ``We pay the entire cost of coverage for our 133 employees, and they pay for their dependent coverage. We are bidding out for new coverage.''
Mr. Shook expects labor costs in general to rise as the economy improves and the demand for employees increases.
On the other hand, ATD's Mr. Sinclair said health care costs are a concern for everyone, and therefore the playing field is level. Mr. Wire at Treadways agreed. ``Insurance is a concern for everyone,'' he said. ``It is a fact of life, and you don't need to spend a lot of time worrying about it. However, we must do something about tort reform. (Lawsuits) continue to add costs at all levels, and they are a hidden cost for consumers.''
As if rising costs were not problem enough, pricing pressures driven by offshore tire makers also are having a negative effect on profits for at least some-but not all-distributors.
``Imports are killing us,'' Burggraf's Mr. Thrasher said. His company distributes the Cooper, Kelly, Dean and Vanderbilt brands.
``The imports are coming in with lower prices,'' he said. ``We have always tried to stay American, but this year we bought some tires from offshore. Hankook and Kumho are undercutting (prices).''
Big State's Mel Shook agreed. ``We've gone to some offshore tires because of their prices. We will see more American jobs go to Southeast Asia, China and India. There will be a big long-term impact down the road,'' he predicted.
Mr. Bova at Motostart noted that all of the major tire companies have some connection with offshore tire companies. He said he views the lower prices of such producers to be an opportunity to capture entry-level tire business.
That is also how Mr. Sinclair views the offshore brands. ``The Far East and China produce some quality products at favorable prices,'' he said. ``The major companies don't want the image of being makers of low-cost tires,'' he added, suggesting the imports fill a market niche.
Mr. Wire also does not view the imports as a price threat. In fact, he said, import tire prices actually are rising faster than domestics for several reasons, including the weakness of the dollar, shipping container costs that have gone ``way up,'' and the rapidly expanding Chinese market. ``It is a supply and demand issue,'' he added.
All five distributors agreed that tire prices will go up this year, due in part to continuing higher costs for raw materials.
``The last price increase held,'' noted Mr. Wire, ``and the current one is holding, as well.'' According to Mr. Bova, ``tire prices are rotating upward. That will be OK if they hold the line.''
Mr. Sinclair, however, cautioned that distributors should not focus too much on pricing. ``Prices are increasing this year, and that is not necessarily a bad thing. But we tend to focus too much on price. We need to focus on performance.''
Capturing a larger share of a more profitable market segment is also on the minds of tire distributors, and they view the increasing demand for performance tires and bigger sizes as an opportunity to do so.
They do not envision, however, any major shifts in consumer preferences between flag and private brands. Because of the current wide array of tire and wheel sizes and choices, the distributors are working to help dealers stock all of the inventory they need.
In essence, the distributors are now acting as expansions of tire shop back rooms. They can do this because most offer 24/7 ordering capabilities and daily or even twice- daily deliveries.
``The more SKUs that are offered, the less the stores can hold,'' Mr. Sinclair noted. ``So we are the dealers' distribution center.''
He said that as a tire and wheel distributor, opportunities abound with proliferation. On the West Coast, ATD offers tire and wheel packages. Mr. Sinclair also said he recognizes the profit opportunities in the increasing demand for high-performance and ultra-high performance tires because ``selling prices are higher for H-, V- and Z-rated tires.''
At Motostar, Mr. Bova said size proliferation has increased his company's inventory costs but also presents an opportunity. Motostar has doubled its warehouse space in the last three years to deal with it.
``Dealers need sizes instantly,'' he said.
Big State Tire's Mr. Shook said he agrees that size proliferation makes it hard for dealers to meet customer demand out of stock. ``So we handle it for them. It is a unique profit opportunity.'' Big State serves all or part of six southern and western states out of 10 warehouses.
Size proliferation also helps Treadways, Mr. Wire said.
The downside of the issue, however, is the wide array of sizes makes it tougher on the manufacturers. He noted Treadways has narrowed the number of private brands it handles, choosing instead to go with ``power lines'' and expand size coverage within those product screens.
The only concern expressed by Mr. Thrasher at Burggraf is availability of adequate supplies of larger-diameter and performance tires.
``The retail stores are seeing a push on 18- to 22-inch sizes,'' he said, ``and the wheel business is also picking up-even in rural America.''
Burggraf also sells tire and wheel packages. On their way out, in Mr. Thrasher's opinion, are 75- and 80-series tires.
With demand expected to be on the increase in 2004, none of the distributors interviewed expects any new or unique incentive programs to come their way. In fact, Mr. Bova noted that some incentive programs have gone away because tire inventories are low.
Burggraf is a Cooper Tire distributor, and Mr. Thrasher said he does not expect much beyond Cooper's ``Fast Start'' buy now, pay later program. Mr. Sinclair said he believes ATD benefits most from pull-through incentive programs aimed at consumers.
In spite of the publicity it generated last year, the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act is not of major concern at the distribution level of the tire industry.
What is affecting some, however, is the cost of providing road-hazard warranties and the competitive pressures associated with offering-or not offering-them.
``We had a tremendous year in '03,'' Mr. Bova said, ``and we expect a good year in '04.''
His colleagues and competitors agree. Whether they are large or small distributors, they say that as always, service, quality and responsiveness to dealers and consumers hold the key to profitability in 2004.