A contract that fed some $27.5 million in revenue to Bandag Inc. will not be renewed as the recently formed Yellow Roadway Corp. looks to find lower prices.
Muscatine-based Bandag announced the trucking company-formed late last year after Yellow Corp. bought Roadway Corp. for nearly $1 billion-would not renew its contract with Bandag's Tire Management Solutions (TMS) subsidiary. The contract, in place since 1999 with Roadway Express, outsourced all of the trucking company's tire functions-from inventory to maintenance-to Bandag. More than 100 Bandag franchisees serviced the contract.
``The purpose of our outsourcing agreement was really to guarantee uptime and to reduce the amount of tire-related breakdowns, which is what we did,'' a Bandag spokesman told Tire Business.
But the new company, which has combined revenues of nearly $6 billion, hopes to use its bigger scale to work with other vendors at a lower cost, Yellow officials told the Wall Street Journal. Company officials declined to be interviewed by Tire Business.
Goodyear, which held a contract to supply new and retread tires to Yellow prior to the merger, said it has submitted a proposal for the rest of the tire business from the combined company. A spokesman declined to comment further.
The Roadway contract last year brought in about $27.5 million in revenue to Bandag, including revenue from sales of retread materials to dealers who were servicing the contract. Bandag said the agreement contributed about $4 million to consolidated net income in 2003, or nearly 7 percent of its total consolidated income of $60.2 million for the year.
Bandag said these figures overstate the potential financial impact to the company since it does not reflect revenue from the sale of tires and wheels to Yellow Roadway. Per the terms of the agreement, Yellow Roadway must repurchase all tires and wheels owned by Bandag on the Roadway fleet by Aug. 1 for an estimated $37 million. The final price depends on various factors.
According to the Commercial Carrier Journal, Roadway in 2002 spent $14.4 million on tires and tubes. Yellow the same year spent $17.2 million. A Bandag spokesman declined to break out the $27.5 million revenue figure into how much came from dealers and how much paid for tires and services.
Bandag officials said they are working on developing other outsourcing agreements. Bandag has other similar accounts now, but Roadway was by far the largest.
``Obviously it's been a very important customer to us and it's been an important piece of business, so you don't replace that immediately,'' a second spokesman said. ``It'll take some time.''
Larry DeHaven, president and CEO of White Tire Inc. in Roanoke, Va., has mixed feelings about the end of the contract though he said he'd be open to participating in future Bandag outsourcing programs. White Tire, which has 21 locations and five Bandag retread plants covering Tennessee, South Carolina, Virginia and West Virginia, was one of the 10 largest service providers for the Roadway deal.
``It's had good days and bad days, of course,'' he said of the contract.
The contract's two main problems, he said, were that it got started on a negative note with dealers and that it involved a ``tremendous volume'' of paperwork. Dealers were upset from the start because they were told about the deal after it was finalized-and pricing, services to be offered and when those services would be performed were already set, he added.
``The immediate reaction was, `Well, why didn't you call us a year ago to discuss some of the parameters of this program?''' Mr. DeHaven said. ``I think that's where it kind of got off to a bad foot. The dealers just didn't have any input as to the depth of it.''
In the five years since, he added, Bandag has worked to improve the program for dealers like White Tire that stayed with it. But Mr. DeHaven doesn't expect any negative fallout on his business from the end of the Roadway contract.
``It certainly won't affect our company,'' he said. ``The volume was not huge. The attention to detail was huge.''
Bandag also is expected to weather the loss of volume. After Bandag's announcement, Standard & Poor's Rating Services said its rating on the retread equipment and materials company is not affected by the termination of the Yellow contract. ``The effect on revenues and net income of the loss of the Yellow Roadway business for Bandag will be relatively small, about 4 percent and 8 percent, respectively,'' the rating agency said in a statement, adding that Bandag has strong credit protection to withstand this event.
In addition, a Bandag spokesman said the company is confident about future outsourcing prospects.
``We're just as excited about the future of this today as we were last week,'' he said.
Mr. DeHaven said he is willing to participate in future, similar programs that may develop. ``I think (Bandag is) listening and trying to create a program that will bring volume to the dealers and bring profit to the dealers,'' he said.
The biggest caveat, though, is that the programs should have more streamlined processes so dealers don't have to invest so much manpower and time to servicing them, he said. The main culprit is the paperwork.
``That's what has to improve,'' he told Tire Business. ``Margins everywhere are already bad enough, so you're not really comparing a Roadway deal to any other deal we have to get into. (That) is probably not a big deal anymore. It's just what do you have to do to make it happen that needs to be the shortcut.''
The Bandag spokesman said the company is ``continually improving'' its processes.