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May 24, 2004 02:00 AM

Rising fuel costs create tire industry dilemma: Hike prices? Bite bullet? (part 2 of 2)

Lisa Aichlmayr
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    Feeling the pinch

    Higher fuel prices, if not yet a catastrophe for tire manufacturers, are a major concern, according to a spokeswoman for Bridgestone/Firestone.

    Fuel costs this year are running a good 15 percent over last year's levels, the BFS spokeswoman noted. The Nashville, Tenn.-based tire maker estimates the price increase will cost it an extra $120 million this year compared with 2003.

    ``Higher fuel costs hit the tire industry from a number of very different perspectives,'' she said, noting that the impact starts on the most basic level.

    ``Crude oil, refined petroleum and what comes from petroleum constitute whatever is most useful or necessary in the manufacture of tires,'' ranging from carbon black and nylon to essential chemicals such as benzene, styrene and propylene, she said.

    Delivery costs-for both incoming raw materials and outgoing products-also are a major factor, as are utility costs. ``Natural gas prices tend to track those of oil, and tire manufacturing is very heavy in its energy usage,'' the BFS spokeswoman said. There are also secondary and tertiary price increases to consider, such as those in such things as copier paper and airline tickets.

    Worst of all, however, is ``the reduction of consumer discretionary income,'' she said. ``There's less money available for new vehicles and replacement tires.'' If the price increase lasts long-term, she added, one major effect could be a reduction in small truck fleets, which are particularly vulnerable to fuel cost fluctuations. Thirty percent of the large truck business comprised fleets of under 10 trucks in 1990, the spokeswoman noted; that fell to 22 percent in 2000. And if current trends continue, small fleets could constitute less than 10 percent of the market by 2010.

    A spokesman for Goodyear, though not going into as much detail, essentially dittoed everything the BFS spokeswoman said.

    ``When you go to a gas station, you can really feel it,'' he said.

    Like natural gas, natural rubber also tends to track petroleum in price increases, according to the Goodyear spokesman. ``Natural rubber has gone down slightly from a month ago,'' he said, ``but it's still at 61 cents per pound, compared with 441/2 cents a year ago.''

    To address the higher costs, both companies have announced across-the-board price hikes for their tires, as have a number of other tire makers. Among commercial tire dealers, however, the higher prices in general haven't yet made themselves felt yet in some areas.

    ``Our first quarter was stellar,'' said an executive of a dealership in Southern California who asked to remain anonymous. Higher fuel prices aren't yet having a notable effect on his business, he said, adding: ``Everybody's wholesale prices are going up.''

    ``We really haven't seen any effect,'' said G. Phil Wick, president of Prineville, Ore.-based Les Schwab Tire Centers Inc., adding that shipments so far this year have been very strong throughout the six-state area the commercial and retail dealership serves.

    Pete Glesing, director of commercial development for Best One/Zurcher Tire Group in Monroe, Ind., said the higher prices ``certainly'' have increased Best One's expenses, although so far this year it's been ``business as usual.'' The company has been able to pass on its spiraling fuel costs to some of its customers, either as a fuel surcharge or in higher prices for Best One's products.

    Passing on the added costs, Mr. Glesing said, has depended largely on when the customer's annual contract comes up for renewal.

    ``For customers who negotiated in April for contracts coming up for renewal May 1, we've been able to pass on some of our costs,'' he said. Those customers who've been successful in passing on their increased fuel costs to their own customers likewise have been more amenable to Best One's requests for price hikes, he added.

    Passing higher costs on to customers isn't an option for Les Schwab. ``Our stores are our customers,'' Mr. Wick said. ``What good would it do to try and pass on our costs?''

    Les Schwab's fuel prices are ranging about 20 percent higher than last year's, according to Mr. Wick. In mid-May, he said, the price of regular gasoline was about $2.25 per gallon at the pump and diesel fuel about $2.10. ``We buy in bulk, so it's less for us,'' he added. The company has about 90 delivery trucks, all diesel, as well as ``thousands'' of smaller vehicles, he said.

    Gasoline prices in Indiana in mid-May ranged around $2.05 per gallon, according to Mr. Glesing. Best One has hundreds of trucks in its fleet, he said, breaking down to about 80 percent gasoline-powered and the rest diesel.

    The anonymous dealer said it was hard for him to assess the percentage increase in fuel prices. ``Last year, we had a lot of peaks and valleys,'' he said. ``At one point it got down to $1.50 a gallon, so if you're measuring from that, it's a 75-cent increase. But there was a high last year of $2.05-$2.10 per gallon.''

    Both Les Schwab and Best One were caught off guard somewhat by the sharp increase in fuel prices. ``We always budget for some kind of expense increase, but not to this magnitude,'' Mr. Glesing said.

    Neither firm is yet implementing any contingency plans based on the fuel price increase. ``If the cost of fuel keeps increasing, we'll have to do something,'' Mr. Wick said. ``But we don't plan anything for the rest of this year, and we hope things will come down by then.''-by Miles Moore, senior Washington reporter

    Rolling with the punches

    With diesel costs up nearly 40 percent, Parkhouse Tire Inc. in Bell Gardens, Calif., has had to institute a fuel surcharge on customers to keep from operating at a loss.

    ``Every little bit helps,'' said President Brian Parkhouse. ``It's definitely had an impact, and it's been a lot better than just eating it. Whatever we get is worth the effort.''

    Parkhouse Tire, which runs about 135 service trucks on diesel, has seen prices per gallon rise to about $2.25 this year from about $1.50 last year. ``Diesel is as high as unleaded gasoline right now, which it's normally not,'' Mr. Parkhouse told Tire Business.

    The dealership has instituted a fuel surcharge of $7.50 per trip. Parkhouse Tire also had a surcharge last year although fuel prices didn't spike nearly as high. Mr. Parkhouse said customers have been ``fairly'' responsive and the majority accept the fact, while only about 5-10 percent have threatened not to pay it. Still, he said he hasn't lost any customers from the surcharge. If all of his customers had opposed it, he said he would just raise his labor rates.

    ``Everybody's doing it,'' he said of price increases related to various raw materials increases. ``It's not like we're the only industry that's been doing it.''

    For example, he said a supplier of industrial tires has instituted a steel surcharge that fluctuates monthly based on the volatility of the steel market. ``Every month they're going to tell me what the steel surcharge is going to be on their product line,'' Mr. Parkhouse said. ``I've never had anybody do that.''

    He said he'll wait until the end of summer to see what happens with gas prices before deciding whether to impose another fuel surcharge or forego it and just increase rates.

    Though fuel prices haven't risen quite as far in its market, Wilkes-Barre, Pa.-based McCarthy Tire & Service Co. Inc. also is trying to discreetly pass on some costs, said Jack McCarthy, chairman/CEO. About 90 percent of its more than 200 service trucks run on diesel.

    Mr. McCarthy said diesel was up 31 cents-or 22 percent-on May 14, compared with the same day a year earlier. ``It sure has our attention,'' he said.

    The dealership has tried to tighten its belt, he said, economizing trips by having the closest store go out for deliveries and consolidating calls to avoid redundant trips. But scaling back on service in a big way isn't an option.

    ``We don't have a choice,'' he said. ``We have to roll with the punches.''

    Purcell Tire & Rubber Co. in Potosi, Mo., institutes an extra fuel charge when fuel prices pass a certain level. The dealership has used this extra charge in the past, and the threshold at which it kicks into effect has stayed relatively consistent, said Chuck Pilliod, chief financial officer. The exact charge varies by customer.

    Mr. Pilliod said the company always tries to coordinate its runs to reduce travel, but the majority of the fuel increases is softened by the fuel charge, which he added is pretty well understood by customers.

    Both Mr. Parkhouse and Mr. McCarthy said the increases were nearly impossible to anticipate in this year's budget, especially when prices can sometimes fluctuate wildly in a 24-hour period.

    They also agree tire dealerships can't sit back and eat the costs.

    ``There's no way you can just keep absorbing it,'' Mr. McCarthy said. ``You're a fool if you think you can.''

    Mr. Parkhouse said tire dealers are in the same boat as tire makers and other manufacturers who have had to increase prices due to rising costs.

    ``We're at the same point they are,'' he told Tire Business. ``It's not like we've got margins that we can absorb the hit. If it's being raised to us it's going to be raised to (customers) accordingly.''

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