As the average U.S. retail price for gasoline shot to a record high of $2.017 per gallon and diesel prices rose to an average of $1.763 May 17, many tire businesses are feeling the squeeze on their profit margins.
Like many industries, the tire industry depends on gasoline and diesel, not only for transportation, but also for crude oil, which is a raw material in tire construction. U.S. light crude futures peaked at $41.85 a barrel May 17 before declining to $40.54 a barrel. Not surprisingly, most tire manufacturers have raised tire prices during the first and second quarters in response to high raw materials costs.
Michael Sison, an analyst with McDonald Investments Inc. in Cleveland, said the speed of fuel price increases will be difficult to offset in the short-term, but the fact that tire manufacturers have been disciplined in raising tire prices the last few years will help profitability. Strong demand for tires also is helpful and shouldn't affect the bottom line as negatively as two years ago, he said.
``As long as demand is good, it gives (manufacturers) higher propensity to get price increases through,'' Mr. Sison said. ``In addition, I think the earnings leverage from more volume is more important...I think most people out there believe the economy is recovering or has recovered or is headed in the right direction.''
In addition to a ``rapid fax'' poll of several dealers and wholesalers, Tire Business also interviewed several manufacturers, distributors and commercial tire dealers to get an overview of how businesses are handling record-high fuel costs.
ATD works on efficiency; dealers passing on costs
Rising gasoline and diesel costs have caused tire dealers to adjust their operations accordingly to remain competitive.
At Pete's Tire Barns in Orange, Mass.-where gas prices are averaging $2.05 per gallon-the dealership has tacked on a fuel surcharge for the first time in its history, according to Art LeBlanc, vice president and general manager. Pete's Tire, a commercial tire dealership, also raised its service rate to $65 from $55 and is passing on tire price hikes to its customers.
``Most of our customers are accepting it for what it is,'' Mr. LeBlanc said.
However, he conceded that some customers did protest the increased service rate, and he's had to remind them of increases in fuel, workers' compensation and insurance costs from a year ago. Mr. LeBlanc said he finds it frustrating that customers don't like to pay $50 for service from a fully equipped truck that cost $70,000-$80,000 for the dealership to purchase.
``People don't seem to put the value in it,'' he said. ``I think it's our fault as an industry that we have let ourselves be perceived as just a bunch of greasy young guys that can pop tires on a rim. There's no technology, there's no technique, there's no experience needed. I think a lot of people feel that way.''
With 100 service vehicles, Pete's Tire can have 60 to 70 of those on the road at any given time, according to Mr. LeBlanc. A 25-percent rise in fuel costs every month with no additional revenue from fees charged add up to a ``one-way train wreck,'' he said.
To watch costs further, Mr. LeBlanc said he's asked his employees to use discretion on delivery frequency and call the customers first to see if they need tires for that particular week.
``We kind of got into the habit of, it's Wednesday so we drive from point A, B, C and D and then come back,'' he explained. ``If all this person needs is a tube and it's going to cost me $4 to UPS it-then UPS it. It's cheaper to do that than pay a man to drive 15 to 20 miles out of his way.''
Durand, Wis.-based Bauer Built Inc. hasn't instituted a fuel surcharge corporately, though the subject has been discussed, according to President Jerry Bauer. He admitted, though, that some of his stores may have added a surcharge.
``I've got so many guys out there floating around, doing their own thing in some cases, that I wouldn't tell you that I don't have a store manager out there who might have tried to create a fuel surcharge program and might have tried to pass it on to a customer or two,'' he told Tire Business.
As North America's sixth-largest commercial dealership, Bauer Built operates 27 company-owned outlets and 67 service trucks and posted $107 million in commercial sales in 2003, according to Tire Business' rankings. Wholesaling brings in another $40.5 million in sales.
Mr. Bauer said he was cautious about surcharges because if gas prices come back down, customers tend to want the surcharge returned. His dealership is looking at adjusting its service charges, instituting a delivery charge in some cases and trying to modify its product pricing to overcome higher operational costs.
``We try to build all of our costs into our pricing,'' he said. ``But it's not easy to do. Our margins are down this year. I'm hearing that from a lot of dealers across the country and manufacturers. Our margins are being squeezed because our customers are not allowing us to pass on the cost as fast as we're getting them.''
Some of Bauer Built's store managers have increased rates on service calls and alignments by $5, Mr. Bauer said. Another is charging wholesale accounts a drop-off fee.
Charlotte, N.C.-based American Tire Distributors Inc. operates 650 gas- and diesel-fueled delivery trucks in more than 35 states but has yet to pass on any price increases to customers due to skyrocketing fuel prices. Ron Sinclair, ATD's vice president of marketing, said higher gas prices do affect the business costs, but the firm so far has passed along only manufacturers' tire price hikes.
``We're always trying to become more efficient,'' he said. ``Customer service is key. At this point, we haven't reduced any routes or reduced deliveries to our customers based on the increased price of fuel. We'll see what happens over time with the cost of fuel.''
Mr. Sinclair said ATD's increase in fuel costs are slightly below the national average, though he could not elaborate.
The three companies-Pete's Tire, ATD and Bauer Built-all said they anticipated and budgeted for gas price hikes, although not all expected prices to go to $2 per gallon and beyond. All use gas- and diesel-powered vehicles, and none has cut employees to offset higher operating costs or made contingency plans in the event gas prices continue to rise.
``I don't have a contingency plan because I don't know that I need to do anything,'' Mr. Bauer said. ``Our plan, our focus is how we deal with these issues in our pricing. You can't provide the service if you're not here, and we have to get a fair return.''
Mr. LeBlanc added: ``Like so many tire dealers, we're so busy putting out the daily fires that we haven't talked about (contingency plans).''
``I'm assuming that if (fuel) continues to rise, we'll continue to cut down on the amount of miles we go without evaluating the return on what it is we're trucking and picking up. As far as the emergency service rates go, if we have to raise them, we'll raise them.''-by Vera Fedchenko, Tire Business staff