AKRON (Sept. 26, 2005) — Survival of the fittest probably can describe how independent tire dealers have continued to prosper with so many larger competitors applying pricing pressure.
Warehouse clubs in particular have posed challenges for dealerships over the years by undercutting dealers' tire prices consistently with their Goliath-like buying power. Despite the clubs' near rock-bottom tire pricing and store growth, the fact remains independent dealers still control more than half of the replacement tire market.
Another unchangeable fact is that consumers desire different shopping experiences, according to Pascal Couasnon, vice president of marketing for Michelin Americas Small Tires. This fact may explain why club loyalty is high—a key reason why some tire manufacturers sell to clubs—but it also works to the advantage of tire dealers.
“We are not surprised by the stronger performance of independent dealers even though some industry observers had suggested they might struggle when clubs began offering tires,” Mr. Couasnon said. “Consumers who need more expertise in terms of wheel and tire packages, vehicle tuning and service continue to be attracted to independent dealers.”
Jack Winterton, Goodyear's vice president of consumer tire sales, agreed with that assessment and noted that most dealers compete successfully by leveraging their locations, service and product variety.
“In fact we have dealers who compete (with clubs) head-to-head across the street, or even on an adjacent lot, and would never give up the location,” Mr. Winterton said. “The consumer decides, and today more consumers choose independents because of service, variety and location.”
Nick Hodel, CEO of Portland, Ore.-based Northwest Tire Factory L.L.C., said he believes most tire dealers have moved beyond fearing price clubs because time has shown that not every customer makes purchasing decisions on price alone.
“It's not the impact it used to be,” Mr. Hodel said of the growth of price clubs. “I think everybody's fighting for all the customers they can get.”
That said, Mr. Hodel acknowledged he still sees during his commute to work a tire dealership with a large “We beat Costco” sign off the highway. He said he thinks dealers need to focus on exceptional customer service so that customers won't go anywhere else for their tire and service needs.
Club customers tend to be in high-income brackets and enjoy a shopping experience that is like a “treasure hunt,” said Doug Bennett, client director for market research firm ACNielsen. On average, members visit the clubs once a month, he said, while “heavy” shoppers go twice a month.
“Regardless of which frequency we're talking about, what they love is that while they're in the store, they're surprised by new categories being carried or new items within specific categories,” Mr. Bennett told Tire Business. “That element of the hunt or the surprise is very appealing and enriching in terms of the shopping experience.”
Sam's Club, a division of Bentonville, Ark.-based Wal-Mart Stores Inc., unsurprisingly dominates in store count with 555 U.S. locations, 549 of which sell tires. A company spokeswoman said the retailer projects 35 new locations by year-end.
Costco Wholesale Corp. operates 332 U.S. stores and expects to add 17 more, said Steve Messmer, Costco's assistant general merchandise manager.
BJ's Wholesale Club Inc., which did not return calls seeking comment for this report, operates 161 locations.
New York-based ACNielsen forecasts that warehouse clubs' revenue will grow because all three firms plan double-digit store growth in the next two to three years, Mr. Bennett said, with the greatest growth occurring in the central U.S. This region includes the Dakotas down to Texas and as far east as Ohio and Alabama, he said.
Mr. Bennett added that the market still had room for clubs to open more than 300 additional stores.
Although expansion and in-creased competition is coming from clubs, he noted that smaller retailers can pose a threat to clubs if they also “enrich” consumers' shopping experience.
“It's really about understanding your consumers and the motivation for how they view price values,” he said.
Warehouse clubs began appearing on the scene in the late 1970s and grew rapidly, reaching 924 stores and posting $67 billion in sales in 2002, according to research firm Mintel International Group Ltd.
Although regional clubs were a dime a dozen during the 1980s, consolidation and buy-outs have pared down the number of warehouse club firms to the big three—although there are still some small regional players.
Just how are warehouse clubs doing today?
In terms of market share, general merchandise distributors—which includes warehouse clubs—comprise 17 percent of the U.S. passenger tire aftermarket and 8 percent of the light truck tire market, according to the Rubber Manufacturers Association. Mr. Couasnon estimated the clubs' market share to be about 8 percent but has remained flat during the past few years.
None of the big three wholesale club companies discloses its tire sales. Sam's Club reported a 5.4-percent rise in operating income for the fiscal year second quarter ended July 31 and a 7.6-percent income increase for the six-month period to $666 million. Sales for the quarter jumped 5.9 percent to $9.97 billion, and first-half sales also increased 5.9 percent to $19.1 billion.
BJ's reported second quarter net income of $30.5 million, an 8.9-percent jump from last year. First-half net income climbed 11.3 percent to $49.1 million. Second quarter sales increased 7.7 percent to $1.98 billion, and first-half sales rose 8.7 percent to $3.75 billion.
Meanwhile, Costco's fiscal year ended Aug. 28; it will release operating results on Oct. 6. The Issaquah, Wash.-based company posted a 5.6-percent jump in third quarter net income to $209.8 million. Net income for the nine-month period surged 21 percent to $708.4 million.
While it has yet to release its fiscal 2005 opeating results, Costco has reported its fourth quarter and yearly sales. Quarterly sales rose 10 percent to $16.4 billion, while annual sales rose by a like percentage to $51.9 billion.
Mintel forecasted in its U.S. market report that the annual growth rate for the warehouse club category in 2003-2007 would be 8 percent, down from 10 percent.
All three clubs offer major tire brands and no private label or house brands: Sam's sells Michelin, BFGoodrich, Dunlop and Goodyear; Costco sells BFGoodrich, Bridgestone and Michelin; and BJ's sells Michelin, Uniroyal and BFGoodrich. The clubs also offer special order programs for tires and automotive accessories to help them with their stocking limitations.
Costco's Mr. Messmer described the club as a “keep-it-simple-stupid” company, with its tire shops offering only installations, warranties and balancing but no alignments. Costco also is limited to about 100 SKUs in its stores and 2,000 through its special order program. That problem caused the club to stop selling custom wheels because its stores could only stock 12 different wheel lines.
“There are so many SKUs that are introduced on a yearly basis by the OEMs that it's a losing battle in trying to keep up with it by having all the right sizes and performance characteristics on the floor,” Mr. Messmer said.
Like Costco, Sam's Club also offers only tires and installations and has no plans to delve into wheels, automotive parts or auto service, the spokeswoman said. Sam's lists 2,200 tires on its special order program including hundreds of sizes of performance tires.
Shoppers exiting a Sam's location in Fairlawn, Ohio, near Akron, come face to face with a small display holding a Goodyear medium truck tire—available by special order.
Mr. Messmer acknowledged that Costco's tire business is drifting into trendy, high-performance tires since the club's research indicates its average member has a high household income and drives a Mercedes or BMW.
“That's our main customer,” Mr. Messmer explained. “We have some high-performance tires, but we're a simple company.
“The best tires that sell in a geographic area are the 100 tires we'll stock there, 100 different SKUs. So we have a different assortment in downtown L.A. than we have in Boise, Idaho.… Our SKU screen is very much customized to the area.”