AKRON—Tire distributors are optimistic about the tire market in 2008 and several contacted by Tire Business are expecting increased sales and possible expansions this year.
The benefits of burgeoning tire SKUs, which have virtually secured the wholesaler's position in the tire distribution chain, have offset concerns about fill rates, fuel costs and other issues going into 2008.
“As the proliferation of products continues to grow, it is excellent for wholesalers of the products,” said William Tolerton, president of Terry's Tire Town Inc. in Alliance, Ohio. He said he is “very optimistic” about the wholesale market conditions in 2008. “Distributors will be a larger share (of the market) as mass merchandisers decline.”
The continuing proliferation of high- and ultra-high-performance tires also presents a boon for the wholesale market, according to Ron Sinclair, vice president of marketing for American Tire Distributors (ATD) Holdings Inc. This trend is fueled by car makers that continue to increase the horsepower and torque of the newer vehicles.
“I believe it will continue to fuel the shift to high performance and ultra-high performance. That's good for the independent dealer, we believe,” Mr. Sinclair said.
“With the complexity of inventory and SKUs, dealers need distributors to manage the complexity for them. There is no way dealers can stock all those (products),” Mr. Sinclair said.
“The role of distributors will increase dramatically in the next five to 10 years, mostly due to proliferation of products that retailers can't stock. And it's too difficult for manufacturers to handle,” Mr. Tolerton predicted. “The most economical way for the manufacturer to go to market is through distributors.”
“I don't think the one- to two-store company will be able to maintain a direct relationship with the manufacturers in the future,” said Gordon Leffler, CEO of Suburban Tire Auto Care Centers in Glendale Heights, Ill. “Their size will limit their ability to negotiate (with manufacturers).”
Huntersville, N.C.-based ATD, which expects about a 15-percent increase in 2007 sales compared with 2006, has been expanding its distribution coverage across the U.S. and plans to continue to invest in inventory management, Mr. Sinclair said. The company has 82 distribution centers to serve more than 47,000 customers in 36 states.
“Our objective is to continue to grow,” Mr. Sinclair said. ATD plans to do this with acquisitions where possible or through new construction.
Terry's Tire Town declined to reveal its sales for 2007 but said it was “a nice increase” over 2006 and it expects similar gains this year. The distributor is looking to expand in its existing markets where it operates three warehouses to service about 2,000 customers.
Suburban Tire's Mr. Leffler predicted that “with the proliferation of sizes and our standing in the market, I think we will increase sales. Not tremendously, but 2008 will be a very good year for us.”
The family-owned dealership operates one warehouse, which distributes to other independent tire stores and car dealerships, and six retail outlets. Suburban Tire plans to expand its wholesale coverage in the Chicago market by adding satellite warehouses at two of its retail locations this year to handle servicing the north and south ends of the suburban Chicago market. Wholesale accounts for about 20 percent of the company's sales.
Reliable Tire Co. in Blackwood, N.J., which operates seven warehouses, said sales improved “marginally” in 2007. “We've been through tough times in the past,” said Bob Green, Reliable brand manager. “One good thing about being in the tire industry is it's relative to customer needs. There's a built-in replacement market every year.”
Area Wholesale Tire Co. Inc. in Baton Rouge, La., had a unique situation, having come off a spike in sales in the aftermath of Hurricane Katrina in 2005. Sales were down or about even in 2007, but President and CEO Billy Potter expects revenues to increase in 2008.
The company, which operates 11 warehouses in the South and Southeast and delivers to about 4,000 customers, is considering opening additional locations within its market in the next couple of years “to provide better service,” Mr. Potter said, adding that for 2008 “we plan to increase business and service to our customers.”
Mr. Potter said his only major concern for the new year is “finding employees willing to work. That's a constant battle for everybody. We thrive on service and we push service.” His remedy is to offer more employee perks and “continue on with what we've been doing.”
As for the so-called “credit crunch,” the distributors contacted by Tire Business hadn't seen any effects on their businesses. Terry's Tire Town's Mr. Tolerton said his company had seen some of its customers file for bankruptcy this past year but he didn't see it as a growing problem because “good operators don't have issues.”
Amid the general optimism for the new year, distributors' ongoing concerns included rising fuel costs and low fill rates from suppliers.
As with other industries, rising fuel costs have been a major concern for distributors. ATD added a fuel surcharge to its delivery charges in 2007. “We're hoping when the (fuel) prices go down, the fuel surcharge will go away,” Mr. Sinclair said. That is the reason ATD didn't incorporate the costs into its overall prices, he explained, so dealers would understand why the company needed to add the extra fee and that it was temporary.
Other wholesalers have held off instituting a fuel surcharge. Mr. Tolerton said it is “highly possible” Terry's Tire Town will add a charge this year. Likewise, Area Wholesale's Mr. Potter said that “if it gets much worse, we're going to have to do something.”
Mr. Green said there has been talk within his company about adding a fuel surcharge, “but we're reluctant to do that.”
Suburban Tire has chosen to raise its tire prices rather than add a fuel charge. Mr. Leffler said competitors in his market have added surcharges, “and we believe they lost customers.”
Some of those customers switched to his company, he said, surmising that these customers were willing to pay increased tire prices rather than feel they were being “nickled and dimed” with fuel surcharges. “It's not a profit center,” Mr. Leffler said of the increased prices, “but it covered the costs of doing business.”
Managing inventory levels has been another concern for distributors. With a growing number of flag brands produced in Asia and the drop in the value of the U.S. dollar in foreign markets, “it poses a challenge in terms of product supply,” ATD's Mr. Sinclair said. “It's becoming a supply-constrained environment. A trend we're seeing is a real challenge in acquiring products and a challenge in fill rates from manufacturers.”
This puts the onus on the distributor to plan its ordering and determine future supply needs, according to Mr. Sinclair. He expects the supply constraints to continue this year.
“When you shop offshore, it's a nightmare to try to get things in a timely fashion,” Reliable's Mr. Green said, adding that there has been a problem with “continuity of inventory, even on the domestic side” this past year. Some manufacturers have had fill rates as low as 50 percent, he said.
Suburban Tire's Mr. Leffler conceded that fill rates always have been a problem but more so this past year with consistent shortages of the most popular and newer sizes.
Area Wholesale also complained of tight product supply in 2007 but Mr. Potter said his suppliers gave him assurances that they were ramping up production for passenger, light truck and medium truck tires.
About 10-15 percent of Area Wholesale's inventory includes Chinese-brand tires, a ratio that will remain the same this year, Mr. Potter said. “We'd rather see U.S. manufacturers beef up their production.”
The distributor will be focusing on adding more private and flag brands to its portfolio. “We've been a private-brand wholesaler since day one,” Mr. Potter said. “We've started to see a demand in the market for major brands vs. private brands. We see a market segment we can step into if we carry major brands.”
ATD carries “what we believe are all the key brands,” Mr. Sinclair said, noting that nearly half of all consumers tend to request the original equipment brand that came on their vehicles. So the vast majority of its portfolio is flag brands.
Increased tire prices due to rising raw materials and fuel costs “puts the onus back on the manufacturers in branding their products,” added Mr. Sinclair, noting consumers are willing to pay more for a flag brand if they perceive it carries extra value.
Chinese-brand tires constitute about 5-8 percent of the inventory of Terry's Tire Town and it expects that rate to increase slightly in 2008. However, as far as major brand tires made in China, “I look to that to increase,” Mr. Tolerton said. Despite much-publicized recalls of Chinese-made products, including tires, demand for imported tires hasn't dampened, he said. “There are still value-seeking customers. There will always be a market.”
Reliable Tire expects to increase its offerings of Chinese tire brands to 20 percent from its current 15 percent of inventory. “A lot of U.S. companies don't want to make commodity tires,” Mr. Green said. “There is a need for the (offshore) product. If you don't buy into that segment, you lose that segment.”