(Editor's Note: This story is part of our #TireBiz30 in which we feature one archived story every day of September to celebrate Tire Business' 30th anniversary. Each story represents one of the most relevant news story published in our pages for that year.)
MEMPHIS, Tenn.— TBC Corp. is a step closer to building a true nationwide empire in the U.S. retail tire market.
Fulfilling its promise to pursue more acquisitions for its Tire Kingdom Inc. subsidiary, TBC Corp. signed a definitive agreement Sept. 22 to buy the National Tire & Battery store chain from Sears, Roebuck and Co. for $260 million.
The deal — expected to close by Dec. 1 — includes 226 retail tire and automotive centers in 20 states, including many markets Memphis-based TBC has yet to tap with either its Tire Kingdom or Big O Tires Inc. subsidiaries. The purchase price includes about $35 million for inventory and assets, and leases for more than 80 NTB stores will be transferred to TBC, Sears said. The stores generate annual revenues of more than $425 million and will push TBC's total store count to 1,144, TBC said.
"The acquisition of NTB enables us to expand our national footprint by 25 percent with the addition of strong, profitable retail locations in many attractive markets where we currently do not operate," said Larry Day, president and CEO of the private brand marketer.
In a report, Merrill Lynch analyst Jackie Weiss said the deal, which will increase TBC's retail segment by about 65 percent, is a revenue-growth opportunity.
"On balance we think that the NTB acquisition is a good strategic and geographic fit for TBC," she wrote.
Just this summer, Mr. Day said TBC was actively pursuing acquisitions following the quick-even by TBC expectations-integration of 112 Merchant's Inc. outlets earlier this year. While reporting second quarter results, he highlighted qualities the company was looking for in acquisitions, which Mr. Day said have been met by NTB.
"The volume of these stores is outstanding, in fact higher than Tire Kingdom, Merchant's and average Big O stores," Mr. Day told analysts in a conference call. "Margins are strong, and this is not by any stretch of the imagination a fixer-upper. We do see, however, significant opportunities to generate increased profit from these stores by integrating them into the TK network."
The stores had been a drag on Sears, which said it was unloading them to return to its core business. Since Sears' Tire America and National Tire Warehouse chains were rebranded as NTB in 1997, the stores never reached Sears' goal of 700 outlets by 2001. In fact, the stores hit a peak of only 330 stores in 1998.
To generate more profit, Mr. Day said TBC will introduce its private labels-including Multi-Mile, Sigma, Cordovan and Vanderbilt-and the Fulda import brand to the NTB stores in the future as well as offer more service work that carries higher margins. NTB's tire-to-service sales ratio is 75 to 25, he said. Ms. Weiss estimated TBC would target 35-40 percent of sales from automotive service.
The NTB stores average $1.88 million in sales per outlet, whereas Tire Kingdom stores have averaged $1.35 million with a 65/35 tires/service split in the past, according to published information.
For the six to eight months dedicated to integrating NTB into Tire Kingdom's realm, TBC will continue to purchase support services from Sears. For this reason, this acquisition won't produce quick cost savings since that usually comes from cutting back corporate services, which in this case is Sears, Mr. Day said. TBC expects the deal to positively affect 2004 earnings.
Mr. Day declined to say if TBC would rebadge the NTB stores as Tire Kingdom. He suggested, though, that the situation could mirror the integration of Merchant's, where the company kept the well-known name in some markets and dropped it in others.
"NTB is a very, very good name in the marketplace," Mr. Day said. "Sears has added significantly to the brand strength of NTB over the years, and there's lots of value in that name."
However, when TBC bought family-run Mueller Tire & Brake in Cleveland in March 2002, it said it would keep the long-standing name for awhile. About 11 months later, the 84-year-old name was history-giving way to the Tire Kingdom flag.
For the coming six months, Mr. Day doesn't expect huge changes at NTB. He said major brands, such as Michelin, BFGoodrich and Goodyear, still will be sold at the outlets. And though he doesn't expect it to reach the levels of Tire Kingdom and Merchant's in the first year, Mr. Day has goals for private label sales to represent a significant percentage of throughput. He suggested this level could be in the high teens to low 20s.
That scenario is exactly what dealer Mike Patrick had predicted.
"It's probably a good strategy for TBC," said the owner of Tri-State Tire Inc. in Doraville, Ga., near Atlanta. "I don't think it's such a good strategy for the independent tire dealers.... They'll have to compete basically with their supplier."
The 35-year-old dealership has been selling TBC's Cordovan private label since its inception, and five years ago the brand accounted for about 75 percent of the single-outlet dealership's sales.
But now Tri-State Tire has totally replaced the Cordovan line with products from Hercules Tire & Rubber Co. Mr. Patrick said he hasn't ordered from TBC since March.
He said he stopped selling the tires because he was worried about competing with a growing chain like Tire Kingdom that sold the same private labels. Mr. Patrick said he was concerned that he would promote a brand in a market, only to have the wholesaler's own chain swoop in and benefit from his work.
"When they did that (bought Merchant's), I knew we probably needed to go ahead and switch tires," he said. "They would come to Atlanta soon. They wouldn't leave a gap in the middle," he said, referring to Merchant's presence in six mid-Atlantic states and Tire Kingdom's heavy presence in Florida and surrounding states.
Mr. Patrick said his business has adapted to the change well.
"We've built our business around some of the TBC product," he said. "We've been very fortunate in switching people off of it."
TBC officials could not be reached to further comment on this issue, but analysts have said in the past that competing with wholesale customers is not a widespread problem because of the company's effective management of its brands.
Even for dealerships that do not sell TBC private brands, the move is likely to generate increased competition.
Tire Kingdom will enter several new markets, including Dallas; Houston; Austin, Texas; Chicago; Birmingham, Ala.; Boston; Kansas City; Philadelphia; and Pittsburgh.
Mr. Day acknowledged Tire Kingdom and NTB stores will overlap in Baltimore, Washington, D.C., Cleveland and Columbus, Ohio, but it is not expected to be significant. TBC does not anticipate closing any NTB outlets, in part because Sears already closed many underperforming stores.
"It adds to our presence in the market very nicely," Mr. Day told analysts.
Tire Kingdom could grow its reach in some new markets beyond existing NTB stores, Mr. Day said. Organic growth in Tire Kingdom in general will be reviewed, he said. Also, Mr. Day expects TBC to open at least two distribution centers to cater to the extra locations.
"We could add at least 20 stores to the Chicago market," he said of that area's 19 NTB outlets. "Many other markets also provide similar type growth opportunities."
Rick Appelman, owner of Rick's Tire and Auto Service Inc. in Chicago, said he's sure Tire Kingdom will blitz the area with new advertising, but over the long term that may either make him gain or lose customers.
"They'll have to prove themselves to people," he said.
Even if there's a short-term flux in the Chicago market, Mr. Appelman-who has owned the Cooper single-outlet dealership for 33 years-isn't sweating it.
"I've seen a lot of companies come and go, and pricing is not the way I sell my service," he said.
What issue concerns you most heading into 2019?
|The threat of more tariffs.||
27% (27 votes)
|The new Congress in Washington.||
35% (35 votes)
|Price fluctuations for the products we sell.||
10% (10 votes)
|More disruptions across the industry.||
29% (29 votes)
|Total votes: 101|