ORLANDO, Fla.If you want to open a tire dealership today, you have your work cut out for you, according to Dennis Byrne, professor emeritus of economics at the University of Akron.
Tire companies are international now, and the effect of globalization on a tire dealership is on price, Mr. Byrne said in a presentation at the International Tire Exhibition & Conference (ITEC) in Orlando Aug. 20-22.
Competition at the production level is dog-eat-dog, he said. The market is driven by cost, which means it is ultimately driven by price.
In some ways, according to Mr. Byrne, the tire industry is moving to a marketing model similar to that of Wal-Mart Stores Inc.
The greeters at the door are trying to give you a pleasant shopping experience, but price is the main driver, he said. You're going to get the best price on what you want.
However, Wal-Mart's had a lot of problems, he said. You have to have good managementeven in the biggest marketswhich is something people take for granted.
Ninety percent of all small businesses fail in their first five years, according to Mr. Byrne, and tire dealerships have three built-in obstacles:
c Changing products and technologies;
c Increasing competition; and
c Ever-growing pressure to master information technology.
You may have tremendous technical knowledge, but what you know is only about one-tenth of what you need to know, Mr. Byrne said. You have to deal with hiring, firing and IT, when all you wanted to do was sell a tire.
As you grow and expand, you are working 20 hours a day, he said. You're making your way, but you're killing yourself, and you're not making as much money as you would somewhere else.
One of the biggest problems for tire dealers, according to Mr. Byrne, is that they sell a product that customers replace at most every three or four years.
You have to keep people coming through the door, he said. No matter how hard you try, establishing those relationships is hard to do.
Meanwhile, large dealerships are generally a part of manufacturers' supply chains and have all sorts of built-in advantages over small dealers, Mr. Byrne said.
The more tires you buy, the greater tire volume and advertising discounts you get, he said. Large dealers get advertising fees from the manufacturers, so their per-unit price is less.
I don't know if it's fair, but that's how it operates.
Despite the problems they face, independent tire dealers are responsible for 60 percent of replacement tire sales in the U.S., Mr. Byrne noted.
The average tire dealer is male and in his 50s, carries 12 different brands of tiresincluding some sourced out of China, India, etc.and has seven service bays, he said.
Half the profits of the business come from service, with a profit margin of 33 percent on oil and lube, 52 percent on brake work and 65 percent on wheel alignments, according to Mr. Byrne.
Tires are the low end of the business, he said. You want to sell all the things that go along with tires,
Auto dealers are competing for the tire and service business, but their market share isn't likely to rise above 7 percent, Mr. Byrne said, adding that car dealerships have the same trouble as tire dealers in keeping people coming through the dooronly worse.
Car dealers are in a position to straddle both markets, he said. But you're not spending $30,000 for a tire.
Nevertheless, economies of scale will dictate consolidation within tire retailing, Mr. Byrne said.
As 55- and 65-year-old tire dealers retire, their businesses will disappear, he predicted. Tires will be just a commodity. Is that imminent? No. Is it coming? Yes.
Mr. Byrne noted that Chinese tires are once again the subject of a U.S. trade investigation.
The replacement market is dominated by imports, he said. China now sells one out of every four tires in the replacement market.
If the U.S. levies antidumping and countervailing duties against Chinese tires, Mr. Byrne said, the same thing will happen as under the Section 421 tariffsother countries will take up the slack.
We'll get a lot of Taiwanese, Thai and Indonesian tires, he said.
The tariffs did nothing for the American consumer.
To reach this reporter: [email protected] crain.com.