ROCHESTER, N.Y.—Monro Muffler Inc.'s decision earlier this year to buy the Car-X Tire & Auto franchise business was based on Monro's belief that it could foster a franchise-type auto service business model effectively alongside its traditional business model.
Monro will derive income from the Car-X system both directly and indirectly, according to statements made by Monro executives to financial analysts during a recent quarterly conference call.
The company declined to be interviewed for this article, but Tire Business culled Monro's financial statements and conference call transcripts and spoke to Jim Isabell, owner of Brex Inc., who has been a Car-X franchisee for 29 years in the St. Louis metro area and president of the Car-X franchisees association.
Car-X franchisees pay royalties of 4 to 5 percent of their annual/monthly sales, based on the existing franchise model. Monro is forecasting this revenue stream will add about $2 million to its earnings before income taxes, depreciation and amortization starting in fiscal 2016.
In addition, Monro expects Car-X franchisees to start sourcing a portion of their purchases—especially tires—through Monro's wholesale network.
Monro President and CEO John Van Heel, responding to an analyst's question about the Car-X acquisition, said franchises are not required to buy from Monro, but at the same time, “we think we have a lot of compelling things to offer them.”
During the conference call, Mr. Van Heel declined to go into specifics about Monro's growth expectations for Car-X, but he did say: “As this transaction indicates, our approach to acquisitions remains flexible and opportunistic and our view of increasing market share is broad.”
In the press release announcing the Car-X acquisition, Mr. Van Heel said Monro “will provide Car-X franchisees the benefit of Monro scale, resources and experience, which will drive higher profits for franchisees and will allow Monro to grow the Car-X brand.”
Rochester-based Monro is retaining the Car-X office in New Chicago, Ill., as well as the employees there and in the field, it said at the time.
The company declined to say what it paid Tuffy Associates Corp. for the Car-X business, but Monro said in its first-quarter earnings report that it spent $15 million on acquisitions in the period ended June 27. Monro also closed its acquisition during the quarter of eight Martino Tire stores in Florida.
The Car-X acquisition was financed through our existing credit facility. Tuffy in turn had acquired the business in 2002 from SMK Speedy International Inc.
Shortly after the acquisition, Monro named Christopher Hoornbeck, a 42-year Monro veteran, president of the Car-X business within Monro.
He retains his title of divisional vice president, a position he's held for 17 years, responsible for the operations of 540 retail locations. Mr. Hoornbeck started with Monro in 1973 as a store manager, according to his LinkedIn page.
The Car-X locations are owned and operated by 32 independent franchisees, Monro said, and the stores are similar in volume and sales mix to the Monro Muffler Brake & Service stores—roughly $925,000 in annual sales, split 44/56 tires/auto service and parts.
Car-X franchisees operate in Illinois, Indiana, Iowa, Kentucky, Minnesota, Missouri, Ohio, Tennessee, Texas and Wisconsin. Of these, Iowa, Minnesota and Texas are new territories for Monro.
From the franchisees' point of view, the deal is seen as “very positive in the short run,” according to franchisee Brex Inc.'s Mr. Isabell.
The change in owners “will create new opportunities for the franchisees,” he told Tire Business. “The key opportunity here is to be able to take advantage of Monro's vendor relationships,...which should create margin benefits for Car-X franchisees.”
In the initial stages following the purchase announcement, Mr. Isabell said Monro has been “very professional in the way they've approached Car-X.”
The franchisees are keen to tap into Monro's tire knowledge and expertise, he said.
Under Tuffy's ownership, individual franchisees were left to develop tire programs on their own, Mr. Isabell said, and to explore direct purchasing options.
Mr. Isabell said the Car-X franchisees collectively are comfortable with the selection of Mr. Hoornbeck to head up the franchise system business, pointing to his wealth of experience, especially in financial matters, and his optimistic, positive approach.
Asked whether he thought Monro would seek to expand the Car-X network, Mr. Isabell said: “(Monro) is not a complacement group of people. They're quite aggressive. Got to believe they'll support growth.”
Monro and Tuffy Associates had dealt with one another before. In 2012 Monro bought 17 corporate-owned Tuffy Auto Service Centers stores in Wisconsin and South Carolina, which it converted to Monro Muffler and TreadQuarters outlets, respectively.
Monro said recently its growth strategy could accommodate up to 1,300 tire stores and 1,300 service stores in its 25-state operating area.
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