Under Sumitomo's microscope: TBC focuses on performance

PALM BEACH GARDENS, Fla. (Nov. 10, 2016) — TBC Corp. has had a busy 60th year in business, launching inititiatives to expand tire sales through its Midas International Corp. and SpeeDee Oil Change & Auto Service franchise organizations, revamping and refeshing its retail business and refranchising its last few remaining Big O Tires L.L.C. franchises.

While that was the company's public persona, behind the scenes the company was dealing with pressure from parent Sumitomo Corp. to amp up the pace of recovery from a few off years — a business malaise that forced Sumitomo to record an “impairment loss” of $181 million for the fiscal year ended March 31, 2015.

• This article appears in the Nov. 7 print edition of Tire Business.

According to various investment sources, an impairment loss is defined as the decrease in an asset's net carrying value that exceeds the future undisclosed cash flow it should generate. Net carrying value is an asset's acquisition cost minus depreciation.

Impairment occurs when a company sells or abandons an asset that is no longer beneficial. Impaired assets must be recognized as a loss on the company's income statement.

In its fiscal 2015 annual report, Sumitomo — which has owned TBC since 2005 — said that TBC “had been suffering from poor performance for some time. This was largely due to a decline in the number of automobiles within the age range that TBC targets, a result of the drop in new automobile sales that followed the bankruptcy of Lehman Brothers in 2008, as well as the delays in this company's response to diversifying customer needs in its retail operations.”

Sumitomo went on to say, “While we attempted to address this situation by placing the reconstruction of TBC's retail operations as a top priority, the pace of recovery was not up to the speed called for by business plans.”

As a result, Sumitomo booked the $181 million impairment loss for the fiscal year ended March 31, 2015, as well as an undisclosed further impairment loss — albeit smaller — for the year ended March 31, 2016.

Sumitomo does not report TBC's sales or earnings separately, so it's not possible to determine the company's current profitability or operating status. TBC declined to comment on its parent company's comments or the implications of the impairment loss.

In the fiscal 2016 report, Sumitomo reported: “Further, we will steadily implement a plan to regenerate U.S. tire businesses” as part of its 2017 growth strategy priorities.

In terms of generating additional revenue, TBC's most significant move could be its initiative, disclosed in March, to persuade its Midas auto repair network franchisees to shift their business mix more toward tires.

“The future of our brand is in tires and auto service,” Mike Gould, the retiring TBC executive vice president and COO, said at the time.

Specifically, TBC launched a “tire sales initiative” in Philadelphia — where there are 25-plus Midas locations — that the company said would roll out across the rest of the U.S. throughout 2016 and into 2017.

Mr. Gould called the initiative a change in Midas' DNA, and predicted the Midas franchise network would be a “full-service tire and auto-service company — and a significant player in the tire business.”

TBC did not quantify the expected impact on its tire wholesale business volume, but Mr. Gould — who's retiring at year-end after 36 years in the auto service industry — said at that time: “Our stores will look like tire locations, associates will be tire-service experts, and the Midas brand will become known as a destination for tires in the same way that we are known for brakes, repairs and exhaust.”

TBC did not elaborate on what measures it will undertake to effect the desired change, nor did it disclose the  network's current sales mix.

TBC did, however, strike a deal in September with Michelin North America Inc. to allow Midas auto repair franchisees to offer Michelin-brand tires at the 1,000-plus Midas locations in the U.S.

Midas stores already carry major brands such as Goodyear, Cooper and BFGoodrich, TBC noted. Adding the Michelin brand reinforces a “multi-faceted makeover” of Midas that TBC has been carrying out since acquiring the franchise group in 2012.

Since then, the Midas network has experienced a “significant tire sales increase,” TBC said, to the point that when related services like rotations are factored in, Midas shops generate as much revenue through tires as they do from exhaust, the service with which many people associate the brand.

Building on these gains, plans are under way to accelerate Midas' tire-service expansion significantly in the next two years, with upgrades in distribution, computer support, shop signage and more.

“We are hopeful that the increased emphasis on tires will transform Midas over the next two years and position us for more cars, customers, sales and profits,” Mr. Gould said.

In 2012 when TBC bought Midas, tires made up less than 10 percent of the stores' sales volume, according to publicly available data at that time. The average U.S. franchised shop had sales of $672,000 that year, the company said then.

There are more than 1,500 Midas locations throughout the U.S. and Canada, so even an incremental increase in tire sales by each franchisee potentially could yield measurable dividends.

TBC also is looking to expand the Midas brand in Quebec beyond Montreal into communities like Quebec City, Drummondville and Trois-Rivières.

Midas has been present in the Montreal metro market for more than 45 years, with 18 locations active and run by 15 franchisees. TBC said it is looking for franchisees to open multiple locations in the coming two years in the targeted metro areas.

There are 156 franchised Midas locations across Canada, TBC said, predominantly in Ontario, where roughly a third are located.

TBC also reported earlier this year that its Big O Tires network reported gains in the number of franchisees, stores, retail tire and service sales and customers served in 2015.

During 2015, TBC welcomed six new franchisees into the Big O network and noted a net gain of 14 Big O locations throughout the year.

Overall, the Big O network collectively reported 5.5-percent better retail sales last year vs. 2014, the company said, with tire unit sales up 3.3 percent and same-store service sales up 6 percent.

TBC is considered the largest vertically integrated marketer of tires for the North American automotive replacement market, with more than 3,200 franchised and company-operated tire and automotive service centers, nine proprietary tire brands and more than 50 retail and wholesale distribution centers.

Collectively, TBC claims this equates to nearly 10 percent of all aftermarket tires sold in North America.

The company's roots date to 1956 and an entity called Cordovan Associates in Dayton, Ohio. That business changed its name in 1972 to Tire & Battery Corp. and in 1981 went public under the name TBC.

“Throughout the years we have worked diligently to remain a tire company ahead of the curve,” said said Erik Olsen, president, CEO and chairman of TBC since July 2014.

“Our history, proven track record of success and continued growth speak to our overall objectives, and I am confident that we have the right team in place, nearly 11,000 associates strong, to maintain momentum and to continue our industry-leading position for years to come.”

Some key events in TBC's history include:

• Establishing TBC de Mexico in 1995;

• Acquisition of the Big O Tires franchise group in 1996;

• Acquisition of Carroll Tire Co. in 1998;

• Acquisition of Tire Kingdom Inc. in 2000;

• Acquisition of National Tire & Battery (NTB) from Sears, Roebuck & Co., and Merchant's Inc. in 2003;

• Being acquired (for $1.1 billion) by Sumitomo Corp. of Americas in 2005;

• Consolidation of SCA's Treadways wholesale unit with TBC;

• Acquisition of Midas International Inc. (for $310 million) in 2012; and

• Acquisition of certain assets and brands of Del-Nat Corp.

The company also owns R.O. Writer, a provider of shop management software solutions for automotive repair and tire shops.

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To reach this reporter: [email protected]; 330-865-6145; Twitter: @reifenmensch