When times are tough, everyone starts looking for new revenue streams.
Whether that’s offering new services or specializing in particular vehicle makes, increasing gross revenue through diversification is a legitimate strategy – as long as you have the requisite skills to handle the new work.
And that’s true for the tire business too. Putting greater emphasis on tire sales is not as simple as putting a few displays in your waiting area and hanging a shingle. It’s a very different kind of business, with unique supply issues, inventory requirements, and cost structures.
If you’re thinking about going big in tires, here are a few things to consider.
Get ready for lower margins
Without doubt, tires have become a commodity purchase, and they’re often used as a loss leader, like an oil change, so a tech can get the wheels off and check the brakes and front end. The difference, of course, between using oil as a loss leader and tires is the frequency of sale. You can expect your customer to return two or three times a year for oil changes. Tires do not have the same kind of replacement interval.
“The perception that there’s a low margin on tires is accurate,” says Paul Hyatt, owner of Toronto-based Superior Tire. “Drastic price increases due to supply and demand of rubber, more competition, and internet shopping has created lower margins. Furthermore, cheap tires from offshore are available at very low prices which adds to lower margins.”
“Yes, the margins on tires, historically, are much less than automotive,” agrees Ed King, associate wholesale sales manager, Ontario, for Kal Tire. “The main reason for that is competition. It’s what the market will bear.”
He says a some basic education on how to make a decent profit on tires would go a long way in this industry.
“A lot of mechanical shop still sell the way they did 20 or 30 years ago where they said if I can make $20 or $25 bucks a tire, I’m happy,” he says. “But they should be looking at the proper gross profit percentages.
Greg Sims, president and CEO of OK Tire, agrees that the emphasis on margins may be misplaced, given the potential profitability of tires.
“It’s a different category of product and it does have different margins. It may be low margin compared to mechanical work but you have to remember, they’re on some pretty big dollar items and if you maintain a flow of them you can do very well with them.”
Depending on whom you talk to, you might not have enough room to run an efficient tire shop. The best shops have built-in warehousing where they can store enough fast-moving tires to increase their productivity.
Sims says although OK Tire has a full distribution system in place to back the stores up, franchisees should expect to carry some inventory, particularly on the most popular stuff.
“You just cannot run a tire business with a jobber supply model,” he says. “You can’t get a car up on a hoist and then expect that in half an hour you’ll have the product there. So, yes, you do have to have some inventory.”
Levels will depend on type and size of shop, he says, and his dealer development team would work with the shop to determine the appropriate stock level.
Other programs put less of an emphasis on in-store inventory – good news for shop owners with smaller shops.
“Current trends make us stock less tires, and order in as required, with speedy delivery from distributors,” says Hyatt.
Todd Richardson, director of sales and marketing at Tirecraft, says lack of inventory space does not have to be a limiting factor.
“We really don’t encourage our dealers to carry a lot of inventory. There are so many SKUs these days that it’s impossible for a retailer to carry everything,” he says. Instead, his shops rely on multiple daily deliveries to keep inventories low and free up cash to operate the business.
But if you’re planning to store customers’ tires, however, you’re going to have to make a plan. Storage of tires is tightly controlled by most municipalities because of the flammable nature of the product, so you can’t just throw them in your basement. You can use trailers, but, again, you’ll have to have a place to park them.
A solution that Tirecraft offers is “The Tire Hotel” – a climate-controlled, fully insured, tracked warehousing system offered by one of its distribution partners.
“We have a lot of dealers that want to take advantage of getting the tires out of their shops,” says Richardson. “In some cases, even if the dealers has the space, tying it up with someone else’s tires is not a good business move, compared to using that space for sales displays or work areas.”
If you plan to carry inventory the cost will add up quickly. Given the increasing number of tire sizes, styles, and brands, you’re looking at $150,000 worth of tires easily – and that’s for a small shop.
Tire franchises will be looking for a fairly high purchase commitment to get a dealer on their program. If you can’t do the volume they’re looking for, they’re not likely to be too interested in setting you up. So cash flow is going to be key.
“At any given time our dealers could owe us $100,000 to $200,000, so we want to make sure that they have the business to justify it, the wherewithal to repay it, and some background in the tire and automotive business,” says King. “It is different than other retail sales and it does take a certain type of person to handle it.”
Richardson says a new Tirecraft program is designed for mechanical shops that will do smaller volumes.
“It’s a step up from entry level. Our Signature Tire Centre program lets shops be more of a player,” he explains. “But we’re looking for a minimum of $50,000 in purchases or the ability to grow the business to that level.”
And that’s not the end of your investment.
With today’s large rims, delicate chrome rims, and expensive alloy rims, you need a good tire changer to be in the tire business today. You’ll probably also need a cheap back-up machine to pitch in when you’re busy. You’ll also need a good alignment machine, and a balancer. Plus all the diagnostic tools and programming equipment related to tire pressure monitoring systems (TPMS) – which is a big part of the business now. This can be an expensive business to be in.
You’re going to face some stiff competition – both from shops that do tire work on the cheap and from shops that offer really, really cheap tires. The good news is that competitors who offer the cheapest job tend to fail quickly. The bad news is that cheap, off-shore tires are a permanent part of the landscape now.
And you’re going to have to carry them too, by the way.
There’s big demand from used-car lots that want new tires on a vehicle to help it sell, but have no interest in paying top dollar. Plus, in this economic climate, there are plenty of people who need a low-cost option for their tires. Since the recession has taken hold, off-brand sales have been climbing.
“We have to offer the low cost off-shore brands to stay competitive,” says Hyatt. “There is a market for these tires and also for the better quality name brands. Our sales staff explains to the consumer the differences. Consumers know that you get what you pay for. Being independent, we’re able to sell whatever brands we want giving us the opportunity to fill all market requirements.”
King says his shops offer low-cost alternatives, but they’re careful not to build their business on it.
“It probably accounts for 5% of our business, and most other legitimate tire dealers are probably in that range too,” he says. “You got a have that low-end stuff but it’s dangerous to build your business on it because it will come back to bite you.”
And if your customer does go for a cheap off-brand against your recommendation, or has refused an alignment, note that on the bill so they have less of a case when they come back in a couple years with tires that are cue-ball bald after only 48,000 kilometers.
Supply chain issues
Establishing and securing a supply of tires is going to be your first priority if you’re not with a program, or part of a franchise. For an independent, that could be tough.
There are times when manufacturers are happy to sell tires directly to independent shops. At other times, when supply is tighter, they sell only to their affiliated stores and customers. That’s where we’re at right now.
Developing economies are straining the supply of rubber products, manufacturers are finding it difficult to adjust their production levels to fluctuating North American demand. And there have been some problems with the availability of natural rubber. Put those factors together and you’ve got a prescription for supply chain nightmares.
“Supply has been a struggle in recent months,” admits Sims. “We’ve had to work pretty hard to try to make sure we have everything that everybody needs, and some days we don’t. If you’re not with a group, you’re going to have to look around for it, and you might get stuck.”
Resources for managers
If you’re looking for a group to join, ask what kind of help is available to associate dealers. In some cases, you’ll find dedicated business management reps who will visit your store frequently enough to get to know your business and offer valuable advice on management issues, financial statements, and budgets.
More sophisticated help involves understanding your market, using data to determine everything from you inventory level to your product mix. Mapping software can help you understand your own particular marketplace and the people in it.
Ultimately your suitability for the tire industry is going to boil down to what you bring to the party. Industry players are looking for people with serious business objectives, a positive attitude, extensive automotive experience, good financial judgment, and solid business ethics.
Above all, you need a willingness and ability to grow.
Jamie Bliss, director of marketing (light vehicles) for Fountain Tire, says his group wants team players, not just franchisees.
If you feel the need to diversify your services into the tire market, it’s just a matter of finding out where the opportunities lie.
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Edited comments may appear in Canadian Technician magazine.