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Go Toe-to-Toe to Knock Down Car Dealer Competition
June 18, 2015 – 04:35 pm

Robots-slideCar Dealers want your tire business, but do they have a glass jaw?

Sometimes the biggest threat can come from behind – and in very subtle ways.

Though you may not have considered car dealers as legitimate competition in the past, it’s high time you did.

Back to the early 2000s, General Motors, working with Boston Consulting Group, looked at ways to increase service business for its dealers. The study concluded that 75% of maintenance customers serviced their cars where tires are sold. And that 78% of maintenance customers buy tires from the first person that recommends a tire purchase.

As a result, more and more GM brand dealers began including tires in their service offering, and that spread from badge to badge, car dealer to car dealer. Growth was slow but steady; in 2002 P-metric tire shipments, car dealers barely registered but by 2014 car dealers held an 11% replacement market share, according to Tire Review estimates.

With an ever-growing number of car dealers taking tire sales seriously, how might it affect your business? And how can you fight back?

Tires as a Target

Like so many business models that underwent a major shift during the Great Recession, those economically sluggish years are the root cause of car dealers’ heightened focus on service and tire sales.

“At the bottom of the downturn in 2010-11, with new and used car sales off between 30% and 35%, OEMs and car dealers realized that in order to stay profitable, they had to focus on whatever area of their business they could, ” explains Mark Rogers, 20 group manager and dealer consultant for the National Automobile Dealers Association (NADA).

A combination of factors – largely the fact that people were keeping cars longer and spending more to maintain them – led to the solution: service and maintenance. Especially tires.

“When we started looking into things, we found that about 83% of customers who buy a set of tires from a car dealer will service their vehicle at a dealership, ” Rogers says. “It didn’t take us long to think that if we want to increase our service business, we needed to focus on tires.”

He estimates that 80% to 90% of all new car owners service their under-warranty vehicles at the car dealership. After the warranty period ends, though, roughly 70% to 80% of the service business car dealers lose comes from what Rogers refers to as wheel well items – tires, alignments, brakes, shocks, struts, etc.

“OEMs have realized the retention issue – they understand that service is the way to keep customers and that they are losing customers when warranties end. In order to compete, we can’t let our customers go. It’s a cradle-to-grave approach in which a dealer wants to sell someone their first car, their last car and all the maintenance in between.”

The strategy is simple: at the time when most new car warranties end at 36, 000 miles, the original tires are nearing the end of their useful life. Car dealers performing one last bit of warranty work have the perfect opportunity to bring up the subject of replacement tires.

“If a customer comes in toward the end of the warranty period, a dealer can comment that their tires are getting worn and talk them through their options.”

The majority of auto dealers take slim profit margins on tires – the average is 13%, according to Rogers – and use them as a loss-leader to keep maintenance customers.

Car-dealership-tire-wheel“In many cases, car dealers are not making anything on tires; it’s often looked at as a cost of advertising, ” he explains. “Instead of spending , 000 on service advertising, they accept a lower margin on tire sales and count that as sort of a supplement to advertising.”

With NADA studies clearly indicating that tire sales have a direct relationship to service department profitability, automakers sprung into action. Ford and General Motors advertise more heavily for their dealers’ service departments than ever before, and Toyota has offered a ‘buy three, get one free’ tire promotion for about four years in different regions of the company, according to Rogers.

How Dealers Get Tires

For years, independent tire dealers counted auto dealerships among their best customers, not their competition. Many, in fact, bragged about all the money they made selling tires to local car dealers.

Jim Melvin Jr., president of Melvin’s Tire Pros in North Kingstown, R.I., recalls going to a meeting put on by Ford with his father about 16 years ago. “They said, ‘Gentlemen, we’re coming out with an Around the Wheel program that’s going to be a way that you can provide car dealers with tires, ’” Melvin says, adding, “My father leaned over to me and said, ‘This is the beginning of the end.’ He was right.”

Though Melvin’s Tire Pros still counts car dealers as part of its wholesale business, the amount has shrunk drastically from a decade ago, according to Melvin.

Because automakers have realized the true value of tire sales, they are heavily involved in the distribution chain, often to the point of instructing car dealers where to buy tires.

“For example, Ford offers a tire program and suggested suppliers, and when the local dealer buys tires through that local supplier, Ford probably gets a certain amount of cash per tire sold for recommending them, ” explains Rogers, adding that more aggressive auto dealers use a combination of OEM programs and local independent tire dealers or wholesalers to get the best all-around deal.

“We used to sell a lot of tires to car dealerships from our store, ” says Alpio Barbara, owner of Redwood General Tire Pros in Redwood City, Calif. “We’re down about $200, 000 a month because now they’re buying through Dealer Tire. The parts department tells us they like to buy from us because they can buy only the amount they need and get twice-a-day delivery, but now the car manufacturer is telling them they have to buy through this channel because there are incentives on the backside.

“The ultimate thing is Ford Motor Co. has a lot better buying power than an independent tire dealer does. The buying price they have is unbelievable.”

In addition to large-scale national and regional wholesalers (like ATD, Tire Rack, etc.), Cleveland-based Dealer Tire is a very large part of the car dealer tire distribution chain.

Founded in 1999 by Scott and Dean Mueller, former owners of the highly successful Mueller Tire & Brake retail chain, Dealer Tire is a national distributor that provides program management, logistics and IT services to assist automakers and their franchised dealers in selling replacement tires and parts.

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