What is driving the M&A in tire retailing?
There are four major players when it comes to tire manufacturing, which include Goodyear, Michelin, Continental, and Bridgestone. Manufacturing is a capital-intensive process where companies are also exposed to the fluctuation of rubber prices, so it’s a space where there are only a few real players. The top four tire vendors control over 70% of the U.S. market, and that is before Goodyear’s recent $3.2 billion acquisition of Cooper Tire and Rubber.
With a concentrated vendor base and a ubiquitous product, tire retailers find themselves serving a highly competitive and mature market. Hence, selling tires is a high-volume low-margin business.
Further, the inventory management requirements are intense. It seems every vehicle needs a different type of tire and in any case even customers with the same type of vehicle seem to want a different type of tire. As a result, retailers are often reliant on distributors that can deliver any certain type of tire within 24 hours or less from the time of order.
What are the key success factors?
- Scale – with a concentrated vendor base the more tires you move for a vendor the better pricing you get. These vendor rebates based on volume can often make the difference between profit and loss for a retailer.
- Service – low margins on tires means that without scale, related service offerings are key to profitability. That’s why the tire dealer is often the place you get your oil changed, your brakes fixed, or your wheels aligned.
- Focus – most retailers survive by focusing on a type of customer (e.g., a retail consumer with a car or light truck vs. a fleet owner or commercial operation with many, often very specialized, vehicles). In a market as complex as tires, focus helps drive customer satisfaction. Additionally, regional focus can be a plus as, especially for the retail customer, tire retailing is a neighborhood business which attracts loyalty.
- Growth – a saturated and mature market with a highly fragmented base is ripe for a buy and build strategy, so operators with a successful acquisition history are valued at a premium in the marketplace. This strategy also helps build scale.
Looking at M&A activity in the tire retailing business, we find strategic buyers dominate. Of all the M&A transactions that occurred in the U.S. last year, almost 80% of the acquirers were strategic buyers. These strategic buyers are very focused on the type of retailer they prefer to buy (to maintain that strategic focus).
As the hoped-for road to recovery continues over the next few quarters, we expect tire retail M&A to continue. The growth imperative never dies, and in the U.S., M&A seems to be a key, if not the key, growth driver in tire retailing. If you are interested in a conversation on this topic, please reach out to John Johnson (firstname.lastname@example.org) or Peter Morgan (email@example.com), both Managing Directors at The Spartan Group.