Distribution Channels Continue to Evolve

“I would like to get rid of the expression ‘controlled distribution’,” one contributor told Tyres & Accessories. And this is because along with this term come some ominous implications – that manufacturers can purposefully steer purchasers towards their own products. Of course, this is said to take place most naturally in a manufacturer owned equity like Michelin’s ATS Euromaster, for example.

However, the concept of ‘controlled distribution’ covers a whole spectrum of different scenarios. These range from the obvious – manufacturer owned entities – to the more subtle influence manufacturers can exert over completely independent wholesalers and dealers. It is seldom as straightforward as one person controlling and another being controlled. ‘Controlled distribution’ does not only refer to the role played out by manufacturer equities alone, but also to a wide spectrum of influence extending as far as the independent wholesaler.

This might all sound rather academic, but almost all market participants agree on one point – most sources expect that in the coming years the so-called ‘direct influence’ of large tyre manufacturers will increase.
This is because, from the large manufacturers’ point of view, market share can best be secured or even developed, if influence on the trade is exerted. A tyre manufacturer that already has a considerable market share will aim to mix the influence it can exert over an owned equity with a support programme for loyal independent dealers. Alternatively a manufacturer may aim to become the leading partner of a producer-independent buying co-operative.

Between the direct influence of manufacturer owned outlets (where the company has an easier time dictating what is sold), to a wholly independent dealer that selects each of the brands purchased and negotiates prices with suppliers etc, there are a number of intermediate stages. Manufacturers that gain a strong position within buying groups, for example, have a degree of control over the member businesses – although individually they are independent. The implicit and overt strength of manufacturers is compounded by the fact that times have changed. We are no longer living in a time when Smith’s Tyres only customers are regular local customers. Today consumers look for trademarks, which bring them confidence. Quite apart from the importance this has for fleet services and/or the leasing companies, end users feel in safe hands when they know they can go to an outlet in Edinburgh, which looks and feels the same as one in London.

Different kinds of franchising

To some traditional tyre dealers, ‘franchising’ has just as many negative connotations as ‘controlled distribution.’ In fact the term is so commonly seen as negative that some franchisers avoid the implications of using this word at all. During the introduction of this American business idea, franchising was associated with the restriction of free enterprise. This was later dubbed ‘hard franchising.’ Shortly afterwards, due to the negative connotations associated with the hard franchising style of business, ‘soft franchising’ emerged as an alternative. However, it is too simplistic to say that only hard or soft franchising could work, there are pros and cons in each case.

Market cooperatives that were originally founded as ‘buying groups’ consisting of a number of more or less independent tyre dealers have evolved to include marketing functions as well. And at this point it is worth highlighting the fact that the better an organisation develops, the more influence it can obtain.

But what is the difference between these ‘soft franchising’ concepts and ‘hard franchising’? This comes in the form of historical differences in the philosophies of some organisations. Groups that started out as buying cooperatives and then developed marketing strategies have a different approach to those that began as marketing concepts and later developed buying strategies.

However all cooperatives need one thing – discipline. With a manufacture owned business or a chain developed by a large dealer this is quite simple. If a branch manager fails to meet the required standards, there are sanctions and ultimately he could be moved on or kicked out. But if independent partners don’t have the necessary solidarity and only pick and choose what suits their interests, then they can become misaligned with the group. Those that do not fulfil previously made agreements must be aware of the fact that they could be excluded from the group.

One thing that often shapes the proceedings is antipathy against the concept of “vertical co-operation.” For dealers this idea still represents something of a “psychological barrier,” which leads to “horizontal co-operations,” namely tyre dealers and the people responsible for the concept communicating on the same level.

But manufacturer equities, chains and independent groups are not the only tyre distribution channels. On the continent tyres are sold at petrol stations and through DIY stores as well. Quantitatively these channels don’t carry much weight. But businesses that operate in this way can anger individual local tyre dealers, who will consequently be less enthusiastic about fitting the low budget and occasionally even retreaded tyres that consumers may have purchased there. In the UK the total number of tyres sold at petrol stations is virtually nil, but there is a small handful of non-tyre retail outlets where tyres can be purchased. Again these outlets generally sell low budget products.

With the exception of alloy wheels, mail order sales of car parts have not really developed. Internet sales (which incidentally are often delivered by mail order) have achieved some amazing growth rates. In this respect regional and local dealers, those who seek to reach potential customers locally and those who want to operate nationally and even internationally have to be differentiated.

The latter will also be judged on whether they have got the appropriate variety and number of ‘service partners’ for fitting and possibly for auxiliary services (wheel alignment etc). The closer the partner is to the exact place where the online customer made his order, the better. However the question of how much market share this selling route can get from the market in the long-term remains unanswered. At least two aspects are counter productive: selling a tyre should be a consultation intensive process and should take place at the vehicle; the increasingly technical nature of tyre technology will mean that users will have a tough time entering their dimensions, speed rating and exact TMPS type into their computer search.
In the past car dealers did a negligible amount of business selling car tyres. Instead they would tend to recommend a local dealer. The problem was the tyre dealers would then have a foot-in-the door when it came to the customers other servicing needs. Determined to take their piece of the tyre and servicing pie, brands like Ford’s Rapid Fit, Vauxhall’s Masterfit and Peugeot’s Xpress-fit began to emerge.

Later, after Ford, for example, acquired Kwik-Fit, other car companies became active in this field. On the continent this was all justified as being the logical way for carmakers to extend the “value chain.” Volkswagen jumped immediately onto the bandwagon with its own high-speed repair chain “Stop & Go” (Express Fit in the UK). However observers are still waiting for this idea to prove itself successful.

Only a few years ago the strong growth of the fast-fit chains appeared to be pre-determined. In one sense this is exactly what happened. Kwik-Fit and ATS Euromaster now run 669 and 515 branches in the UK respectively, while the car manufacturers (through Masterfit, Rapid Fit and Express Fit) have 310, 265 and 105 each. But these things are not always as they seem and Continental’s decision to sell National in 2001 preferring a group of independents seemed to suggest that this route was losing favour with tyre manufacturers. That was until the news of Bridgestone’s interest in Kwik-Fit was made public.

The role of tyre wholesaling

As far as the wholesale of passenger car tyres is concerned, selling-out simply does not happen. And of course this is because a wholesale dealer does not offer tyres directly to end-users. Regional wholesalers tend to source their tyres from manufacturers, national and even international wholesale operations and often have a distribution function in their area. This concept is different to the large Benelux wholesalers like Intersprint, Deldo and Co., who predominantly work on the market using the “watering can” approach – delivering relatively small quantities of tyres over a wide geographical area. Both models have pros and cons from the wholesalers point of view: Those that work with the “watering can,” can have more customers and in terms of price and business policies remain quite free. However these operations incur substantially higher costs in the form of considerable logistics expenditure. Although current legislation and the inflated fuel price puts pressure on everyone, these costs don’t affect wholesalers with regional bases as much. However, while on the one hand direct control has less influence, on the negative side of the balance there is another link in the chain that needs to be supported by tyre retail.

There is no one particular way in which the manufacturers work with wholesalers. While one might want to cooperate with only regional wholesale dealers, others may sit down at the table with the likes of Intersprint and/or Deldo to see if their two businesses can complement each other.

What the independent tyre retailers do not source directly from the manufacturer, they can obtain via a wholesaler. And with car garages, for example, wholesalers have further customers for passenger car tyres – even the Internet trade is shaped by the wholesale activities. The reason for this is two-fold: The online B2C retailers do not buy their tyres from industry, but from wholesalers. And secondly because they have developed a B2B business model that contrasts with the classical “wholesalers supply retailers,” strategy.