Settle for Reduced Margins or Scale Down

UK tyre market analysts, Plimsoll Publishing are characterising the difficult market conditions of 2008 as a recipe for failure, with companies facing a stark choice: hold on to sales at reduced margins, or reduce in size and scale. To put this into context, 67 of the 201 firms analysed in the company’s latest report are losing money, a direct consequence of rising costs and price reductions set against a slowing market. The net effect? Increased merger and acquisition activity.

Senior analyst David Patterson points to the amount of tyre manufacturers and distribution firms using an overdraft as a permanent means of finance as a dangerous position for any companies to place themselves in. The banks are taking a critical look at all unsecured finance and are reassessing their exposure to small businesses- this could leave these firms in a position where their overdraft would need paying back on demand. Acording to Patterson, many of these firms simply cannot afford to do this.

Plimsoll highlight two characteristics common to 80 per cent of failing or failed tyre businesses. The financial performance of the company is allowed to slide. Costs are not brought under immediate control. As a knock-on effect, debts increase and interest payments then further deplete profitability. The final blow usually comes when an outside factor hits the company, such as the loss of a large contract, a bad debt, or a slowdown in business. The failing company simply does not have the financial resources to adjust in time and the inevitable occurs.

Two distinct types of acquisition are predicted: Classic distress sales occur when predators are able to profit from other’s misfortunes, snapping up essentially sound businesses at bargain prices; Larger players in the market may use the opportunity to snap up smaller players in the market who add value to their core business. These companies will be prepared to pay well for these niche companies as they offer a clear and easy route to new markets.