Wholesale changes in UK tyre distribution

Like London buses, acquisitions come along in threes – or so the string of recent purchases in the UK tyre distribution sector would make it seem. Between the tail-end of February and the very first days of March, it emerged that Stapleton’s Japanese owner Itochu had bought Britain’s largest tyre retailer Kwik-Fit, Stapleton’s had itself bought North Eastern Tyres & Exhausts, while fellow Grouptyre member King David Tyres had been sold to Malvern Tyres. And what’s more, this movement doesn’t look like it has quite finished yet. In February Harris Brothers sold its four branches to Micheldever Tyres Services, bringing the company’s retail depot count to 53 and counting. True, this overview is lumping changes in the wholesale business together with developments in the retail sector, but as history and recent events tell us the two parts of the trade are inextricably linked.

Tyres & Accessories will, of course, be reporting on and analysing these developments as the details continue to emerge (look out for further coverage in future issues), but at this juncture it is worth taking a step back and reflecting on what has happened in the past few months and considering this against the background of what has been happening in the retail market for the last couple of years. In order to do this T&A has expanded on a survey of the top 20 tyre dealership first published two years ago to include details of the number of branches operated by the top 25. This compares branch counts for these firms two years ago with the retail landscape today.

Latest retail survey shows strong growth trend in top 25 tyre chains

Judging by the overall growth trend, it has been a good couple of years for tyre retailers. Indeed the vast majority of leading retail chains grew in size, some very rapidly (see table). The first thing we picked up on was the fact that there are now no chains with less than 10 depots in the top 20. Since Kings Road has hit double figures with the addition of one branch during the last two years, you have to go down to 22nd place Lodge Tyres before you reach single digits. However, as this growing business’ retail operation has also gained a branch since the last survey, it is a fair bet it won’t be too long till they reach 10 too.

The wider point is that the market appears to be showing signs of consolidation, with the top 25 companies playing an influential role in the direction of the market as a whole. As it stands, more than three-quarters (1,533) of the 1,934 depots controlled by the top 25 are run by the top five retail chains alone.

ATS Euromaster the fastest faller

Nevertheless despite the generally positive performance of the sector, not everyone’s retail network has grown in the last two years. Taken as a whole the branch-count of the top 25 tyre retailers in Britain this year is 45 lower than it was in 2009. However, when you look at the figures it is clear that although County Tyres has one less branch, no-one outside the top 18 shrunk at all. And it has to be said that virtually all of the attrition in the top 25 came from just one retail chain – ATS Euromaster. ATSE’s branch count has fallen from 482 at the last count to 369 this year, 113 branches less. Initially the company told Tyres & Accessories it was “reviewing” 80 branches, but it now seems clear that it was a few more than that.

Nevertheless, as ATSE group operations director Chris Hufflett told T&A this time last year, small centres are “broadly speaking not good in economic terms” and as a result the programme of consolidation embarked on can probably best be termed as rightsizing. Last year the 380 centres then still in operation were characterised as the approximate “critical mass” for ATSE, now it seems the aim is to make a slightly slimmer (but still the UK’s second largest) tyre retail chain just as efficient.

One interpretation of this is that ATSE appears to have adopted a Yahoo-esque strategy of deciding not to compete with the dominant force in terms of ‘dots on the map’. In the same way that the world’s second largest search provider decided not to continue trying to beat Google for sheer size in favour of following its own strategy, ATSE has radically rationalised its operation. It is not longer close to Kwik-Fit in terms of branch footprint, but executives will tell you that it is now more focused and efficient than ever. It is also still a significant way ahead of the next nearest competitor (National Tyres). However, while Yahoo probably did the right thing in that case, the firm’s decision also allowed Microsoft’s Bing search engine to quietly gain market share. And with National, HiQ and Stapleton’s continuing to grow, the sizeable gap between the number two player and the rest of the top five is similarly narrowing.

First Stapleton’s buys NETE, then Stapes-owner Itochu buys Kwik-Fit

Two weeks after the news that the conglomerate behind Stapleton’s Tyre Services bought Kwik-Fit, the company officially confirmed that on 28 February 2011 it acquired all the shares of North Eastern Tyre & Exhaust Limited (NETE). More on this later, but first a word on the size and scale of the wholesale operation that was doing the buying in this case.

Stapleton’s is part of the Japanese Itochu Corporation, which has an annual turnover of $200 billion. For its part, the UK tyre wholesale operation turned over more than £300 million in 2010, and is on target to exceed this in 2011. It runs a network of 10 distribution centres, holding around 1 million tyres in stock. In addition it is by far the fastest growing retail operation in the UK at the moment (and you have to remember that this is after literally doubling its retail footprint overnight with the purchase of 50 Central Tyre branches at the end of 2009). When you consider both its direct ownership, familial relations via Itochu and the customer relationships it has with thousands of independent tyre businesses in the UK, Stapleton’s is clearly fast-growing force to be reckoned with in the retail sector.

Looking at the growth of the company’s retail footprint in the last two years, it is clear that the Letchworth-based business’ influence has grown largely by virtue of a string of acquisitions – notably of NETE (22 branches) and RSR Tyres & Wheels Ltd (7). Then there’s the firm’s indirect connection with Kwik-Fit, which means that (one way or another) the wholesaler’s Japanese backer Itochu controls a whopping 807 branches in the UK. For its part Stapleton’s operates its retail centres under the STS Tyre Pros, Central Tyre, STS Tyre & Exhaust, Tyre City and RSR Tyre & Wheel names.

However, it must be pointed out that this is more complex than a simple domination of the market. In response to the Kwik-Fit purchase, an Itochu representative told T&A that the retail business and Stapleton’s would be run as separate businesses in parallel. So while Itochu may be linked to the largest wholesaler and the largest retailer the idea is that they are not directly linked to each other. Similarly, an official statement issued by Stapleton’s following the NETE acquisition said the business will continue to trade as a wholly-owned subsidiary of Stapleton’s Tyre Services. Stapleton’s representatives said the company intends to complement NETE’s “professional approach to the market and their excellent customer service in order to ensure the future success of both companies.” No further details of the price or the terms have been released.

Referring to the NETE acquisition, Stapleton’s chief executive, Kenji Murai, said: “We are a progressive business and this latest acquisition will allow us to realise synergies in several key areas. Our aim is to provide excellent value for money alongside great customer service, across both our B2B and B2C sectors. This philosophy will be at the heart of everything we do.”

NETE was founded in 1970 and has established itself as the largest tyre and exhaust distributor within the north east, operating 22 retail centres and offering multi-drop delivery services for wholesale and dealership customers from their six warehouses.

Micheldever continues expansion by acquisition

While the Micheldever-owned Protyre chain hasn’t been linked to any high profile acquisitions the size of the recent Kwik-Fit sale or the earlier Central tyre acquisition, the company has been gradually increasing its retail footprint too. Micheldever’s strategy appears to centre around purchasing well-performing chains of around five or less branches. Recent buys including Harris Tyre and Barry & Wilkinson tyre, which bring the firms current total to 53. Looking forward it seems unlikely that the company’s continuing quality-not-quantity buy-out strategy is about to cease.

The most recent addition was the acquisition of Harris Brothers Tyres in South Wales in February, adding a further four tyre outlets to the group’s growing aftermarket operation. According to Micheldever the directors of Harris Brothers Tyres Derek Phillipart and Leighton Walker built an extremely successful business based on “best service, best prices, strong availability and friendly customer service” principles.

The word is that Phillipart and Walker decided that the time was right for a strong partner to help take the business forward. The South Wales retailer has had a long association and working relationship with Micheldever, so the group was a natural business choice partner. The two founders will stay on in the company to help and assist with further business growth.

Jon Cowles, group acquisitions director at Micheldever commented: “Once again we have provided an exit opportunity to a valued customer. We will continue to follow this strategy of growing our market share and working in harmony with our wholesale customers. We have a strong pipeline of acquisition targets coming through over the next few months and it is great to kick off 2011 with an acquisition of this quality and size”.

Take a look at the figures and you can see that even the largest players on the map has still grown during the last couple of years. Surprisingly, you might think, Kwik-Fit is six branches bigger than at the same point two years ago. In addition HiQ’s franchise scheme appears to be continuing to be generally successful. The network now reports that 150 “live” branches is the current official total, but company representatives made it clear that “more are in the pipeline.”

Looking around the rest of the top 25, Merityre have achieved a 10 per cent increase in branch count rising from 19 to 21 and Bathwick Tyres has added four branches to its number, bringing it total size to 32.

What will happen next is anyone’s guess. But there is a feeling that there continuing interest in terms of mergers and acquisitions – from both inside and outside the market. With the larger players seeking to increase their strength through acquisition of some of the most strategically valuable small and medium sized retail chains and with investors always looking good ways to put their money to work, there is likely to be a continued trend towards consolidation in one form or another. As analysts from Plimsoll Publishing said earlier this year: “There will still be distress sales…as companies buy struggling competitors on the cheap. However, there will be a return of more strategic acquisitions as larger companies look to buy into growth areas in the market.”