Price Deflation: No Pain, No Gain
Recent price drops may result in long term benefits,but are you ready for the short term pain?
Many tire manufacturers have instituted price reductions in the Canadian market since the beginning of 2013. In addition, some have introduced new products priced below the products that they are replacing. This has created a new issue – price deflation.
While price deflation will bring benefits to the Canadian consumer and make local tire distributors, wholesalers and retailers more competitive with our American counterparts, it also makes business more complicated in the near term. Like most things that bring long term benefits, some short term pain will be experienced… no pain; no gain.
Although it’s great to sell a product at a lower price, the tradeoff is a lower dollar profit margin. If you are retailing a tire for $200.00 plus labour and enjoying a 20% gross profit on the tire, you are making $40.00 per tire, plus labour. If the price of the tire drops by 10%, you are now selling the tire for $180.00 and the 20% gross profit is now $36.00.
If you sold 100 of these tires in 2012 and accumulated an annual gross profit of $4,000.00, in 2013 you must sell 112 tires to accumulate an annual gross profit of $4,032.00. Lower prices mean that you must sell more just to hold the same dollar value in gross profits. This is the short term pain.
How do we manage the short term pain and maximize our long term benefit? Increase efficiency. We are steps in a supply chain that moves a completed product through to the consumer, and efficiency is key to productivity.
In many cases, Canadian productivity falls below the level of our American counterparts. The average tire retailer in America achieves higher retail sales per square foot than achieved in Canada. While market size / population density is a factor in some comparisons, a key difference is that the American tire retailer carries a larger tire inventory than does the tire retailer in Canada. Yes, a larger inventory in your store can lead to increased efficiency and productivity.
Consider the following:
• Inventory on hand = higher closing rate on sales. It is easier to close the deal if you have the product on the shelf.
• Inventory on hand = higher turn rate in service bays. With product on the shelf, you are not waiting for it to come in, you can complete the job faster, cut waiting time with the car on the hoist, and push more jobs through each service bay.
• Sell what you have on the shelf = a proven factor in increasing efficiency and productivity. This is practiced by Canadian Tire, Costco, Walmart, etc.
These proven steps to success have been followed by many tire retailers just south of the border – the same tire retailers you may be competing with for the Canadian consumer’s dollar. And here is the “shocking truth” – many of these American tire retailers do not enjoy the high delivery frequency of twice per day or three times per day that has become the norm in many major Canadian markets.
Google the article “The Truth & Lies Behind Fill Rates.” Pay close attention to the section “What Can You Do?” and note the points “Increase your inventory” and “Train your staff to sell what you have.” The second point was made by the director of retail operations for a chain of stores across the border in New York – a chain that competes with you for the Canadian consumer dollar.
Peter-James Gregory is President of Atlas Tire Wholesale Inc.