Wholesale Distribution: Supply Chain Consolidation
The WD landscape has changed dramatically in recent years. More change is on the way.Are you ready?
Today, in 2014, the supply chain landscape is vastly different than it was just two years ago. Many players in the Wholesale Distribution (WD) end of the tire business have disappeared, both large and small. In most cases they have been purchased and absorbed by larger players. Their names will become a part of history, no longer a part of the present or the future reality.
While the speed of change surprised some, the change itself should not be a surprise. When you have too many sellers chasing too small a market, something has got to give.
The Canadian marketplace is geographically large, but in terms of population and market volume, it is smaller than the market in California (California’s population is approximately 38 million / Canada’s population is approximately 35 million). Canada lacks population density and market volume and is faced with strong seasonality – our severe winters.
If we take New York as an example (the state experiences seasonality as well), and compare it to Ontario, the Canadian market still falls short when it comes to population density and market volume (approximately 19.5 million people in New York over 47,214 sq. miles / approximately 13.5 million people in Ontario over 415,600 sq. miles).
Let me illustrate some of the key market conditions affecting the operation of a Canadian WD:
• The lack of population density means a WD has to cover a far wider delivery area to achieve truly viable business volumes. This drives up delivery costs.
• The lack of market volume means the demand for tires cannot support a lot of WDs. This limits growth potential.
• Seasonality means a WD works with a low throughput per square foot (the number of tires moved / square footage of the warehouse). With a Canadian WD having to receive large volumes of winter tires in June that will not be sold until October or November, it is very hard to achieve the throughput per square foot enjoyed by many WDs in the USA. A Canadian WD needs more warehouse space to sell the same number of tires. This drives up the cost of handling each tire.
If we take the 3 points above and add the price deflation in 2012 and 2013 as tire manufacturers reduced prices to close the gap with USA pricing, a Canadian WD has to sell more tires to generate the same revenue. However, market demand is not growing fast enough to allow every WD to grow their sales volumes at a sufficient enough rate to offset the price deflation.
The result? The WD sector was ripe for consolidation. To achieve economic sustainability a WD must develop critical mass. Unfortunately, with the limited market size and high cost of operation, it is very difficult for a WD to achieve the critical mass required to be truly viable and enjoy economic sustainability.
Consolidation creates critical mass and reduces the cost of operation. Consolidation can create economic sustainability.
I understand many tire retailers are very nervous about the changes in the WD sector. For some of you, your preferred supplier disappeared overnight. However, this is the new reality, and if you understand the reasons behind the changes, you are better able to plan and adjust so as to operate in the new reality. Be prepared, there will be more changes ahead in 2014.