November 2018 – The tire industry is one of the most important sub-sections of the automotive aftermarket. At the same time, the forces of change are having a particularly significant effect here – from digitization to consolidation via M&As and new technological trends. The fourth and final part of the industry studies on the automotive aftermarket by Roland Berger and HSH Nordbank describes how these are shaking up the market, as well as the counterstrategies that can be employed by the wholesale industry.
As soon as the first slush falls, the phenomenon repeats itself: Germany’s car drivers suddenly remember the good old motto “Have winter tires fitted between October and Easter.” Lines form in front of garages and specialized tire businesses. Trade and services relating to car tires, whether for private or business clients, should be an extremely lucrative business given the increasing numbers of cars in Europe and, in particular, Germany.
Around 480 million passenger cars and nearly 80 million commercial vehicles are currently on the road in Europe. The manufacture and distribution of spare parts alongside car maintenance and repairs currently accounts for a market volume of around EUR 248 billion in Europe.
However this is far from being the case. The 50 or so tire wholesalers in Germany, who shape the domestic replacement tire market as a link between manufacturers and retailers, are under huge pressure. Their gross margins are around eleven percent – and, according to the study by Roland Berger and HSH Nordbank, “the medium-term trend is for a slight decrease.” In the tire retail industry at least, gross margins are double that at some 22 percent.
Development of the tire market in Germany in the last ten years – car/off-road tires in million items
Source: BRV, Roland Berger, HSH Nordbank
Several factors are responsible for falling profit margins. On the one hand, the market is shrinking overall. In contrast to the number of vehicles, the sale of car tires in Europe is stagnating. This is particularly true for Germany, Europe’s most important tire market next to France. Between 2007 and 2015 the quantity of car tires sold fell by eight percent, while the number of vehicles increased by nine percent in the same period. Between 2015 and 2016 alone, tire sales dropped by a further nine percent. Another reason for this is the increasing trend for year-round tires. As the climate is getting milder and extremely hard winters seem to be a thing of the past in Germany at least, a growing number of clients are turning to year-round tires. While all-weather tires are more expensive and offer higher sales and margins upon the initial purchase, these clients are then absent from garages and do not require their services for a very long time.
The keyword is clients: Unlike in many other sub-sectors of the independent aftermarket (IAM), private clients are particularly price-focused, quality-conscious and more open to online channels when it comes to tire purchases. Because tires are easier to have fitted and changed independently, online sales already account for a market share of almost ten percent in the European tire trade. The study predicts that this figure will increase to as high as 14 percent by 2022. In Germany, online orders for tires in B2C web shops such as reifen.com, reifendirekt.de and tirendo.de already make up between twelve and 15 percent of the total retail tire trade.
Numerous B2B portals, such as market leader Tyre24, which have inserted themselves between wholesalers and specialized dealers and garages, are creating extra transparency and, sadly for wholesalers, falling margins.
The fundamental characteristics of tires as products play into end consumers’ hands: Tires are, to quote economic language, a comparatively homogenous product requiring little advice. Cheaper online purchases independently do not pose a particularly big increase in risk. While it is true that there are many quality differences when it comes to the detail of cheap products from the Far East and high-tech tires from manufacturers such as Continental, Michelin, Bridgestone, Goodyear or Pirelli, who connect their “High Value Added” tires or “Connected” tires with the vehicle and the outside world via the Internet of Things, ultimately they all do the same thing: They get cars moving. Whether these vehicles run on gas, diesel or electricity.
Market shares of tire types in Germany 2017
Source: Mergermarket, Roland Berger, HSH Nordbank
“The replacement tire market has long been characterized by the high level of vertical integration. The boundaries between the individual levels of the value chain are becoming blurred,” says Alexander Brenner, Partner at Roland Berger. In his words, there are wholesalers who are playing all sales channels, sometimes using different brands, and targeting both business clients and end consumers. At the same time, however, the market has been altering for years. “The value chain in the tire market has not been completely blown away, but the power structure of its players has changed considerably and will continue to do so,” says Patrick Heinemann, likewise a Partner at Roland Berger.
On the tire market, a persistent wave of consolidation has for years swept the smaller regional wholesalers into the clutches of larger competitors. Tire manufacturers themselves are increasingly among the buyers, no longer being satisfied with the role of producer but looking for access to clients themselves in the spirit of vertical integration. “Manufacturers are playing a strong role in trade too and taking up interfaces to end consumers,” states Jens Thiele, Head of Trade Clients at HSH Nordbank. Manufacturers are using direct contact with end consumers to push the sale of their products and to secure a larger share of margins at the expense of wholesalers.
For instance, the Dutch Pon Group bought Reifen Gundlach GmbH from the Japanese ITOCHU Group in 2012. Tire wholesaler IHLE from Baden-Württemberg was taken over by Michelin in 2014, as was Meyer Lissendorf a year later. The two companies were then merged to form IHLE tires GmbH in 2017; Meyer Lissendorf continues to be used as a brand.
Medium-sized parts wholesalers with annual turnovers between 100 and 400 million euros are often stuck in the sandwich trap: too big for a niche strategy, too small to take on the big players. What to do in this case? For one thing, these companies could emancipate themselves from the industry giants as “consulting champs”. There is the also opportunity to grow through joint ventures or acquisitions. “In about half of European markets, there are one or two regional market leaders who may be interesting candidates for acquisition,” says Thiele.
The major parts wholesalers with annual turnovers of 400 million euros upwards need take only one courageous step forward to stand against the giants from North America. What is needed here is a supraregional or international expansion strategy. According to the study, while the British or Scandinavian market has already been carved up, it is worth looking into the still rather fragmented markets of South-Eastern Europe or Southern Europe. Charles Darwin sends his regards.