Tyre retailers feeling a little flat

High fuel costs are weighing heavily on the tyre retailing sector and the switch to small cars looks set to further hurt the industry’s prospects. IBISWorld’s ROBERT BRYANT reports.

By Robert Bryant

High fuel costs are weighing heavily on the tyre retailing sector and the switch to small cars looks set to further hurt the industry’s prospects.

Australia’s automotive sector is taking a hammering at the moment, with falling consumer confidence, rising interest rates and high fuel prices denting sales.

The tyre retailing sector, which is dominated by companies such as Bridgestone Australia, Bob Jane Corporation, Wesfarmers Limited (through its ownership of the K-Mart Tyre and Auto business) and Tyrepower, has not escaped this pain.

IBISWorld estimates that this industry will grow by 2.7% during the five year period to 2008-09. The performance and profitability of this industry is dependent on the stock of motor vehicles, the age of vehicle stock, price movements, movements in real household disposable incomes and consumer knowledge of product performance.

The industry has enjoyed moderate if unspectacular growth in the last few years, thanks to booming car sales (which helps increase Australia’s vehicle population) and a jump in the total number of kilometres travelled. In addition, tyre prices also increased during this period.

But revenue growth is now tapering off, mainly because there are less kilometres being travelled due to ongoing high fuel prices – less driving means less need for new tyres. Soaring fuel prices means industry revenue growth is expected to remain stagnant in 2008-09 as high fuel prices continue to dampen motor vehicle travel, thus lowering demand. Indeed, the weaker demand for tyres is expected to put some smaller tyre retailers out of business, with smaller non-employer establishments being the most vulnerable.

The longer-term outlook for the sector is slightly better, with IBISWorld tipping this industry will grow by 2.8% over the five year period to 2013-14.

While moderate revenue growth is expected throughout the period (supported by reasonably good levels of household income) consumer demand for tyres will remain volatile, with uncertainty surrounding petrol prices resulting in a number of tyre purchases being postponed.

There is also a key structural change occurring in Australia’s automotive sector as a result of record fuel prices and demographic shifts such as the shrinking of the Australian family: Australians are now buying more fuel efficient and smaller passenger vehicles as opposed to the traditional large models such as the Commodore and Falcon and, more recently, large SUVs.

This structural shift will start to have an impact in the tyre replacement market. This will put downward pressure on industry revenue growth, as small car tyres are generally cheaper.

Changes to the way tyres are distributed will also affect the tyre retailing industry. Service stations and automotive repairers are increasingly less significant in the distribution of tyres, losing out to mass merchandisers such as K-Mart, tyre specialists and diversified retailers.

This trend is expected to continue, with the major consequence being that product differentiation will be increasingly difficult to achieve. Price, service, warranty and performance differences will be the keys to staying competitive.

Products and service segmentation

Major market segments

Key success factors for operators in the industry

• Having links with suppliers. The must-have association(s) with a major manufacturer.
• Production of premium goods/services. There is a need to provide a range of tyres as price and service competition is fierce.
• Having a high profile in the market. The need to have a high profile image and well-located site.
• Use of production techniques that add value to base product(s). The need to have the ability to sell not only tyres but also the other higher value added services available at the premises.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au