2009 Set to be Turbulent Year for Tyre Market

2009 is set to be a tumultuous, but “exciting” year for the UK tyre market. According to data supplied analysts at Plimsoll Publishing, UK tyre manufacturers and distributors need to be ready and prepared for a series of unique opportunities that will present themselves in the year ahead.

The overall tyre financial conditional of tyre manufacturers and distributors “is not in bad shape,” say Plimsoll. Sales growth is running at a little over 2.6 per cent, which is actually up on the previous year. However, it is not clear whether the latest data takes into account the full extent of the credit crunch. As the report says, “even the most bullish of companies will need to rethink for 2009.”

Plimsoll predicts that the overall market will see very little growth, if any. Already over half of all UK tyre manufacturers and distributors have seen a decline in sales as the impact of the wider economy closes in. Where opportunities to increase sales do not materialise, this is sure to be at the expense of other, weaker players in the market. For a select group of 29 companies, 2009 could be their year. These companies, many of whom are offering low-cost alternatives, could capitalise as businesses and consumers alike seek to reduce costs.

As Tyres & Accessories reported in mid-October, 2009 is likely to bring with it more merger and acquisition news. According to Plimsoll, the top of the market is most congested – 81 per cent of the total market size is now shared by the top 15 players, and the significance of this should not be underestimated. As the market tightens the major players have started to review their strategic options. However their key strategy will be to look at the emerging sectors within the market and target their acquisition strategy. The major players need to establish their position in these markets quickly, despite their reluctance to spend any cash. “The penalty of not moving in now is too high for each of them,” Plimsoll analysts told T&A.

Profitability rationalisation

Historically, profitability in the UK tyre market has been very uneven – with a select band of 15 super profitable players delivering 34 per cent plus margins, whilst most of the other companies achieve 3.3 per cent margin, according to Plimsoll. It is hard to see how margins will not be compressed again during 2009, as consumer demand increases pricing competition.

“If 2008 taught us anything, it was that using other people’s money to run your company is a risky business. 37 heavily indebted tyre manufacturers and distributors companies are now paying the penalty. Having invested heavily, they are now desperate to keep busy; they are a serious threat to pricing levels in the market in 2009. Their high risk strategy is in stark contrast to the 82 companies who have elected to run their businesses debt free, many carrying large cash surpluses,” the analysts explained.

If and when sales decline companies will need to work hard to maintain their competitiveness. Plimsoll’s estimates suggest 1000 jobs could be under threat as business come under pressure to reduce costs in line with sales. 63 companies are currently on the watch list for this exact scenario. Over the last few years productivity levels have been increasing well, the sales per employee figures rising from £173,600 per person 2 years ago to just over £173,200 now. According to the report, managers should be setting their businesses up to deliver at least £179,000 sales per employee in 2009.