We’re going to talk about tire sales and service, with Scott Rea, Market President at Tire Profiles LLC.
But before we talk about tire sales and service, I wanted to know what it was like working for Scott Rea to work for Les Silver.
Scott Rea tells us his story about working for Les Silver
“Les was a very good mentor to me. I entered the car business when I was fairly young, during this time I was working at Xerox and he recruited me away from there. And I joined him at a 20 group meeting, which I had no idea what that event was back then.
He presented his information to a bunch of Canadian dealers and it all made a lot of sense. He was selling at the time a customer management system which created these personalized maintenance coupon books. Thinking about tire sales and service I wondered what it was like for all of this to happen.
They had to hire staff and we charged them about $50,000 – $60,000 for the equipment and 1500 bucks a month for consulting and dealers bought it.
Les always said we may as well charge them a lot because we can make them a lot. He was a pretty smart guy coming out of the system house and then bought a small company called Tricom and converted it to a new gen.”
For me, my experience was similar to Scott. I had the pleasure of connecting with him.
Les was really good at selling things, but MTI in and of itself was a paperweight. I’d never seen sales go down so quickly in a Service Department than putting in NPI. His son used to call me all the time, just because I was holding up a bunch of dealerships from going on MPI.
The manufacturers would come after me and stuff too and it was very interesting how aggressive they were. I used to tell him that I could help Les Silver fix MPI if he wanted to pay me. They were so focused on selling it that they never really figured out how to actually make it work.
In the sense that it increased sales because it was so cumbersome. The steps in the way they had a Service Advisor in the dealership and just all the issues with it and that sort of thing. But I was really impressed how he scaled.
I ended up having a long lunch with him once at this NADA event. I remember just asking him about his approach and how he scaled.
Let me tell you, I learned a lot from Les Silver!
Scott Rea came back to talk about the entities that Les Silver bought. He says that,
“There were four entities. Identifix was one that looked after the aftermarket, IATN was a group of sort of subscription-based technician help. You sign up for five bucks a month and when you get stuck on something, you send a message out to the other 90,000 Technicians around the world.
They would share the information back and then they bought Auto Point from Jim Roach, which was part of the next layer. Additionally, NPI was part of it and service repair solutions was the umbrella company and underneath were all four of those other entities.”
I told Scott that NPI was a small percentage of the value of that, which I had never understood until I had lunch with them and talked to Les Silver. This is where he replied and enlightened me by saying,
“Identifix probably had around 30,000 independents that were signed up, all paying $150 approximately a month, and that was the bulk of the revenue that was coming in.
It was essentially all profit because they just sold a software application, loaded it up with pure information, and away it went. It provided the Technician with a lot of data that they didn’t have to help repair cars more quickly and efficiently.”
Furthermore, Scott told us that when a dealer or any independent looks at their statements and their ledgers, anything that bumps up against a certain dollar amount, typically that gets scratched off first.
NPI was charging $2,500-$3,000 bucks a month for the software that raised a lot of flags, if it wasn’t generating money. From here he said that they had defections pretty regularly to the point where if people executed on it there was enough money to be found in an inspection to sink a ship.
That MPI was a really good idea and near the end of that company, we ran reports all the time to look at the data and the amount of work that a technician could discover for a variety of reasons.
Scott further explained the history of the industry and said,
“A vehicle wasn’t what it was when we started the company 15 years earlier, the quality had actually caught up with the ability to avoid many of the repairs and maintenance.
The warranty op codes were squeezed and there’s less and less work. I think about going forward. What’s a service department and who knows what the answer to this is when an electric car takes over.
You’ve got a 3000 moving part combustion engine vehicle that has all sorts of things that can break. When the mileage band started to pile up on a car…
You’re going to have big ticket items at a hundred thousand plus miles. But you look at the data coming back on some of these Tesla $400,000 mile runs not many breaks.”
He finishes in depth by saying that they go through tires like breakfast cereal because of the weight and the torque in the engine.
Scott says that these sorts of things are gonna wear out quickly that the tire manufacturers are licking their chops because they’re going to sell 100% more tire sales and service and service on electric vehicles than they do on a regular passenger car that weighs 3,500 – 4,000 pounds instead of 6,000 – 7,000.
But then what is the Service Department going to end up having to sell?
Scott Rea says that they’re going to have to sell a lot of suspension work because that’s going to also take a hit with the extra weight. Brakes are going to go quickly until they maybe change the components that can last longer.
Scott says that it is less than 10%!
Scott states that,
“9.5%. It’s up a full per percentage point in the last five years. So they’ve gained one percentage point in five years of market penetration.
That’s terrible, right? I think part of it is the whole incentive plans that the OEMs have mob with.
When you look at a dealer, 90% of their net profit comes from the incentives from the manufacturer.
Those are geared around CSI and short term retention of the customers. Additionally they are also interested in the volume of cars, sales, etc. But when you’re only at 10% operating profit, something’s really broken with that model.
So a dealer needs to look at his Fixed Ops and ask them if they are really optimizing the department? Not one of them can say yes…”
Scott Rea then talks about how if you hold onto your customers, you should have growth in your ROI counts.
He’s looked at this for years and the ROI counts are flat and when you talk to a Service Manager, most of them don’t want growth in Repair Orders. Scott has a revolving door of Service Advisors.
I can’t grow my ROI count by 20% a year because I can’t handle the work because I’m booked six months out. So they have a flat ROI count and simply replaced the VINs that defect with new cars delivered over the curb.
It’s a terrible strategy, however, for the most part not many of them think strategically. They sell a hundred cars a month and some of them have 35 technicians.
The most interesting thing that Scott Rea brings up is about shops that specializes in tires and told us,
“You could sell more tire sales and service but I don’t want to sell tires because we don’t make any money at it. That’s the number one thing you hear and it’s true because you look at a market like Dallas, Houston, or LA, go to the yellow pages and put in tire replacement.
That zip code is unbelievable. Houston has 1,365 companies that advertised in the yellow pages for tire replacement, 1300, maybe those guys do 10 hours a day, 20 Repair Orders a day. That’s 26,000 Repair Orders a day in that market.
Think about that for a minute, it is no wonder they can’t make any money. The tire companies like Goodyear and Costco can just give the tire away. They don’t give a crap because there’s no margin in tire sales and service. Let’s all admit that. It’s just a fact.
They’ve used it as a loss leader since day one. Because they don’t sell cars. Therefore, let’s win them on the tire, get them off, look at the suspension, and see how we can further keep them in the shop.”
After listening to what Scott Rea had to say about tire sales and service, I made this statement to grasp at him response,
“The independent tire guys are making a lot of money, there is a ton of money in tire sales and service.”
Scott Rea replied by saying,
“They do and they don’t. The people that make a lot of money are companies like discount tires. They do it by being the big gorillas of the tire industry.
They sell $5 billion worth of tires a year and their strategy is interesting.
I took my Mercedes there before and they go to the car, they get your tire size. They’d come back in and recommend the highest grossing tire sales and service they have in stock.
Is it the right tire? Is it the tire that came on it from the manufacturer? They don’t give a crap. They want to make money selling tires. Am I happy with the tires that are on my car now? I am not. They’re not the same tire as the original manufacturer’s tire, that was the continental. Now they made a lot of money.”
Although I resonated with some of the points that Scott Rea made, I told him that the point is that there is a lot of money in tires.
We have coaching groups and we have guys that own tire shops in those coaching groups. The thing that happens to dealerships is manufacturers make a deal with dealer tires and the dealer rebates 5% to the manufacturer.
The dealers are at a disadvantage when the local tire shop is getting up to 10% back on performance. Therefore, the more tire sales and service they sell, they get it back in rebate. Dealers aren’t seeing that the manufacturers have to go with dealer tires or whatever the manufacturer is doing.
But the manufacturers are keeping a lot of that money and create the perception in the dealership world that there’s no money. But I have dealers that have gone out and bought a Goodyear franchise or a Big O tire franchise and they’re making a ton of money on tire sales and service.
It’s the model that needs to change in a sense where the manufacturers need to understand it. Additionally, the dealers need to understand that that’s a retention tool and not a loss leader, but it’s seen as a loss leader.
That’s not the case because it’s just how the setup is currently. But it’s going to have to change because you’re pointing out the idea that tire sales and service are going to become more important for retention. But also, as electric cars are rolling out, that’s going to be a part of what the service departments need in order to survive.
Scott Rea does not disagree with me and he gave me his perspective on tire sales and service, he says,
“Tires tend to be a volume game if you want to make money at it and here’s the example: there’s a little town south of Dallas called Waxahachie with about 30,000 people. They got a discount tire store there.
This is where I put my tires on when I lived in Texas. I asked the manager how many tires did they sell a month? He sells on an average month around 5,000 tires and a good month possibly 6,500.
Think about that, when you talk to a dealer. He’s happy when he sells 150 tires a month, and he’s got a dozen Technicians. It’s pathetic. Even if he’s making 15 or 20 points on the tire, for reasons that you just described, they don’t have the volume of tires.”
He goes on to state that the profit from tire sales and service really comes from the work around the wheel. Scott says that no inspection processes for years have been flawed because you couldn’t motivate a technician to pull the tire off the car unless you sold the rotation.
He details that they didn’t find work and if you did, you sold tires and got the wheels off. Now, all of a sudden you see the scored rotors, you see the brake pads that need to be replaced, and you see all the work that’s there.
Scott Rea implies that if we ran a report, which we’ve done in dealers, how much gross profit is on a Repair Order with tires sold versus the gross profit on just a regular repair with no tire sold?
We see it anywhere from $150 to $300, more in gross profit not from the tires alone. Scott tells us that,
“You have to replace the tires. There’s some things that we can do if we provide them with more beta.
Do you care? Do you want to go to 200 or 300 or 400 tires a month? Here’s what you might need to do.
You might need to stock more tires and look at your pricing model. Or do we need to go up the street and steal the guy from the discount tire at $10/an hour?
Having this guy just run around your shop, putting tires on all day is a pretty simple solution there. We don’t want a master certified Technician putting tires on at $45 bucks an hour.”
After hearing his thoughts on tire sales and service, it really got me thinking about what needs to be done.
Scott Rea was an amazing guest. The moral of the story here is that tire sales and service are a huge opportunity. They lead to alignments, breaks and other things that people have issues with.
He leaves us off here by talking about tire sales and service,
“Why are people not loving selling tires and alignments? Because it leads to a lot of gross. Especially if your compensation plan has the variable component paid on net profit and the contribution of incremental sales.
You’ve probably done these calculations for about 60% and net profit is fixed because most of your stuff is covered. When you add another $100 in gross on an alignment. $60 goes to the net.
Why wouldn’t you want to do as many of those as you could? Especially if you’re paid on that might mean another thousand bucks on your paycheck. These are things I’m sure we talk about every day when you’re wandering the streets of Dealerships.”
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