Caruso & Co. Podcast

Harry 0:00
Thank you so much for joining us. This is Harry Caruso, founder of Caruso and CO, and today we are joined by Ray Pickens, who is the Vice President of Operations for America's car Mart, coming to us with decades, over 40 years of experience in the Tire and Auto Service space. And we are going to be discussing everything that's going on in the tire industry between the financial sponsors, the recent investments and all the trends that are going on. Ray, thank you so much for joining me.

Ray 0:27
Thanks, Terry, thanks for having me looking forward to an exciting conversation about a great industry. Yeah,

Harry 0:32
and we are tremendously excited to have this opportunity here, because, as I briefly mentioned, you are bringing decades and actually having witnessed multiple cycles throughout this entire sort of universe, and so very curious to get your take as to generalistically, what you're seeing, hearing and feeling on your end, in terms of all this private equity money coming in and where, where the market sits as a whole.

Ray 0:59
Sure. So if you think about it, for years the industry was made up of large chains, regional chains, and then independent, you know, one two shop owners, and more recently, with the injection of equity from from the private equity group, you know, a lot of these more robust regional players have kind of been gobbled up, you know, some some larger companies have spun off some of their retail operations to PE so that they can focus on distribution things like that. So with that, it's really driven up the multiples on these businesses to higher than what most industries will bring in this in this acquisition arena, and the other side of it too, Harry is now that a lot of these regional players have been gobbled up. Folks are starting to think there's a stall in, you know, availability. You know, there's no all. There's no more regional players. Where are we going to look for these acquisitions? But there are 1000s and 1000s and 1000s of independent tire dealers out there, which actually are now in a good position, because they may be able to get more for their business, but they don't have an exit strategy. They're they're not familiar with PE they're not sure how to go about doing this. And on the flip side, you know some of your larger PE groups, you have to think, you know, do I want to, do I want to try to acquire a 30 store chain, or do I want to try to acquire 31 store chains? And the amount of work in an acquisition, as far as the diligence, the list is the same. So, you know, it may not be as appealing, but that's where the opportunities really lie to consider, to continue to consolidate this industry, is start going after these independents, and there's some very well run operations out there. And then the other the other piece to that too, Harry, you got to balance, because obviously, as larger companies acquire locations they want to absorb them into their culture, their processes, you know, kind of integrate them into their way of doing things. And you have to be careful, too, because some of these folks have been in operations for years and are a staple in the neighborhood. They're a household name, you know, they're family, owned and operated. So there's always that balance between, you know, do we lose that? Do we keep that? How do we maintain that legacy? So, just a lot of, a lot of unprecedented opportunities still in this in this industry, right?

Harry 3:36
I feel everything that you're saying is what we feel on our end and what we're seeing. So to take us back to sort of square one here, I think one thing that's never fully addressed, and we would love to get your opinion on, is, what is this whole consolidation game, as pertaining to tire retailers, tire stores, tire shops. Why are they being consolidated, and to what benefit is that actually bringing to the table for the consolidators? Yeah, there's, Unknown Speaker 4:06 there's a couple benefits, obviously,

Ray 4:10
building the brand by adding additional locations, larger footprint, deeper market penetration, key market penetrations and a markets and B markets. The other thing that you can leverage as you get size is buying power distribution. You know, if you're that mid level operator, you're going to be able to leverage size and probably get better cost. You know, better better pricing, better rebates. You know, a higher level of service because you have more locations, and then as you get big enough, you may want to branch off and create distribution within your own network. And that's when you can really get some savings. And there's some out there, Harry, some, you know, tire stores that are also manufacturers. You know, a couple common names like buyer stone. Good year. So then you get the benefit of having more locations. You know, perhaps if you're have a manufacturing piece tagged on there and a distribution piece, now you're, you're, you're creating profit centers within your organization in other verticals besides just the company owned stores. So you, the bigger you get, the more opportunities there are for that. So Unknown Speaker 5:24 I think tire presents a very interesting

Harry 5:28
perspective on what can be done by way of vertical integration that I don't think many other parts of the aftermarket automotive universe can with dealerships. You only can go so far up. You're not becoming an OEM, right? But private label does work entire and it's not dissimilar to what we're seeing the big, big push for and wave of inconvenience, which is private labeled goods in the convenience stores themselves. So that makes total sense, but what you're saying, Ray is there is true cost savings to be had by these consolidators, absolutely. So. So then if we take that one step further in terms of a really well run independent operator, single store, do they what? What impact does this have on them?

Ray 6:16
It'll, it'll likely drive their cost up in some cases as an independent, because they won't be able to leverage that volume. Now that being said, most business is said to be a relationship business. Whether you're fixing cars, selling tires, washing cars or selling shoes, it's a relationship business. So keep in mind, too, some of these independents have been in business for years in their area, and they have relationships with distributors. They have relationships with other suppliers. They have relationships with manufacturers. And so there may be some grace there and some good will that allow them some leverage. But over time, keep in mind that automotive repair and tires is not the only consolidation going on there. So is distribution, so is manufacturing. So as those counterparts to the actual repair shop begin to consolidate and get bigger, that is also going to put a little bit of pressure, because it takes away some of that ability for that independent to to maintain that relationship, because the supplier they've been doing business with for years just got purchased by a consolidator, and now that goes out the window.

Harry 7:33
We saw it. We saw it in the car wash industry, right where, whether before, after, leading or lagging, that can be argued on an individualized, transactional basis. But when the people you have 50 year relationships with are no longer the people in the seats they were in that as a supplier, that supplier relationship is non transferable, if you will.

Ray 7:54
Right? And look some of these independents. I mean, there are some fantastic, fantastic business operators are out there. I've met several of my career. I know you've met several in your career, and you know they talk about it being the person behind the counter is what makes that place. So a lot of independents will will weather these storms, but there are some, and I've heard this, you know, in a near quote, you know when, when I was with other companies doing acquisitions, and you know, you're talking to the owner, and they're like, I just don't, you know, I love what I do. I love my customers, I love the legacy we built, but I just don't feel like dealing with the rest of it anymore. I know I have to open extended hours. I know I've gotta start opening on Sundays. I know I gotta start opening later. I know I've gotta do all these things to be competitive, and I just don't have it in me. So their solution is sell my business. Take good care of my people, take good care of my customers, but relieve me of that anxiety and stress of having be the one to do some tough things, or I've been in business for 40 years, and I'm tired. I don't have family to take over the business. You know, I want to, I want to retire. I want to ride off into the sunset. And, you know, I want to cash out and and take, take my money and go and so, you know, here, we come

Harry 9:22
hard to argue with that motivation. I gotta say that one is a tough one to argue with. And everything you're saying we saw over the last seven years in the car wash base. However, to your earlier point, one thing I will bring up that is remarkably unique and beyond transparent when you look into this industry as a whole, the average tenure of ownership of tire retailers across this country is outstandingly longer than anything else I've ever seen. Yeah, the average owner's been owner, owning their their stores for 30 something years at this point, whether it be in the family or not. It's wild how long people have been in this business.

Ray 10:03
And it's a lucrative business, it's a it's a relationship business, as we talked about. And you know, one thing that that there's a lot of resilience in this industry. There are several industries that are resilient. But when it comes to your car, you know, in order to get to work, to get the kids to school, to get to church, to get wherever you need to go, you have to have your car. And the average age of cars continues to nudge up a little bit, especially now with with the downturn, you know, and with everything we went through after COVID, with the chips and availability of parts. And, you know, new car sales slowing down a little bit, it just creates an even bigger opportunity for the aftermarket. And as I've said to you before, Harry, you know, regardless of the economy, tires still continue to wear out, and now with the influx of hybrid and other cars, you know, there's still, you know, there's still a huge opportunity to expand into that market. Hybrid tires tend to wear quicker than, you know, than your internal combustion engine vehicles. And you know, more manufacturers are making the tires to spec because they want a tire to fit a certain criteria for their vehicle. So now there's a broader assortment of tires that are going to be necessary. And so it's this, this industry just continues to have non discretionary demand. So

Harry 11:29
and, you know, and color me a fool or naive, but one of the most interesting things as you start exploring the different aftermarket automotive sectors is you would think the same as it applies to collision, does it? No, no, you can get away with leaving the dent on your car. You can't with tires that are pulled

Ray 11:49
right. So it's another other maintenance on the car too. I mean, that's and that's the beauty of it is there's verticals within the repair shop of, you know, oil changes, okay, you know, there's some maintenance, there's some fluids, there's repair. When things break, things wear, like brakes and, you know, then you have the tires, and then all the related services, because you don't just put the tires on the car. You're, you know, programming or rebuilding the TPMS sensors, you're doing an alignment. You know, there's other maintenance that you can suggest to the consumer, things that are, you know, hey, at this particular point in time in your car, you should be doing these maintenance items. And then there's two schools of thought there. Do I maintain the car to help reduce overall expense, or do I just wait for something to break and then I'll fix it when it breaks? There's, there's, there's two schools out there for all that too. But you're right. You don't have to get that dent fixed. I don't have to have that latest and greatest new outfit by that you know that, that new brand, but I've got to keep my car going. I've got to, I've got to be able to get around.

Harry 12:51
And it's the forced milestone, if you will. Right? Like some of us don't like going to doctors in our personal lives, right? We'll put off going to the doctor as long as possible, or the dentist, right? Getting your tire you are this is what you cannot avoid. So you're going to learn about what needs to be repaired while you're there. But is that worst event you cannot avoid? So one thing though, right? I'm curious to get your thoughts on this that I find a bit perplexing is the building of new tire shops, because unlike so many other industries, especially discretionary industries, such as car wash, where it's very elastic by way of demand, the tire demand within a certain MSA is rather predictable. So these groups that you know are building new boxes. Is the play there, just to split the pre existing pie, or am I missing something?

Ray 13:44
There will be some of that. You know, you'll, you're, you know, the hope is that you'll cannibalize some of the competition. But you know, you won't, surprisingly enough, either, even in major metro areas. And follow me on this because I can think to my time when I lived in Baltimore, you know, there's a there's a main thoroughfare through a certain part of town, and folks that live on the west side of that thoroughfare typically never cross to the east side of that thoroughfare because of the amount of traffic. So they shop and, you know, things on this side, they may commute on that main thoroughfare to somewhere downtown, but they'll do most of their shop. And we've had locations in previous lives where we've had two tire shops four miles apart, and the two of them together will do more business than either one ever could have by themselves, just because of capacity. You know, in order to increase business in a tire shop, there's a couple things you have to do. Either have to increase car count, get more traffic through. You have to increase the average ticket, you know, sell more stuff on each car. Or you have to add base so you have more holes to put cars in. And when you're reaching capacity, there you. Build another location and and there will be some bleed off, but then you're going to attract customers that may not be coming to this location, who might be farther out, maybe the wait time was too long, and now they can, you know, now you've reduced wait times. So there's, there's benefit to building additional locations, plus you get more brand presence, you get more market penetration. You know, there's, there's, think about the amount of cars on the road any given day in any given city, and you don't have enough capacity to service them all. So I don't think you're ever going to run out of opportunity.

Harry 15:39
That makes sense, and it's not something that immediately, you know, hits you straight dead in the face when you're thinking about this industry as a whole. But it does make sense to me, one thing that I think people are very much underestimating in terms of tire shops and what the future lies for tire and repair is the entire Adas calibration side of things. Because, in my personal opinion, and then, if we go back to that sort of that forced doctor's visit, you can put it off as well you want, until you need to. But when you need to, they're going to find all the dirty laundry and one of those things that they're going to find. And where, I think the most arguably naturalistic place for a desk calibration to truthfully find its home is entire shops.

Ray 16:20
Yeah, and there there are, there are folks that are thinking about that, and have been thinking about that, and ways to, you know, I say get ahead of the curve, because we're really not ahead of the curve at this point, because all that has been out for a while, but a lot of folks have left it to the specialty shops to deal with that kind of stuff. And pretty soon you're not going to be able to, because more and more vehicles are equipped with that. Oe, and now a lot of those vehicles are entering that window of age where they're now, because now they're, you know, not going to the dealerships anymore. Now they're going to independence. And you know, some of these volume retailers that we've been talking about. And Harry, that brings up another point. You know, if I'm an independent shop owner and I'm like, wow, to be competitive, I'm going to have to spend, I don't know, let's put a number on it, 50,000 75,000 $100,000 to get some of this equipment, to be able to service some of these cars. I don't know that I want to inject that type of capital into my business at this point. So what do I do? I look for an exit strategy. Look for somebody that has, you know, that that capital, and that's, you know, thinking about PE and some of the larger players they have that that financial backing to be able to make those investments in that new technology. And you know, whether it's calibration, whether it's EV I mean, cars will continue to evolve, and companies will have to continue to make, you know, investments in in technology at the service level, as well as technology at the consumer level, because we have to continue to evolve with the consumer and meet them where they are. And you know, I think back to my early days in automotive, when it was a fight to get the right page of the sports section to put our ad in, you know, and then then it evolves to radio and TV, and now it's like it's everything's digital. I mean, you you need to invest in technology. Customers want to be able to get a text on their phone that their car is done, pay their bill, you know, come in, pick up the card lead they want. You know, a hassle free, you know, experience, and it takes any investment in technology to do that. So there's

Harry 18:30
a lot to unpack there. Ray, I couldn't agree with everything you're saying. I'll tell you what I think is so very fascinating, not to put a tin foil hat on, not to get too out there. But to me, the way I view all of this, in terms of where it all goes in the end, is running your errands on your way home from the office. Nowadays, if you're even going to the office, you're making far less frequent stops than you were 10 years ago, I don't know, 20. So these sort of points of contact that you have are worth infinitely more with potential clients, and I think the tire and the repair centers are one of those ones that are going to last, and that's why we're seeing in the convenience store side of things, no longer is it the way to go in terms of separating it, having a dumpy convenience store and a good gas station, you're not getting away with that. You're not getting people to stop at every single stop, right? You need to bring more to the table in order to garnish that foot traffic. And I think that this is the trend that we're going to see here. And I think tire retailers as a whole, tire and repair are going to end up standing the test of time as being one of those epicenters of the automotive visit.

Ray 19:35
Yeah, yeah. And there's, there's, again, within that, there's probably two or more schools of thought. One could be like we talked about earlier. You've got a shop, you know, that specializes entire, entire related services, and that's where you invest extra money in the in the upgrades to technology, and that's where speed becomes a factor, because the. Today's consumer, you know, they're packing 25 hours worth of stuff into a 24 hour day. We all do it. So I need to get in. I need to get out. And you think about the business as a whole, and you think about folks that specialize in tire you think about the quick glue industry. You know, where it's quick oil change. You know, you're 10 minutes or less, much like a lot of the car washes. You know, you're in that three minute tunnel you're just shooting through. Maybe I'll use the free vacuum. Maybe I won't, but it's Hurry, hurry, hurry. But then, on the flip side, to your point, I don't want to go to three different places. I want to be able to go and I want to be able to get my oil change fast. I want to be able to get my tires done fast. I need breaks. You know, I know Harry. I trust Harry. I'm going to go down there to Harry's and get it taken care of. It's convenient. It's right on my way to the pick up the kids from school. It's right on the way to, you know, home from the office in the afternoon. So, you know, that relationship piece comes back, but, but I still want it to be done quickly. I want it to be done correctly. You know, we throw the word around trust in the industry. And you know, it's a, it's a, it sounds cliche when you say it, but, but the consumer really wants to be able to get their car fixed, get their car serviced, get their car maintained, and go on about their life and not have to worry about it. And know that the job was done right, know that they paired a fair price, know that it was a good value. You know, know that their cars in good working conditions, so they don't have to think about that anymore. And so there's a big piece that that we have to make sure, as we consolidate and get bigger, that as a company, it's about margin, it's about EBITDA, you know, it's about footprint, but we can't forget that customer experience and making sure that no matter how big we get, we never lose touch with the most important piece of that is making sure that customer gets that service that they're expecting, that they're needing, and not having to worry about it when they get in their car and drive out to go pick up Sally from soccer practice. I don't want to have to worry that, you know, my tire is loose, or you didn't put enough oil in my car. He didn't plug something back in. So, you know, we got to be careful with that too,

Harry 22:13
absolutely. And this isn't a trust in the way of people. You know, maybe what you would quintessentially think of trust, right? It's reliability. They need to know that when they come to you to have something done, you are going to be able to competently and quickly do it. And that trust doesn't come overnight, but it goes away overnight. Absolutely. Yeah, that's for sure, quick to lose. Yes, very much. So, so switching back towards the valuation side, let's, let's dig in a little bit here. Because, you know, Ray, I primarily spent the last seven years now on the car wash side, which I think seven years ago, if you said to anybody, I was going to spend seven years on the car wash that they would think that you're an absolute lunatic in general, which is fair. Now, it doesn't seem so crazy hindsight, but in that side of the business, to say that there was huge oscillations and valuations over the past decade, let alone five years, would be an understatement, and I'd be lying to say we're not seeing early to mid innings of a very similar trend on the valuation side In terms of what these groups are paying,

Ray 23:23
yeah, in automotive, the multiples have continued to accelerate, and they're much higher. You know, companies are paying a lot, a much larger multiple for a successful automotive service, entire facility than they would be for other you know, do it for you industries, HVAC, some other things. So, you know, Car Wash had big multiples. I mean, we're seeing multiples with some of these deals. You know, double digits. You know, 10 used to be a surprising multiple. Now we're seeing multiples of 1516, you know, 13, I think, is kind of that, you know that that average of where we're seeing these multiples on a lot of these bigger deals, and that's, that's huge. So zoom out, you know, on these big deals. Now zoom in to that independent shop who thought, you know, man, if I can just get enough to retire, that'd be great. Well, it might be 345, 10 times what they thought that business was worth, because that's what some of the multiples are paying. So you have to think, you know, look, you gotta, you've gotta make your business attractive for a larger consolidator to come after. So, you know, get your financials in order, make sure that things are buttoned up, make sure that everything's clean. You know, when you're an independent operator, there might be a little bit of looseness in there, because it's just you, it's you, it's your CPA, it's your attorney, but you got to get all that buttoned up. So if you have a big consolidator coming in. So you know, and they want to do some diligence and see if you know, why are you selling? What's your business worth? Let's look at the valuation. You know, the easier that that process is for them, the more likely you are to get some of these consolidators to be more anxious to dig down and do those 41 store acquisitions instead of 140 store acquisition. So that

Harry 25:20
I couldn't agree with, but I will. I'm going to play a little bit of a devil's advocate here, because I think there's a balance also in what you said, in that if there's one message I could get across to individual 2z, 3z, site owners, do not kill yourself to think that if you had your son in law on your payroll, that that is going to deduct value from your business. The buyers in today's market are sophisticated enough where if there's one number, that's the almighty it's units, and it's dollars of revenue, you can get credit back for some of the profitability that you may be benefiting from as a small business owner. That's why you did it in the first place, to be the beneficial benefits. So I couldn't agree more, in terms of the operations being clean, you certainly need the revenue reported. That's return, Sure, absolutely. But you're not going to get, you know, the hatch I brought down on you, for some reason, your personal, you know, a porch that you built last year shows up on your tax return. That'll be added, that'll be adjusted for, right, right? So there's some, there's some moving around there. I think, you know, Ray, one other thing on this heightened valuation range sort of discussion is, has enough changed in the industry over the last 10 years to warrant multiples going from four to five to 13?

Ray 26:41
I think a lot of what's driving that Harry is not just evolution in the industry, but I also think it's interest in the industry. And you know, the more folks that are interested, you know, if it was just you and I, we'd be competing against each other, and the price might nudge up a little bit. Then you bring in some other folks that have more equity to, you know, inject into these businesses. It creates a new layer of of multiple and then as some of the bigger regional players have gotten gobbled up, and there's less, I guess, for lack of a better term, let's call it less inventory. You know, that starts to drive the price up. Because, you know, I can't, well, this deal didn't work out. So we'll just go this good do this other deal with that other deal is not there anymore. Somebody else bought it already, so now you got to be coming in higher. So it's just driving the multiple. It's the whole supply and demand, right? So

Harry 27:33
it works until it doesn't correct. And I think we're a bit away from it not working on the tire side, oh, I can speak very openly and saying on the car wash side, the gig is up, and it has been for some time. We're seeing national scale bankruptcies. We're seeing leverage levels that are just unfathomable, absolutely conceivable as to somebody ever expecting that to work out for them. And a lot of it was overzealousness, but the vast majority of it was literally to your point, supply and demand. And I'll tell you, it's exponential, because when that opportunity that you came back to and now maybe you're willing to pay up for, wasn't there, and you have to go to the third all of a sudden you're not up one turn or two turns, you're up four turns. That exponentiality is very real thing, not to completely switch over here. But one thing that that's interesting to me, and I'd be very interested to get your take given your experience, right, is not every tire shop, tire and repair shop, is going to be applicable to this roll up strategy, our wash side of things, what we always sort of used as the litmus test is the site, certainly in all ways, shapes and forms, has to be at least capable of washing over 100,000 cars a year, and that's a factor of the physicality of the location, the site layout, the surrounding demographics, the competition profile. But if you're not going to hit that sort of minimum bar, chances are consolidators not going to be interested. So my question to you is, do you think that that sort of proverbial bar exists as pertaining to tire consolidators? And if so, what do you think the correct measure for such is? It

Ray 29:14
does, but the second half of that is a little bit of a challenge, because when we say tire shop. You know, we're we're lumping several different business models into one. And you know, a tire shop, Harry will do mechanical work, they'll do tire work, they'll do oil changes. But surprisingly enough, some of your tire shops are primarily mechanical work and very little in tires. So now there's your upside from a revenue standpoint. So if you're going to base your benchmark on straight revenue, you know your your revenue on service only may be a little bit lower, because you don't have that high ticket item of a four tire sale at 12. Or $1,500 pushing up that ticket average. But if you're heavy in tires and light and service, now you're going to have that high revenue, but your margin is going to be a little bit lower because you're not making the same percentage on tire and tire related services as you would on mechanical and labor. You know, depending on how whether you look at your labor loaded with mechanic pay or unloaded without, without Labor's 100% margin, right? So it's, it's hard to, it's hard to plug that in and say, well, it needs to be doing a million dollars in revenue. Okay, a million dollars in revenue and tire sales is a lot different than a million dollars in revenue and service. You know, what's the mix of business. I can tell you, mix of business is important. You know, the the world looks at at 5050, well, they're 50% mechanical, 50% tires. It's not always that way. So where, where do you gain that leverage? When you look at this particular repair facility, what is their current mix of business? Where is my opportunity? It's my opportunity in increasing mix. On one side of the business. Is my opportunity as a larger dealer with with leverage on purchasing. Do I have opportunities in margin where I may be able to infuse more margin with my better buying cost? You know, is my opportunity in labor. You know, how is the current owner paying versus what might be a more current and competitive pay structure that's more pay for performance. So there's a lot of pieces that go into it. But you know, you want to look at car counts, it's always good to see a steady increase of car count. That tells you that, you know, we're not losing traffic. It's always to see a good, steady increase in ticket average, not too heavy. You don't as long as the mix is the same. If your mix goes heavier tires, obviously your average ticket is going to climb a little bit quicker. But you want to make sure that we're adding additional services that we're doing all those add on ancillaries with tire sales that we're doing the add on ancillaries with mechanical service. So to say it's just hey, if it hits this criteria, this criteria and this criteria, it's a great business to buy tough to say, you know, the car wash may be a little bit the car wash may be a little bit less convoluted, because it's Hey, am I getting the basic wash? Am I getting the better wash, or am I getting the primo wash? But how many cars can I get through that tunnel in a day? How many cars can I get through the shop in a day? Well, if you're if your model is more heavy this way, you're going to have less cars, but if your model might be this way, you're going to have more cars. So you gotta, you gotta really look at the pieces of the business and where you gain the most leverage every acquisition I've been involved in, that's the first thing you look at is, what's their business mix? Now, what are their margins? Now, you know, how's their car count? How's their ticket average? You know, what opportunities do I have to expand services, to add additional you know, you might have a shop that specializes in European cars. Okay, can I, can I broaden what European cars I'm going to service? What about my customers that have a Mercedes, but they also have a Ford truck? Do I not service their Ford truck because I only service Mercedes? Get back to your earlier question. Maybe I need to open a second shop in the neighborhood that now I can do, you know, all types of makes and models over here to cater to all my customers, while I'm servicing just the European stuff over here in my specialty shop. You know, maybe I've got that tire only shop that has all the specialty, latest and greatest technology, and I'm focusing on tires over here, but now I've got a second shop in the area that does the mechanical service, and maybe I've got a quick loop around the corner. In case you want a 10 minute oil change, I can take care of you too. So, yeah, hope that answers your question. Oh, it

Harry 33:52
answers the question, although I'd be lying to say it doesn't create a couple more. Sure it does. So, so here's something I've been curious about. Do you think that there's a different ideal mix for two different consolidator groups in the arena, so 100% and why? What's driving that? Why would one group want to see more service than tire versus vice versa? A

Ray 34:14
lot of times it's it's in their mind who they are. So they look for businesses that are who they are, or they look for businesses that can transition to who they are, you know, like, like, if I'm a, if I'm a tire only, like tire discounters, if I'm going out, you know, Now, granted, tire discount dire discounters does mechanical repairs and things as well in their locations. But you know, if I'm a consumer, I'm going to them, because I think they sell tires. Yeah, so am I going to look for a business that's 95% service? And, you know, 5% tires by default, not by desire, but by necessity. You know, they the facility doesn't have any place to stock tires, so everything's going to have to be delivered in. You know, they've got five days and, you know, there's really not a lot of room to put tire, you know, is that facility going to be conducive? Is that current business model going to be conducive to me when I want to make, you know, a larger portion of my business tires, or vice versa,

Harry 35:16
where did the, where does the the behemoth of like, a Mavis, or like, as a son, like, what are some groups that are quintessentially considered more, one versus the other?

Ray 35:27
Yeah, when you, when you get into Mavis, when you get into some of those large, consolidated you've got Mavis, you've got sun, you've got less Schwab. You know, there's a big piece of the tire business there. But surprisingly enough, when you look and this is probably migrated a bit more recently, but you know, back a decade or so ago, you have a company like Goodyear. And so you think Goodyear like they're a tire shop. That's all they do is tires. But Goodyear was a heavier percentage of service over tires, really, yeah, absolutely. And you know, over time that that will will tend to evolve. But you know, it it's not just the name that makes the business. It's what consumers, you know, go to them for. So, you know, back in my day, when I worked for a good year retailer, you know, sure, we sold plenty of tires, don't get me wrong, but there was more cars there for brakes and mechanical work and things like that than there was for tires. And the reason for that is everything has a frequency, oil changes and things like that being the most frequent. Then you start to get into the next realm of things. You know, how long are tires going to last? They're designed to last longer and longer. Now that's the selling point. Like, hey, it's not a 40,000 mile tire, it's an 80,000 mile tire. Maybe they will, maybe they won't, but everything has a frequency. But back to that whole trust thing, back to that whole convenience thing, it's like, you know, I don't want to go all these different places or to all these different brands to get work done, you know. But so when I'm when I need breaks, I'm going to go to the same place and put my tires on. Now, back to what I was saying before, where you might have a tire only shop, and then may I have a quick blue, brown accord, and then a mechanical place. Again, you've got that trust element. But a lot of these retailers that that talk about tires do a lot of mechanical work as well, and there's margin in it, and, you know, there's additional revenue in it. So why wouldn't you?

Harry 37:31
Yeah, and I, I think that this, this exact aspect as pertaining to brick and mortar, real Realty as a whole, is an interesting topic. Because, funny enough, I was looking at a company the other day that has done a phenomenal job with combining dry cleaners with drive through coffee. The idea being the client's touch is that very important that we need to find other ways to bolt stuff on here, because they don't want to stop at places you do both ones that throwing you your dry cleaning while they're, you know, shoving a coffee at your face so and it's working.

Ray 38:04
But on the Think about, think about that on the car wash side too. You know, you've got, you've got crossover between car wash and car service. You know, I've seen quick lubes and car washes teamed up. You know, you get your car wash and you get your oil change, or get your oil change if you get your car washed. And often when you get one service, there's a discounted on the other service. So it's like, bang, bang, I'll just get them, but it's done while I'm here. So here's

Harry 38:27
what's interesting with the car wash. What we've seen over the last seven years, during this last sort of boon from institutional investors, is the actual delineation and specification of not even being full service. If you want to vacuum your own car, you have to vacuum it, and the segregation of that of the oil changes from the car wash, and I think it, you know, I think it's safe to say, beyond just anecdotally, that a lot of that is due to the fact that when you do combine multiple business units together in revenue streams, it's so very easy to kind of neglect one and focus on the other. The key is that doesn't work in anything. You have to care about both. And it sounds like the tire and the service side has enough overlap where you can truthfully nurture and properly maintain both Unknown Speaker 39:13 aspects.

Ray 39:14
Yeah. And you'll see too, that a lot of these chains that we're talking about these consolidators, these national brands. While they will do mechanical repair, they will do tires. They try to avoid the more technical time, like, I don't want to replace transmissions. I don't want to replace engines. There are plenty a lot of these independents will still do that type of work, because it's inherent to you know, they've been in business in their local area forever. And you know, the Jones family has been bringing all their cars to them for everything. So if the motor went up, they would replace the motor. But a lot of your bigger chains don't do that. It's a slower Bay turn, you know, more technical. You know, you talk about full service car wash versus. Express tunnel. You know, what's one of the major savings from going to full service to express it's labor, right? So you don't have to have, you know, in the auto service industry, you don't have to have all brain surgeons working at your shop. You know, you know, you don't need brain surgeons doing stitches. So you condense down some of the services you offer, and it gives you a better ability to staff someone who can do multiple services under that umbrella, versus, you know, higher technical labor. Now that being said, you know, there's still a huge demand and a bigger shortage. Always has been a shortage in the 40 plus years I've been doing this of great technicians that you know can can do technical work. And I think we went through a period of time in our in our history, over the last four decades, where, you know, vocational trade kind of fell off, and it was more about making sure I had that degree. And I'm not saying one's better than the other. But without that, without that trade, that focus on trade, you know, it's limited, not just automotive. It's eliminated, you know, H back. It's probably had an impact on the car wash industry. It's had impact on manufacturing. It's had a lot of impacts on the ability to find good, qualified help. So

Harry 41:20
I'll tell you what Ray I read one of the I don't know if you caught this. I don't know why you would chewy that the patent company laid off 80% of their employees by and large due to automation. It's,

Ray 41:32
it's, I was going to say it's not because of us, because we have four dogs and there's a chewy box on our porch every other week. But now that you say automation, that makes a lot of sense, but you can't automate repairing a car. You could try. There's people that talked about an oil change machine that would do it, but, I mean, we're probably way, way, way long away from that, you know, not like, it's not like an automated bartender. So no, that's the funniest

Harry 41:57
thing. So Ray, you know, and for the audience listening, my background. I came from engineering. I was not a finance major, despite us being an investment bank, and I specifically focused on linear and non linear programming and algorithms. And I'll tell you this right now, not everything should be automated. There are some things that the juice is not worth the squeeze. And I think one of the most quintessential examples is that of financial statement analysis, the SEC regulates the way in which you file them, and still, to this day, despite the amount of money to be made in financial analysis between hedge funds, private equity investors retail anything you want, we still have not figured out a way to homogenize and compare financials in a reliable manner. Leave it alone. Let's, let's leave that not automated car repair, tire replacement. I think we're okay having a person there. But that's funny, because the other industries here that didn't require vocational training, training, and maybe we're more, you know, tailored towards that of the technological and software development background. We're seeing layoffs Unknown Speaker 43:01 so well,

Ray 43:02
I can tell you there, there will never be enough technicians for the auto repair, and many do it for you. Industries will never be enough technicians. So, you know, getting into a trade is not a bad idea. You know, for folks to talk about early on, that's the decision I made when I was in the eighth grade that I asked parents, you know, they're all educators. Terry, I told you this before, teachers principals, they've all been in the school system, and I'm the one that came to him one day and said, Hey, I think I want to go to a vocational high school and be a, be an automotive technician. And they were supportive, and I applied, and I was accepted. And, you know, I went to high school for auto mechanics. And I was, I was working at a shop, you know, for my junior and senior, senior year. That's, that's how I got my grade. So, you know, there's, there's a lot of value to that. And I think that the last 40 years have worked out okay. So I've been in a great industry that that is recession resistant, but needs a lot of, needs a lot of good talent. And, you know, to to our earlier conversation about the advances and the evolution of technology, it's going to need funding, and it's, you know, it's going to need equity ingested. It's, it's, it's a necessary evil or necessary benefit, whichever, whichever side of that fence you're on, either way, you know, that's the direction we're going. So

Harry 44:19
yeah, and it may be one for some amount of time, and then switch to the other. So I think Ray, we've covered a ton, and before giving final thoughts here, and anything we want to leave the listeners or viewers with touching or, you know, piggybacking on your last comment, the penultimate automation is autonomous driving. Where? Where Where does that all play in here on the tire and the repair side of things?

Ray 44:45
So it creates a new dimension, because now we talk about technology, now there's going to be new technology to learn, and that's the other thing too, Harry, is it's one thing to invest in the technology and the equipment to be able to service these vehicles. So it's another thing to invest in the technology and knowledge to teach your folks how to use that equipment and how to service these vehicles. And it's an ever changing like, you know, you always hear all the cliches, you know, I never paid that much for this, or I never had to do that before. Well, yeah, you didn't have to do that before, because cars didn't do that before. Now they do. So we have to have, you know, higher skill. We have to have more training, and it's ongoing. There has to be continuous learning in this industry and continuous investment in this industry. So whether it's autonomous driving, look, do cars that that have the autonomous driving capability? They have tires on them. Unknown Speaker 45:43 Last time I checked, I think that, yeah, so you

Ray 45:45
still got that. They still have mechanical parts. There's still a piece of machinery, and machinery is going to need things maintained on it, where things are going to break on it, and that's where we come in. So again, it's just the investment in technology, the investment in the training and the knowledge to continue to evolve with the industry as it continues to evolve, and with the consumer too, because we have to educate the consumer why it costs this much now, and you have to do this service that you've never heard of before and didn't have to pay that much for on your last car because your last car didn't have that technology now it does. So you have to be able to explain that to consumer in a way that they understand that you're not just raising your ticket average. So

Harry 46:27
yeah, that doesn't work out too well, and that is definitely more true than ever. I, you know very friendly issued the dare for anybody who's renting a car out there to push your rental car from Hertz, from you're going to have all these features that you didn't know cost money to maintain, and it's not small dollar amounts anymore, right? Yeah. So, yeah. We get that feedback a lot. We hear about this a lot. What is

Ray 46:54
cool? I mean, people like it. People like all the cool features. It's amazing. It would be great not to have to touch the steering wheel, you know, but, but with that, you're right, come to cost. So

Harry 47:05
I am the guy who will take a rental car, which, goodness knows if they're calibrated correctly, put it on auto cruise control and the lane, I don't care, Kia, whatever, 80 miles an hour, and start writing emails. Is that the right way to do it? I probably don't dare anybody to do that, but it does work. It's pretty remarkable. We're talking about a do off the lock here from some hertz dealers or rental car center. So Ray, with all of this that we've talked about, I think you know from our side of the business, what I would say is, if you're thinking of divesting or selling your business, it is not as difficult of a conversation to have as people often think. To your earlier point, there's a very good chance that your tire shops are worth more than you may know. And I don't see for all intents and purposes, valuations or values going all that much more higher than they are today, especially for 123, shop owners. Eventually, on the larger scale, there will be some sort of retraction and correction here, because this is not absolutely

Ray 48:10
it'll have to be. You're right. It's not sustainable, and you're going to lose that leverage. And the last thing that we want is what we've seen in other industries. It became, over overly expensive, and, you know, the valuation doesn't hold. And you know, we, we've talked about companies that haven't met their covenants. And, I mean, it's a, it's a, it's a, it's a big hill to climb to get there, but, man, it is a very sheer cliff to fall off of, if you're not careful on the other side, so and liquidity

Harry 48:42
is not always there. That's one thing I can promise you, the car wash side of the world has seen.

Ray 48:49
And I think, I think that a lot of folks not a lot, but there are folks that look at the the the acquisition as another unit in their collection, and don't dig deep enough to find out what makes that place tick. And I can tell you, in previous lives, we've walked away from from some deals of some very great operating businesses, super productive, high revenue, strong bottom line, and the reason was Harry, because we didn't think we could emulate what that specific owner was doing. And if we couldn't emulate that, we were going to take a 20, 25% haircut right out of the gate, and it just it's, let's not, let's not break let's let's be self aware to say we can't operate it like that. Let's not buy it, or we're going to break it, and it's not going to give us the return. It's not so there's will be some of that hardest Unknown Speaker 49:48 conversation to have. You've run your business too well,

Ray 49:50
yeah, yeah. We can't. We can't do it. So you're going to have to keep it.

Harry 49:57
That's how life rewards you. They P. Penalizes you for doing an exceptional, extraordinary and irreplicable job.

Ray 50:05
Yeah, yeah. Now there are people out there. Maybe you have another independent owner that's looking to get two or three, you know, four or five shops in the area. Maybe that's a better appeal. But gotta be careful with that stuff. Now, if you have 1000 locations, or 1500 locations, and you break one, probably not detrimental, but you don't want to do that too often, because, like we said, then you lose that leverage, and it doesn't take, it doesn't take long for the question mark on. Maybe we need to reevaluate our M and A strategy, because the last several deals we did aren't producing the results that we thought they were going to produce. So then, then you hit that stall internally in M A and somebody else is going to come along and grab it. So

Harry 50:50
yeah, and I would go one step further right as a last note on my end here, which is that that sort of appetite for the best of the best operators actually incrementally shrinks the further into this consolidation cycle we go. Because as the consolidators get bigger, they become less willing to take on that risk. But the smaller, more nimble ones are willing to say, hey, we might lose 10% of what you're doing when there are 200 stores, they're saying, Hey, we're going to lose 25 30% right? So this is going to be a wonderfully interesting time to watch. Ray anything else you want to leave the viewers and listeners with here? No,

Ray 51:34
it's just, I appreciate the opportunity. I love talking shop. You know that could have these conversations all day long when it comes to the tire industry, but big opportunity out there still. And it's just, it's a it's a great, great industry to be in that it's often, as I said earlier, recession resilient Folks are always going to need their cars. And it's just, it'll to your point, it'll be exciting to see you know how this all continues to to progress with PE and with, you know, larger brand companies and some companies spinning off retail stores and focusing on other facets of the business. And, you know, I feel like somewhere along the line, we haven't seen them yet, but someone, there's going to be some new players beginning to emerge that think about these independents, and maybe, maybe someone who has 10 or 12 stores is willing to take on another 10 or 12 stores to make it 20 or 30 stores. And we're going to have some new regional players start to sneak up out of all this. So it'll be exciting to watch it.

Harry 52:36
I cannot wait, right? So for all of our listeners and viewers, thank you so much for joining tuning in this week, and stay tuned for many more to come and Ray thank you so much again.

‍

Ray

Thanks for having me. Thank you.