Canadian Tire: Fixing a flat

On a wintry Saturday morning in the Ottawa Valley, the first vehicle rolls into the Canadian Tire parking lot around 7:30. Half an hour later, nearly a dozen vehicles — pickup trucks, minivans and Honda Civics — sit idling, their drivers’ hands wrapped around double-doubles from the nearby Tim Hortons.

When the doors open at eight, those who haven’t already lined up outside leave their cars and stream into the big-box store. Do-it-yourselfers wander the aisles, while others, clutching flyers, scoop up bread makers, wrench sets and whatever other deeply discounted items have been advertised this week before stock runs out. By 8:30, the store is bustling.

But pause on the way out the door and survey the landscape. Next door to Tire stands an enormous Walmart. Just beyond that is a new Home Depot. Down the road, a Rona is open for business, and in the nearby mall, a Sport Chek welcomes shoppers.

That parking lot would have been busier two decades ago when Canadian Tire practically owned places like Pembroke, the kind of small town where, Tiremen liked to say, a mayor couldn’t get elected unless his local dealer was behind him. But in the years since, the glut of retailers hanging out shingles around this city of 14,000 shows just how much the marketplace has changed — and how for Canadian Tire, a national institution and once an indomitable money-making machine, not a single consumer dollar can be taken for granted any longer. Its critics charge — and its executives admit — that for too long the company has rested on its laurels, retail sales flat, an indifferent approach to customer service sending shoppers elsewhere. Now, with another wave of American retailers expanding north of the border, Tire is going back to basics, trying to re-establish its automotive business in an attempt to defend its turf. But after two years of new leadership, organizational overhaul and attempts to repair a sometimes fraught relationship with its powerful dealer network, will it be enough?

For a mature Canadian retailer, the fourth-quarter earnings Tire unveiled in February weren’t bad, exactly, but neither were they remarkable. Last year saw a 3.1% increase in consolidated retail sales across the company, to $10.3 billion, and a slight 0.8% uptick in same-store sales. The stock, which touched $130 a share five years ago, has for the past two chugged along between $60 and $75.

For years, the Canadian Tire stores at the heart of the business haven’t performed the way they once did. The company’s recent growth has largely been driven by its financial services division, founded in 2003 (boasting that one in five Canadians now carries a Tire MasterCard), and the clothing vendor Mark’s Work Wearhouse, which Tire acquired in 2001. Though some retail categories like kitchenware, hockey and fitness equipment have done well, overall performance has been disappointing — particularly in automotive, once the company’s biggest strength. And while a poor economy has been responsible for some of that sag, observers see plenty of cause for concern in the company’s inner workings.

“Ultimately, sales growth is what’s going to need to drive this story,” says Mackie Research Capital analyst Robert Cavallo. While Cavallo admires the work Tire’s done improving its margins via offshore sourcing and squeezing vendors, “things like sales-per-square-foot for the longest time were declining. Now we’re getting to a point where it seems like they’re stabilizing, much lower than where they would have been in 2005 and even 2007. The economic backdrop hasn’t been favourable, but I think there’s a deeper-rooted issue. … I struggle to see some of the longer-term growth opportunities in a market that’s only getting more competitive.”

As their rivals have carved out market share, Tire’s responses — new and bigger store designs, more efficient back-end business processes — have fended them off to a point; but with competition escalating, some worry about the company’s traditional lack of agility.

“Canadian Tire is not known for being a quick mover,” says another analyst covering the company. “It’s basically a big family-run business. One of the things that develops because of that culture is a relatively slow decision-making process. Anything that needs to get done has to get signed off on by the dealers, not just corporate, so that lends a certain inefficiency to everything. I think Stephen Wetmore’s trying to change that. And I think he’s having mixed success.”

Wetmore moved into Tire’s C-suite in January of 2009, in the midst of the economic downturn. Hired from telecom provider Bell Alliant, he had also been an executive in health care and transportation, and had served on Tire’s board since 2003. While he had never worked retail, his reputation was as an effective communicator with a talent for organizational streamlining. Said former BCE CEO Michael Sabia, “He’s a master at being able to find his way through some pretty complex problems where there are a lot of differing and competing interests.”

Complexity and competing interests have been hallmarks of Tire almost since its beginning. Founded in 1922 by brothers J. W. and A. J. Billes, the ’30s saw the company expand beyond the city. Capital-poor and coming off a bad experience with satellite stores run by managers, they created the dealer-associate model when the first Tire store outside Toronto opened in 1934 — a model the company follows to this day. Instead of paying a franchise fee, dealers own their own stores and their own inventory, bought from the company. The Billes brothers believed an entrepreneurial owner with skin in the game would work harder to succeed.

As the chain expanded across Ontario and then the country, Tire’s dealer-associate model and a profit-sharing plan that A.J. pioneered had the company minting small-town millionaires. The dealers’ ownership, and that they collectively hold a big chunk of the company’s voting-class shares, however, has made them a powerful bloc within the company — one that hasn’t always seen level with head office. While they’re as motivated to maximize sales as the suits in Tire’s uptown Toronto headquarters, they haven’t always agreed on how it should be done. In the past, relations have been aggravated by power struggles and disagreements over revenue division between dealers and the corporation. Says one veteran Tireman, “There’s always going to be differences. They’re trying to squeeze as much out of the lemon as they can get on their half of the plate, and we’re trying do the same on ours.”

Getting both sides to collaborate hasn’t always been easy. It’s one thing for head office and the dealers to agree that they need to update the museum-piece computer systems still employed in Tire’s service bays; it’s quite another to get everybody to agree on what’s needed out of a new system. After all, if the dealers don’t buy into a plan, they literally don’t buy into the plan — they’re the ones who will actually have to agree to the purchase.

Last fall, Tire announced an organizational streamlining, expected since the day Wetmore took the job. Senior management was shuffled, the company — which had been structured as five interrelated businesses — was unified. More employees would have performance-pegged compensation.

In announcing the changes, Wetmore reiterated his comments from the quarter previous. “We have to improve our performance,” he declared again. Customer service wasn’t good enough; automotive was particularly underperforming; it had to change.

The Street responded skeptically, both because Wetmore had played this song before, and because some trusted longtime Tiremen were moving on. And while Wetmore was making optimistic noises, there was still no real evidence of a plan in place to correct Tire’s list.

But half a year later, the broad strokes of Canadian Tire’s strategy are coming visible. The compa
ny has set ambitious retail sales growth targets of 3%-5%, and they’re counting on huge improvements in automotive to help get them there. Back-end processes are part of that — quicker delivery of auto parts, for example; but much will depend on improving the in-store experience.

To that end, new shop-management computer systems will replace the antiques still serving as the dealerships’ backbones. The company has assembled a team of auto-industry specialists who are now in the field, working with dealers and managers. An automotive catalogue will launch this spring, with 1.8 million copies mailed to Tire customers and another 600,000 distributed through dealerships. (By comparison, the company’s flyer has a print run of just 400,000.) After an abortive effort at e-commerce a decade ago, the company will re-enter the space this year, using online tire sales as a beachhead. The company’s loyalty program — for decades centred on the distribution of Canadian Tire “Money” — will expand, incorporating a points-based system that will allow Tire to better track its customers habits.

All are elements of the applied focus on service that Wetmore has talked about. But the most crucial players in improving the in-store experience that’s inspired aggravated patrons to create a “Canadian Tire Sucks” webpage will be the dealers themselves.

“Who doesn’t love the sweet smell of rubber?” asks a presenter on the stage of the Metro Toronto Convention Centre’s theatre. An audience of 1,200 dealers, managers and executives chuckles as she gestures to a sample tire display, explaining company research showing that better in-store displays of the company’s namesake have led to 52% sales increases. It’s the last week of March, and the annual Canadian Tire dealers’ convention is hosting its first Automotive University, designed to help give dealers and their managers the support they need to address the customer-service issue. Via U.K.-based firm Dunnhumby, Tire has been gathering some 50,000 customer satisfaction surveys per month, and the results haven’t been pretty. Across the entire chain, tire buyers consistently return the lowest satisfaction ratings.

For two days, Auto U’s sessions have covered all facets of automotive, from demos of the new computer systems to a seminar on selling pressure washers. Between presentations, video clips play of customers talking about a range of ways in which they think their store’s service could be improved. Tires are the product on which the company literally built its name, and, as the presenter says, “If we can fix tires, it’s the first step in fixing automotive.”

As the session progresses, the dealers are reminded when and how to engage their customers, how to explain the often-complicated tire invoices, how important it is to make the customer comfortable with an intimidating process. In some ways, it’s a refresher course in basic sales mechanics, but the audience is switched on. At day’s end, when dealers association president Kevin Estey takes the stage to thank the company for Auto U, and to declare that his members can’t wait to apply the lessons, he seems genuinely to mean it.

Without a sympatico relationship with Dealerland, Tire would not now be able to move forward with the strategies Wetmore and his executive team have articulated. The renovation of those relations may be their most important accomplishment so far.

“Because we’re the franchisees, they’re the ones that have had to make the first step in the relationship change,” says Paul Lamont, Tire’s longtime dealer in North Bay, Ont. Involved with the dealer’s association since 1995, he can’t recall a time when the sometimes adversarial relationship was better. Glenn Butt, corporate’s point person for dealer relationships and a former dealer himself, is widely liked and respected. There’s a new culture of openness at head office that for the first time sees dealers included in strategic planning meetings at the corporate level; and negotiations are already underway on a new dealer contract, three years in advance of the current agreement’s expiry. Both sides are eager for a new, simpler pact placing fewer restrictions on both sides — a sign of a growing mutual trust. Even corporate’s desire for better leverage with which to address underperforming dealers meets little resistance in principle. Says Lamont, “We are now starting to focus not on the inner, but on the outer.”

On the convention’s third day, Wetmore stands under the lights at the convention centre and, halfway through his address to an audience featuring almost every dealer in the company, starts channelling Winston Churchill. “There have been times throughout history — and our history — where the enemy has swept across the land,” the CEO says. “Our competitors would put us out of business in a heartbeat if they could. They would take our customers, take our stores and your staff, take away our brand.” Delivered wrong, to a crowd that isn’t ready to buy into it, it’s the kind of speech that could stiff. But this crowd is ready.

“Throughout history, the enemy has been stopped when a group of people — allies — trusting in each other, standing shoulder to shoulder, stare the enemy in the eye. Draw a line in the sand,” Wetmore says. “And declare with confidence and resolve: this line, you shall not cross.”

He gives an impassioned defence of what he calls Canadian Tire’s “heritage businesses”: sports, hardware, seasonal and, especially, automotive. He begins each section by naming Tire’s competitors in that category — Wal-mart, Home Depot, Target and Dick’s Sporting Goods, an American “category-killer” rumoured to be eyeing the Canadian market — and warns of the battle ahead. And for each category, he reminds the crowd why Tire will win, announcing each time, “That line, they will not cross.” He concludes, vowing that the company will take the fight to its challengers, instead of just hanging on. “As of right now, the playbook changes. We’re on offence.”

If the speech reinforced the new spirit of unity at Tire, it’s worth recalling that the Spartans drew a line in the sand at Thermopylae, and the Texians at the Alamo, and look where it got them. If Tire’s executives and dealers marched out of their convention last week in lockstep as never before, both the Street and Canadian shoppers are entitled to be skeptical until the company proves it can execute. As one analyst puts it, “They’ve unveiled a really great-looking new automotive concept, but it’s going into test at the end of 2011. Assuming everything goes well, they’re not going to roll it out until the end of 2012. That’s a long time. I don’t think investors necessarily have that kind of patience.” Neither will Tire’s competitors — or its patrons. It’s a good thing head office and its dealers are finally on the same side of the line; with a battle ahead for every dollar, they may prove to be each other’s only friends.

From Canadian Business magazine.

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