Potholes to profits -- Sales of tire/wheel plans balloon
Bill Cariss of Holman Automotive Group has had his share of tire blowouts and bent wheel rims living in New Jersey.
"I've bent three rims by hitting monster potholes," says Cariss, vice president of dealership operations for Holman Automotive in Maple Shade, N.J. "It's very expensive. Rims can cost upwards of $500" each.
Cariss and his finance and insurance team can cite personal experience when pitching to consumers. Poor road conditions are resulting in pricey tire and wheel repairs. That, he argues, makes tire-and-wheel protection a worthwhile investment for car buyers.
Sales of tire-and-wheel protection policies are ballooning. Ray Ciccolo, president of Village Automotive Group in Boston, says sales of the products at his group's 10 stores have risen 40 percent in the last four years. Some other dealers report sales have doubled in five years.
In an unscientific online survey by Automotive News, half of the 158 respondents said their sales were up compared with five years ago, while 30 percent said their sales were unchanged or down. Another 20 percent said they don't sell tire-and-wheel plans.
Behind the booming sales are two trends. First, government funding for many road repairs is down. Across the United States, combined spending by states and the federal government on highways and bridges is expected to shrink 6 percent to $72.6 billion this year compared with 2011, the American Road & Transportation Builders Association predicts. That will mark the third straight year of declining spending on roads, reflecting tight state budgets.
Second, replacing tires and wheels, especially on high-end performance vehicles, is getting more expensive. Many customers see tire-and-wheel protection as a great value.
"Of all the products we sell, it's something our customers can really get their arms around," says Mike Conn, business manager at Dryer & Reinbold Inc. in Greenwood, Ind., which sells Subaru, Volkswagen, BMW and Infiniti vehicles. "They've all hit potholes. They've all had blowouts and flats. They'll talk themselves into it."
Ciccolo: Wheel, tire claims are up 25 percent.
Replace, not repair
Most customers buy five-year tire-and-wheel protection policies, Conn says.
Tire-and-wheel protection generally covers the repair or replacement of tires or wheel rims damaged by metal, nails, glass debris and potholes for the duration of the policy. It includes mounting, balancing and labor, Conn says.
In part because of the recent popularity of such policies, the number of claims has risen, Conn says. In turn, so has the price of a protection policy.
"What we pay for a five-year policy on wheel-and-tire coverage has gone up from $290 five years ago to up to $700," Conn says. "It keeps getting re-evaluated because the cost of replacements and repairs keeps going up." The dealership group has raised the prices it charges consumers accordingly.
Customers can expect some tire-and-wheel protection to start at around $500 for a five-year program on brands such as Volkswagen and Subaru, Conn says. For brands such as Infiniti, it can start at $800; while for BMW it starts at $1,000 or higher, he says.
The dealer's margins are large. Conn says that if the dealership pays $400 for a policy, it will sell that policy to a consumer for about $800.
Conn says those costs are continually rising based on loss ratios. Indeed, he expected the price he pays for tire-and-wheel protection to jump $300 for BMW vehicles and about $100 to $150 for other brands this month. He said he planned to hike prices for consumers accordingly.
A dealership usually replaces rather than repairs the tire or wheel. Ciccolo of Village Automotive Group says that costs significantly more. "But customers don't want a repaired tire, where we put a simple plug in it," he says.
His group's 10 stores (Volvo, Saab, Honda, Hyundai, Cadillac, Nissan, Porsche and Audi) sell about 7,600 new and used vehicles a year.
Ciccolo says claims on tire-and-wheel protection are up at least 25 percent from four years ago at his stores. His sales of these products have risen 40 percent in that time frame.
Village Automotive Group raised the price it charges for tire-and-wheel protection about six months ago. It used to charge $295 but now charges $600. Ciccolo says he pays about $400 for the product.
Cool but costly
Cariss says Holman, which sells 23,000 new and used vehicles a year, started pushing tire-and-wheel protection aggressively about five years ago. Holman's 16 dealerships sell such high-end brands as Audi, Bentley, BMW, Cadillac, Lincoln, Infiniti, Rolls-Royce and Volvo.
Year-over-year sales of the product are flat, but the dealership's premiums are up about 15 percent from a year earlier, Cariss says. Since 2008, the dealership's premiums have increased approximately 60 percent as loss ratios have risen, he says.
The dealership has passed along most of that to customers -- but not all, which has resulted in lower gross margins.
Holman aggressively pitches the protection, especially to BMW buyers who buy or lease vehicles with BMW's run-flat tires. A run-flat tire allows a driver to drive on a deflated tire at reduced speeds for limited distances.
"It's cool technology, but it's very expensive," Cariss says.
To replace a run-flat tire costs $300 to $800, and the rims are about $500 or more, Cariss says.
In some cases the price to replace one rim and one tire on a BMW can total $1,500 or more, making a tire-and-wheel protection policy that costs $1,000 or so a good deal, Cariss and Conn say.
Most of Holman's customers match the policy to the lease length, Cariss says, which is typically 36 months. For example, a BMW 3 series with a 36-month term would cost $1,050 for matching tire-and-wheel protection, he says.
"It's become more of a needed product because people have experience with not having the insurance," Cariss says. "They come in and see this isn't the day of $70 or $80 tires anymore."
Ciccolo says the problem isn't just bad roads and pricey tires. Many manufacturers are using low-profile tires, which are attractive but not necessarily durable.
Peace of mind
For domestic brands such as Ford, a five-year policy is $295 at Village Ford in Dearborn, Mich., says President Jim Seavitt.
Seavitt sells it by reminding customers of Michigan's broken-down roads as well as the cost to replace tires and wheels, which he has seen total $1,000.
Seavitt sells about 2,550 new and 650 used vehicles a year. Half of his business is leasing new vehicles. Of those who lease, about 70 to 80 percent buy tire-and-wheel protection. He says the protection has become "one of the easier things to sell" in the F&I office.
"I can't tell you the number of phone calls from people who say, 'I didn't hit anything, and my tire blew,'" Seavitt says.
"They bring it in, and we see a chunk out of a tire and they didn't even realize they hit anything. It's the roads."
You can reach Jamie LaReau at email@example.com. -- Follow Jamie on