Arifur Rahman Case Problem: Goodyear Tires and Robber Company Professor: Arnold Pollack July 28, 2009 A. How would you characterize the competitive environment in the tire industry in 1991? The tire industry divides into two, broad segments: original equipment (OE) tires and replacement tires. The OE segment accounts for 20-25 percent of tires sold annually; unit sales are trending downward. The replacement tire segment accounts for 70-75 percent of tires sold each year; the unit sales trend is “flat”. Passenger car tires account for 75 percent of annual sales.
Although 10 tire manufacturers account for 75 percent of worldwide production, three firms account for 60 percent of all tire sales sold. They are in order: Groupe Michelin, Goodyear, and Bridgestone. These firms compete in both the OE and replacement tire segments. Although Goodyear is second to Michelin in worldwide production, it is the perennial U. S. market leader in both the OE and replacement segments. Even though the OE segment is smaller, it is viewed as strategically important by tire manufacturers for two reasons.
First, prominence in the OE segment provides volume related scale economics in the production of tires. Second, it is believed that car/truck owners satisfied with their OE tires on new vehicles will buy the same brand when they replace their worn tires. However, the case also states that passenger replacement tire buyers are becoming more price sensitive and less likely to simply replace their branded OE tire with the same brand of replacement tire. Overall competition is intense in both the passenger OE and replacement tire segments.
The nature and scope of competition differs, however. Competition in the OE segment revolves around the major vehicle manufacturers and supplying some or all of the tire needs for their new model year cars and trucks. OE tires are essentially “produced to order” and may be viewed as a “commodity” by vehicle manufacturers. Competition in the replacement tire segment occurs across the marketing mix. Major tire manufacturers compete on the basis of “retail points of sale,” product variety and innovation, price and promotion (advertising, retail promotions, and event sponsorship).
B. What is Goodyear’s relative competitive position within the tire industry? Goodyear is the second largest tire manufacturer in the world, behind Michelin which manufacturers and markets the Michelin and Uniroyal/Goodrich brands. The Goodyear brand is the single largest brand, in terms of sales to the OE tire segment. Its share of this segment is 38 percent. It is noteworthy; however, that Michelin with its Michelin and Uniroyal/Goodrich brands combined capture 30 percent of the OE tire segment. Goodyear brand tires capture the largest portion of sales in the U.
S. replacement tire market: 15 percent of passenger car tires, 11 percent of light truck tires, and 23 percent of highway truck tires. Company wide share increases in each category when sales of its Kelly-Springfield brand is included One might also note that Goodyear’s relative competitive position is due, in part, to the following: The broadest line of tire products of any tire manufacturer: product line width and depth. The largest number of “points of sale” for any branded tire with controlled distribution; that is, company owned and franchised dealers.
Price Performance Positioning: Premium pricing supported by product innovation and umbrella brand advertising that emphasizes, “The best tires in the world have Goodyear written all over them. ” Nevertheless, there is evidence that Goodyear has encountered some problems which can be categorized as follows: • Flat or downward trend in OE tire volume. Goodyear has likely felt the effect of plateaued unit volume in the OE segment (see case Exhibit 3). Unit volume growth is possible through market share gains; however, market share is increasingly “purchased” through lower prices to vehicle manufacturers.
Lower prices serve to squeeze already slim profit margins in the OE segment as indicated in the case text. • Changing retail distribution. Exhibit 1 in the case shows that tire company stores share of replacement tire sales declined somewhat from 10 percent in 1982 to an estimated 9 percent in 1992. The market share for replacement tire sales captured by retailers not serviced by Goodyear (discount multi-brand independent deals, chain/department stores, and warehouse clubs) has grown from 17 percent in 1982 to 35 percent in 1992.
Given Goodyear’s primary distribution through company owned Goodyear Auto Service Centers and company franchised Goodyear Tire Dealers, which represent tire company stores, the company is effectively “closed out” of retail outlets that are capturing a larger percentage of the replacement tire segment. • Decline in replacement tire market share in the U. S. Goodyear recorded a 3. 2 percent decline in the U. S. passenger car replacement tire market between 1987 and 1991. This decline represented a loss of about 4. 9 million units according to a company spokesperson.
Moreover, the case notes that the replacement tire market, which accounts for some 60 percent of Goodyear worldwide sales, is more profitable than the OE market. C. Does it make strategic sense for Goodyear to broaden its distribution beyond company owned and franchised Goodyear tire retailers as a matter of channel policy? Why? As indicated earlier, the changing retail environment would strongly suggest that non-company owned or franchised tire company stores are capturing a larger percentage of replacement tire volume (see case Exhibit 1). The principal retailers gaining share are discount multi-brand independent dealers.
These dealers more than doubled their market share (7% to 15%) from 1982 to 1992. During the same time frame, warehouse clubs went from 0 percent to 6 percent. Tire company stores recorded a modest decline in market share from 10 percent in 1982 to 9 percent in 1992. It is also worth noting that chain and department sores actually experienced a decline in market share (20% to 14%) from 1982 to 1992. This change has direct implications for a decision to sell through Sears as discussed in part D below. Broadened distribution through Sears represents a change in distribution policy in two ways.
First, Goodyear is moving beyond a form of exclusive distribution evident in company owned and company franchised Goodyear tire retailers. As such, Goodyear will (a) increase its retail density/coverage, (b) but possibly decrease its control over retail marketing practices, and (c) reduce the “exclusivity” of the brand. Second, distribution through Sears suggests that Goodyear is exploring a dual distribution strategy. A critical issue with dual distribution is that different channels reach different customers – an issue discussed in part D below.
Broadened distribution through Sears should increase the volume of sales for Goodyear, but possibly it may create channel conflict and affect trade relations with franchised Goodyear Tire Dealers. The extent and severity, however, is not known, nor its franchise retailer reaction, i. e. , incidence of carrying more private labels and switching tire buyers to competing brands. D. What are the strategic implications of broadened distribution of Goodyear brand passenger tires through Sears Auto Centers? Based on the case information, reconsideration of the Sears proposal is a defensive strategic move.
Declining market share in the replacement tire segment, changing retail structures, and “flat” OE tire volume resurrected the Sears proposal. It is also noteworthy that a new management team is now looking at the Sears proposal. It may be that they are less tied to past Goodyear distribution/channel policies or strategies. From a strategic perspective, one may be directed toward the three criteria for choosing a marketing channel as described in Chapter 7: ¦ Provide the best coverage of the target market sought. ¦ Satisfy the buying requirements of the target market sought. ¦ Maximize potential revenues and minimize cost.
Target Market Sought: What is the target market? Is it… …Loyal Sears’ customers with worn-out Goodyear or competitor tires? …Vehicle owners in general with worn-out Goodyear or competitor tires? If it is the loyal Sears customer, then this segment is separate and distinct from Goodyear dealers and represents a previously untapped segment and incremental tire unit sales, or a portion thereof. This segment represents 2 million tires according to Goodyear executives. If the target segment is vehicle owners in general with worn-out tires, then cannibalization of Goodyear dealers’ tire sales is more likely.
Buying Requirements: What do replacement tire buyers want and how well do retailers satisfy these wants? It is reasonable to conclude from the case text that replacement tire buyers are highly price conscious, and prefer choices (some “price-quality” ranges). It is also reasonable to believe that prompt and proper installation, a “pleasant” tire store environment, and credible salespeople are important since tire buyers appear to know little about the quality. Can Sears satisfy these wants? Sears currently captures 5. 5 percent of the passenger car replacement tire segment. Sears’ share has declined from 6. percent in 1989 to 5. 5 percent in 1991. Is this decline in market share indicative of Sears’ ability to satisfy buyer requirements? Revenues/Cost: Will broadened distribution through Sears generate incremental revenue? As stated earlier, yes it could provided the loyal Sears customer is the target market segment reached and the draw from Goodyear dealers is minimized. Unfortunately, there is no specific cost data in the case to assess the profit impact. Potentially useful calculations concern the average number of units sold by Sears Auto Centers and Goodyear tire dealers.
As shown in Exhibit 3 below, on average, a Sears’ outlet sold some 10,055 replacement tires in 1991 compared with 2,927 replacement tires sold through Goodyear tire dealers. Revenue and outcomes data are truly inconclusive E. What effect, if any, does the number of brands and specific brands sold through Sears have on the distribution decision? Why? The number of brands and specific brands sold through Sears has a very important effect on the distribution decision. The brand (product) policy decision can be again viewed from three parties: Goodyear Company, Sears, and franchised Goodyear Tire Dealers.
The Goodyear Company and Sears might benefit more from having Sears carry the full line of Goodyear brand tires. Franchised Goodyear Tire Dealers would benefit from fewer brands being sold through Sears. . In general, there are four brand (product) policy choices available to the Goodyear Company. They are: a) Distribute only the Eagle brand through Sears since this brand was part of the original proposal made by Sears in 1989. Note: Based on case Exhibit 9, the Eagle brand represents 12 of the 30 (40%) Goodyear brand models. b) Distribute the complete brand (product) line through Sears. ) Sell certain brands through Sears and others through dealers, i. e. , Sears’s gets exclusive rights to Goodyear Eagle and Arriva brands. Goodyear Tire Dealers retain exclusive right to all others. d) Provide some brand model exclusivity for both Sears and franchised Goodyear Tire Dealers and let both retailers carry the other brands, i. e. , Sears gets only selected Eagle brand models; Goodyear Tire Dealers have the Aquatred on an exclusive basis and top quality brand models (e. g. , Eagle GT II) and other brands, except designated Eagle brand models. A cursory glance t case Exhibit 9 describes the brands and models and their tread wear, traction, and temperature ratings which correspond to both quality and price. As a quick point of reference, the following categorization can be derived from Exhibit 9: |Higher Quality/Price |Lower Quality/Price | |1. Aquatred |1. Decathlon | |2. Eagle GT II |2.
T-Metric | 1. 6. Should Goodyear broaden its distribution through Sear’s Auto Centers? If yes, what brands or models should it sell through Sears? Yes Goodyear should broaden its distribution through Sear’s Auto Centers. Provide some brand model exclusivity for both Sears and franchised Goodyear Tire Dealers and let both retailers carry the other brands, i. e. , Sears gets only selected Eagle brand models; Goodyear Tire Dealers have the Aquatred on an exclusive basis and top quality brand models (e. g. , Eagle GT II) and other brands, except designated Eagle brand models.
A cursory glance at case Exhibit 9 describes the brands and models and their tread wear, traction, and temperature ratings which correspond to both quality and price. As a quick point of reference, the following categorization can be derived from Exhibit 9: |Higher Quality/Price |Lower Quality/Price | |1. Aquatred |1. Decathlon | |2. Eagle GT II |2. T-Metric |