CUYAHOGA FALLS, Ohio—It's a ``take it or leave it '' policy that—if it works—will restore profit margins on sales of a market-leading product that some dealers are selling at or below cost. That's what Michelin North America is telling tire retailers about its new Maximum Value Policy (MVP), unveiled at a press conference Feb. 1.
MVP establishes a minimum price for the new BFGoodrich Radial All-Terrain T/AKO and, effective May 1, for its predecessor, the All-Terrain T/A.
The All-Terrain T/A is the best-selling light-truck tire of its type, Michelin said.
Jaye Young, marketing manager-BFGoodrich light-truck tires, said MVP is ``unprecedented in the industry.''
Under the terms of the new policy, Michelin will cancel pending orders and terminate delivery of the
BFG All-Terrain T/A line to any retailer who:
Advertises or resells the product below the minimum price set by Michelin.
Offers promotional items or services (such as free mounting or balancing) that effectively reduces the retail price.
Resells the product to any other entity other than retail consumers in the U.S.
Advertises or promotes blemished, used, take-off or rerun product in any medium or in any store.
Refuses to permit Michelin to audit the purchaser's records related to the product.
Fails to retain sales receipts detailing individual products or services purchased by all customers for five years from the date of the transaction.
Ms. Young said that Michelin will use phone surveys and mystery shoppers and actually send auditors to stores to check inventory and sales records to enforce MVP.
Mathew Aaron, brand manager-BFGoodrich tires, said Michelin is negotiating with the ``big five'' accounting firms about assisting in enforcement of MVP. The specifics of the enforcement plan are in the process of being finalized.
``We have the right as a manufacturer to apply any terms we want,'' said Mr. Aaron. The policy is legal and does not violate antitrust laws, he added, because it is unilateral and tied to a product.
According to the Federal Trade Commission publication Promoting Competition, Protecting Consumers: A Guide to Antitrust Laws, antitrust law permits a manufacturer to set a minimum price for a product and terminate dealers who don't honor that policy.
The FTC adds that manufacturers may choose to adopt such a policy to protect dealers who provide ``full customer service'' and prevent other non-full-service dealers from ``taking away customers and `free-riding' on the services provided by other dealers.''
Mr. Aaron added that he expects MVP to be challenged.
He said the policy was being enacted now because the price of BFG's All-Terrain T/A tires was ``ridiculously low'' and dealers wanted something done.
Mr. Aaron said many dealers were selling this extremely popular product at or below cost. ``There have been some very small dealers that have decided to become heroes,'' he said, ``and go into the marketplace with very low prices.''
Under the terms of MVP, the minimum price for size 31210.50R15, which is the most popular size, will be $99.99. Mr. Aaron said that this is about $10 more than the average selling price now, but still well below the price point at which research shows sales would drop significantly.
So, why is Michelin doing this?
Michelin said the main objectives of MVP are to protect the high-quality image and brand equity of BFG All-Terrain T/A products and allow dealers to sell a premium product for improved profits.
Michelin maintains that MVP will be good for small, independent dealerships because prices will be set and they can advertise without fear that larger dealerships will advertise the product at a lower price.
Mr. Aaron said the margin for All-Terrain T/A tires under this plan will be 20 percent or higher. ``Because the tire has the potential to be much more profitable,'' he said, ``the likelihood of the dealer wanting to get it into his product stream is far greater than it was.''
Several dealers contacted by Tire Business said they support minimum pricing for the All-Terrain T/A line. ``I welcome the profit it is intended to give the dealer,'' said John Boyle, president of ETD Discount Tire Centers in Lyndhurst, N.J.
Scott Mueller, vice president of Mueller Tire and Brake in Cleveland, called the All-Terrain T/A one of the highest-value products Michelin distributes. By enacting MVP, he said, Michelin ultimately will ``create value for their brands and for dealers as well.''
Roland Lesieur, treasurer at Maynard and Lesieur in Nashua, N.H., said with MVP ``it would be the first time that we would be able to compete against the NTB's and those people who get a much better buying price than we have.''
Under MVP, wholesale dealers are called ``servicing distributors.'' BFG All-Terrain T/A tires will be sold only to retail dealers who order directly from Michelin. Large shipments will be sent to servicing distributors who will deliver the tires to various retail dealers.
These servicing distributors will be paid a service fee for each unit they handle and for record-keeping. Some wholesalers were consulted beforehand about MVP in general terms, and Mr. Aaron acknowledged that their reaction was not always positive.
``The service fee as a return on investment in inventory will far exceed anything they've been able to see,'' he said. And he added that servicing distributors will experience less risk than they do as wholesalers, because they will be paid by Michelin and not by the retail dealers to whom they deliver the tires.
Several large wholesalers contacted by Tire Business wouldn't comment on MVP because they hadn't had time to examine the 20-plus pages of information on MVP sent by Michelin. Mr. Lesieur, whose company does substantial wholesale business, said he thought the handling fee of $10 to $12 per tire was reasonable for a servicing distributor.
Mike Wischhusen, director of product marketing for Michelin Americas Small Tires, said the new All-Terrain T/AKO, ``is not a dramatic change'' from the tire it is replacing. He said the tire has a wider shoulder groove, redesigned tread and a changed crown radius to provide better traction and increased tread life.