RANCHO MIRAGE, Calif.—Pirelli dealers needn't worry about their supplier's commitment to the North American market. ``The decision has been made to play the game with Cooper, no matter what,'' Giovanni Ferrario said. ``From now on, Pirelli and Cooper will be joined.'' They will work together on sales, marketing, production and technology to represent ``real potential in the U.S.''
The CEO in charge of Pirelli's worldwide tire operations left no doubt about his support of the strategic alliance Pirelli S.p.A. struck with Cooper Tire & Rubber Co. in February.
While details remain incomplete, executives of both companies expect Cooper to take over North American sales and distribution for the Pirelli brands by the end of September, offering them in a multi-brand package with its own seven lines.
That package will include a soon-to-be revived Armstrong brand, which Pirelli discontinued in 1997, as well as the Formula line, which replaced it.
Pirelli also has pulled the plug on sales through Sam's Club, in deference to Cooper's approach to the market.
In addition, it plans to build a second tire plant in North America within three years to ensure the company has the ability to supply future original equipment business.
The modular factory, which would make mostly OE tires, would be located in the Southeastern U.S. and signals Pirelli's renewed interest in North America as a result of the agreement with Cooper.
Executives of both firms touted the new alliance during Pirelli's 1999 National Dealer Conference in Rancho Mirage, Calif., March 24-27.
The agreement, which involves no equity exchange, brings together the strengths of the two organizations yet keeps their separate identities, Mr. Ferrario said.
Both firms share similar business philosophies, he added, and ``are represented by good people who are proud of their companies.''
Aligning Pirelli and Cooper, the world's sixth and eighth largest tire makers, respectively, creates a ``powerful force in the industry,'' John Fahl, president of Cooper's tire division, told the 100 dealers at the meeting.
``What we have effectively done with this alliance is to forge a bond between two companies, each bringing strengths and resources to the mix which then, together, represents the fourth largest tire maker in the global market.''
Messrs. Fahl and Ferrario broached the idea of cooperating in a casual conversation during the 1997 Specialty Equipment Market Association/Tire Association of North America trade show in Las Vegas.
It took more than a year before a deal was struck. On Feb. 12, the firms announced they were allying to sell each other's tires in North and South America, reduce costs and share technologies.
Joining with Cooper ``is like being born again,'' Carlo Bianconi, Pirelli Tire North America's new president and CEO, said in an interview. ``We suffered for so many years in terms of profitability. We were obsessed with profitability. Now we've found the perfect solution to grow. Everyone's excited in the U.S. and Milan.''
Cooper, Mr. Bianconi said, is ``very strong and one of the best companies in the tire industry—worldwide, not just in the states. They are a most loyal company toward their dealers, and one of the top companies logisticswise.''
Mr. Bianconi and Pirelli are counting on these attributes to help double the U.S. firm's sales over the next three years.
The challenge is formidable.
Pirelli has lost money nine out of 10 years in North America since acquiring the former Armstrong Rubber Co. in 1988. From a high of $600 million, sales slumped to $211 million in 1998, according to Pirelli's most recent financials. The company has closed one former Armstrong plant and sold another and now operates a single factory in Hanford, Calif.
A year ago, Pirelli pumped $300 million into its U.S. subsidiary to pay down debt and keep it solvent.
Pirelli in North America lacks a broad customer base, doesn't offer very good service and has a weak image, Mr. Bianconi said. Yet it has huge potential.
That's where Cooper comes in.
Cooper brings to the partnership an extensive distribution network of more than 5,000 dealers, success in value-brand marketing, excellence in customer service and the ability to develop complementary distribution partners, Mr. Bianconi said.
Pirelli, meanwhile, provides some of the best tire technology in the industry and an extensive array of high-performance and ultra-high-performance tires. Under the alliance, it will handle marketing for the Pirelli lines, including product management, advertising and communications, original equipment efforts, brand positioning, marketing and support programs and strategic pricing.
Both companies, he stressed, emphasize dealer profitability.
Packaging the brands
Cooper will package the Pirelli brands with its own lines in a multi-brand offering to compete with similar programs in the marketplace.
On their own, neither company could provide a complete good-better-best lineup. Cooper lacked a major flag brand, while Pirelli didn't fully understand the broadline segment, Mr. Bianconi said.
``When our dealers were offered the multi-brand approach (from other firms), we couldn't respond,'' he said. ``We were in danger, same as Cooper. Now in the market (dealers) will find another full-range competitor.''
Besides the Pirelli lines, Cooper will offer its own Mastercraft, Avon, Starfire, Dean, Roadmaster, Dominator and Cooper brands.
``I would challenge any of the competitive programs in the market today to match the strength of these combined brands with the expertise you dealers get from the best of Cooper and the best of Pirelli,'' Mr. Fahl said.
``This multi-brand approach will be different from competitors' in that it is not 51 percent, take it or else,'' Mr. Bianconi said.
While Pirelli hopes to sell more top-end tires in the deal, Mr. Bianconi expects much of the growth will come from its broadline tires, the majority of which are made in Hanford.
Daily production there stands at 9,500 tires—measurably below the plant's capacity—but could be doubled quickly if needed, he said. The company also can source tires from Pirelli plants in South America.
Someday, Cooper may even make Armstrong and Formula brands in its own plants, Mr. Bianconi said.
As part of the alliance, Carl Casalbore, PTNA's vice president of sales, will remain on Pirelli's payroll but move to Cooper's Findlay, Ohio, headquarters as Pirelli brand sales director.
Similarly, Bruce Smith, manager of Cooper's Tupelo, Miss., tire plant, will move to Pirelli's Hanford factory as manufacturing manager where he will assist in boosting efficiency.
Cooper also plans to hire a number of Pirelli salespeople in the field or corporate office, Mr. Casalbore said. Those not selected will be absorbed within the Pirelli organization where they will focus on training Cooper sales staff and dealers.
Growth of the Pirelli brands will come from Cooper's existing customer base, Mr. Bianconi said. Cooper soon will begin to meet with Pirelli dealers, starting in the central and mountain zones, and will strive to minimize marketing conflicts as it expands distribution.
``We're going to try and protect your profitability,'' Mr. Casalbore told dealers, who will not be required to take on any of the multi-brand lines, ``although we would like for you to.''
Cooper will receive a 3-percent administration and logistics fee based on sales as well as a sales commission of 3 to 6 percent per tire depending on the product and where it originated, Mr. Bianconi said.
As part of its new relationship with Cooper, Pirelli decided in January to stop distributing tires through Sam's Club in order to concentrate on the dealer channel.
``We agreed with them, we had to get out of the clubs,'' Mr. Bianconi said. ``It didn't fit Cooper's strategy, so why would we keep it?''
At one time, Pirelli sold as many as 600,000 tires annually through Sam's.
Pirelli dealers at the meeting generally seemed pleased with what they heard.
``I think it's going to be pretty beneficial, but a lot of things need to be worked out'' said Jack McNabb, owner of J.M. Tire in Walsenberg, Colo.
With neither company holding an equity position, the big question is: ``Who's the boss? Who has the final say?'' he said. ``Is our loyalty going to be to Cooper or Pirelli? I don't have a problem with it; they just didn't address it.''
George Clos, general manager of Nortown Tire & Service in Chicago, also felt good about the alliance, ``if they can make it work.'' But the meeting left him with unanswered questions, such as how pricing will change and whether Cooper dealers will be trained to effectively sell the Pirelli lines.
``Cooper dealers must know more about the tires to meet the needs of the high-end customer,'' he said.
Mr. Clos also wondered how distribution will be handled for the various lines. ``Will they be adding lots of dealers where everyone fights for business, or will they zone it?'' he asked.
Such questions don't surprise, Mr. Bianconi. ``Until they see the strategy put in place, there are going to be some worries,'' he said. ``But I've got to give credit to the Cooper people that they'll be able to manage this conflict.''
Still, Mr. Clos thinks the potential for the alliance to succeed is good.
``I'm optimistic,'' he said. ``I think it can be done.''