GREENVILLE, S.C.—The Michelin North America ``pricing police'' have been on the prowl for five months now but have only been able to uncover one documented violation of the company's Maximum Value Policy (MVP). That means the tire maker has had to drop one independent tire dealer from participating in MVP, which on Feb. 1 established a minimum price for the recently released BFGoodrich Radial All-Terrain T/AKO and its popular predecessor, the All-Terrain T/A.
Following a glut of publicity—and debate—about the new policy and its legality, Michelin settled into its regimen of auditing sales records of dealers to maintain the program's integrity and uncover any transgressions.
However, during an interview on the status of the policy, Mathew Aaron, BFGoodrich Tires brand manager, was quick to point out that MVP is a distribution policy—pricing is only one, though he admitted the key, component of it.
And he liberally used the words ``free choice'' when describing a dealer's participation in MVP.
``He has a free choice whether or not to comply to our terms and conditions,'' Mr. Aaron told Tire Business, ``and it's our free choice to say he's not complying.''
The company has been ``very careful'' not to do anything illegal.
``We're just trying to limit people's creativity in marketing the tire by price, special offers etc.''
Violations to MVP include:
Advertising or reselling the T/AKO below Michelin's pricing sheet;
Offering promotional items or services, such as free mounting or balancing, to effectively reduce the retail price;
Advertising or promoting blems, used, take-offs or re-runs—anything less than a new tire; and
Selling tires to anyone other than consumers—i.e. no wholesalers.
Dealers also agree to retain records of sales receipts on individual products or services purchased by all customers for five years from the date of the transaction, and give Michelin the right to audit the dealerships' sales records.
``That suggests we mean to enforce our own policy,'' he said, adding that Michelin ``wants to be sure who the dealer is selling to. We're not selling the tire to dealers we don't want to carry the line.''
Michelin didn't set out to devise the MVP program, he said, because it is an extremely complicated process that requires constant monitoring of an enormous amount of data. ``But credibility is very important to us. In the past, people claimed we didn't do anything about practices that undercut the pricing on that tire line.''
Anything along the lines of MVP has ``never been done in this business before—we're breaking new ground,'' Mr. Aaron claimed.
Early feedback from the retail store level revealed a logical fear that if dealers raise—and maintain—pricing on a tire, they will sell fewer of them. But he said that has not been the case. ``Sales were momentarily soft, then shot back up and are now out the door.''
Before embarking on the policy, Michelin conducted very sophisticted research, including about its legality as well as whether it would work. ``We certainly didn't do this to sell less tires,'' Mr. Aaron said, ``but we had to do something about what was going on in the marketplace.
``Now our sales are doing fine and meeting our expectations.''
A big variable is whether dealers will continue to follow the policy.
During a Michelin dealer council meeting, Mr. Aaron said, one member asked very pointed questions about MVP, then said: ``If you're going to do what you say you'll do, this will be the best thing you've ever done.''
He acknowledged that wholesalers have become a complicated part of the MVP equation, because they've been taken out of the loop and can no longer sell the T/AKO directly to retail dealers. Michelin—not a wholesaler—sets the pricing.
Some dealers joined the program immediately, he said, while others have been more cautious, watching to see what happens.
``The ones who didn't act quickly, sat back and stuck their heads in the sand, aren't doing so well.
``Whether or not they participate is up to them—but they may end up on the outside looking in.''
Because of the complexity of MVP, Mr. Aaron said Michelin had to set up a special program and accompanying customer service department for its associate and non-Alliance dealer network, and recently completed 45,000 mailings to those dealers.
``We were very edgy and nervous,'' he conceded, ``since by the end of April we only had signed up between 300 and 400—and associate dealers represent a significant portion of our sales.''
But when May 1 rolled around, the tire maker's phone lines were swamped by associate dealers wanting T/AKO tires. That caused some glitches—and angry callers—as Michelin struggled to keep up with demand.
``We had a bad first week; a better second week,'' Mr. Aaron said. By the third week, the abandoned call rate—where someone hangs up in frustration—dropped to below the rate of Michelin's regular customer service department.
Since its inception, Michelin has done little to adjust the program, other than some minor tweaks. It decided the market value of a valve stem is zero, since it's a normal part of tire installation cost.
Mr. Aaron would not provide sales numbers for the T/AKO, but noted: ``By mid-July, we'll be beyond our expectations for where we thought we'd be in the number of participants and sales.''
But he did emphasize Michelin is ``getting more serious'' about enforcing MVP.
One unidentified dealer has been denied further access to the T/AKO product line for violating the program, though Mr. Aaron said that person remains a Michelin dealer. The company is also in the process of conducting active audits of 35 other dealerships, but ``it's still unsubstantiated whether or not they're violating the program.''
The policy ``was never meant to be a way for Michelin to get rid of dealers it didn't want to do business with,'' he added.
The company is keeping tabs on dealers via phone audits, checking newspaper ads, and has enlisted Ernst & Young, which has already conducted one test audit of a dealership reportedly wholesaling the T/AKO. Mr. Aaron said the company is ``actively and aggressively'' stepping up its auditing efforts ``to deliver the message that we mean business.''
No one has challenged Michelin on the legality of its policy, he said, but added that the BFGoodrich unit has no plans to expand the program to other product lines. He predicted similar distribution policies ``probably are not something that will be commonplace in this industry.
``We had a unique product that needed special consideration.''