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Published on February 26, 2001

Dealers key to makers' profitability

A man stood by the side of the road and sold hot dogs. When someone passed by he would say: "Buy a hot dog, Mister." Many did and business was good.

Then one day the man's son came by and said: "Father, don't you read the newspapers? Aren't you aware there's a recession coming? You need to prepare."

So the man cut back on his hot dog and bun orders and began devoting less and less attention to business. In time, he no longer stood at the roadside urging people to buy.

Reflecting on the situation, the man said to himself: "My son was right. We are indeed in the midst of a recession."

This fable about a man who sold hot dogs is neither original nor will it be unfamiliar to some readers. I recall having typed it into print at least twice in 30-plus years of reporting and commenting on tire-industry news.

But with Goodyear, North America's largest tire maker, undertaking another massive labor cutback and economic uncertainty seemingly so pervasive, it seemed an appropriate time to remind ourselves of the story's message: namely, that our actions or inaction can make dire economic predictions self-fulfilling prophecies—even when times are good.

Moreover, the times are good for most of North America—including those of us who earn a living in the tire and automotive aftermarket. After all, supplying essential tires and auto service is anything but a "buggy whip" business. In fact, 2000 marked the fifth consecutive year of record tire shipments in the U.S.

Unfortunately, you'd never guess this was the case by listening to some in the industry.

Many within the industry complain that tires always will remain a low-profit product because consumers simply won't pay enough to make them profitable.

If so, that's not the customer's fault. If the companies that make and sell tires market them primarily on price alone—why should buyers treat them otherwise?

Only three companies—Goodyear, Michelin North America Inc. and Bridgestone/Firestone Inc.—garner nearly three-quarters of the estimated $23.3 billion dollars taken in by tire manufacturers in North America. Add Continental Tire North America Inc. and Cooper Tire & Rubber Co., and you have just five companies collectively accounting for an estimated 86.9 percent of tire makers' sales.

With such a commanding share of the market, it's logical to ask why those companies can't price their products high enough to earn a respectable profit.

Unfortunately, most tire manufacturers, for whatever reasons, seem only too willing to sacrifice profit for increased unit volume and market share.

Goodyear, which hopes to boost profits by cutting 7,200 jobs and taking other cost-reducing measures, is a case in point but hardly unique among tire makers.

Eight years ago, led by former Chairman and CEO Stanley Gault, the company broke with its tradition and began selling the Goodyear brand through channels other than its independent tire dealers and company-owned stores.

By introducing its flag brand into Sears, Roebuck and Co. stores, the company hoped to attract vast numbers of Sears' credit-card-dependent customers who otherwise might have little incentive to buy Goodyears.

Since then, the privilege of selling Goodyears also has been extended to other mass merchandisers, including Wal-Mart Stores Inc., and its Sam's Club, Discount Tire, the now defunct Montgomery Ward & Co. and National Tire & Battery, a division of Sears.

Not surprisingly, more than a few "true-blue" dealers reacted by increasing their purchases of competitors' tires rather than Goodyears.

Now, even though Goodyear's unit sales were up 11.4 percent last year, management struggles to improve the bottom line amid what the company financial documents describe as "a shift in mix in the replacement market to lower-priced tires" and "a shift towards less-profitable channels of distribution."

Wouldn't Goodyear's profit picture look rosier if more of its sales were to independent dealers rather than big-volume buyers that demand deep discounts? It's a question Goodyear and other tire makers should be asking themselves.

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