Goodyear Sol

Marketing Management Goodyear Tire

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GOODYEAR TIRE AND RUBBER COMPANY

Synopsis In early 1992, Goodyear Tire and Rubber Company executives were reconsidering a proposal from Sears, Roebuck & Company that was originally made in 1989. The proposal from Sears was for Goodyear to sell its popular Eagle brand tire through 850 Sears Auto Centers in the U.S. This proposal was declined in 1989 because Goodyear management felt that selling through a mass merchandiser such as Sears would undermine the tire sales of company owned Goodyear Auto Service Centers and franchised Goodyear Tire Dealers. However, following a $38 million loss in 1990 and a change in Goodyear top management in 1991, the Sears proposal resurfaced. Two factors apparently prompted Goodyear’s renewed interest in the Sears proposal. First, the Goodyear brand passenger car replacement tire market share had slipped in the U.S. Second, Goodyear executives believed that nearly 2 million Goodyear original equipment tires were being replaced annually at some 850 Sears Auto Centers. According to a Goodyear executive, the failure to repurchase Goodyear brand tires happened by default “because the remarkable loyalty of Sears customers led them to buy the best tire available from those offered by Sears,” which did not include Goodyear brand tires. The case links two strategic marketing decisions. First, broadened distribution through Sears would change a long-standing Goodyear marketing channel policy of selling primarily through company or franchised Goodyear dealers and not mass merchandisers. Second, a product policy decision exists. That is, should Goodyear sell all, some, or one (e.g., Eagle) brand(s) through Sears? A. How would you characterize the competitive environment in

the tire industry in 1991?

1. 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.

2. 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.


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3. 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. This point is significant for two reasons:

It relates to “store loyalty” evident with Sears buyers mentioned earlier.

Tire retailers can influence the replacement brand chosen from among

those carried in their store. Disgruntled franchise Goodyear Tire Dealers might actually be able to switch replacement tire buyers over to other (private label) brands as some have threatened.

4. Exhibits 1 and 2 in these notes show the relationship between passenger replacement tire market share and OE passenger tire market share and share of “retail points of sale”. As can be seen, there is a positive relationship. Moreover, the relationship between passenger car replacement market share and “retail points of sale” is more pronounced.

EXHIBIT 1

BRAND SHARES OF PASSENGER OE AND REPLACEMENT TIRE SALES AND “SHARE OF RETAIL POINTS OF SALE”: 1991

Percentage Share of…

Brand Passenger OE Tire Market

Retail Points of Sale

Passenger Car Replacement Tire

Market Goodyear 38.0% 18.0% 15.0% Michelin 16.0% 16.7% 8.5% Firestone 16.0% 9.8% 7.5% Uniroyal/Goodrich 14.0% 15.2% 3.5% General 11.5% 4.9% 4.5% Bridgestone 1.25% 13.8% 3.5% Sears ---- 2.0% (est.) 5.5%

Source: Based on case Exhibits 2, 5, and 6.


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Brand P-O-S REP MKT OE MKTGoodyear 18.0% 15.0% 38.0%Michelin 16.7% 8.5% 16.0%Firestone 9.8% 7.5% 16.0%Uniroyal/Goodrich 15.2% 3.5% 14.0%General 4.9% 4.5% 11.5%Bridgestone 13.8% 3.5% 1.3%Sears 2.0% 5.5% 0.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0.0% 10.0% 20.0% 30.0% 40.0%

Per

cent

of R

epla

cem

ent M

arke

t

Percent of OE Market

EXHIBIT 2

0.0%

5.0%

10.0%

15.0%

20.0%

0.0% 5.0% 10.0% 15.0% 20.0%

Per

cent

of R

epla

cem

ent

Mkt

Percent of P-O-S

Bridgestone

Sears

General Michelin Firestone

Uniroyal/ Goodrich

Goodyear

Sears General

Firestone

Bridgestone

Michelin

Uniroyal/ Goodrich

Goodyear


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Some observations worth noting are:

• Bridgestone is an obvious “outlier” in the relationship between

replacement market share and “retail points of sale”. One explanation is that Bridgestone has so little share (1.25%) of the OE tire segment.

• Sears is unique as it does not produce tires for the OE tire segment; yet it

captures 5.5 percent of the passenger car replacement tire segment with its mostly private brands.

• Yes, retail coverage, as measured by “retail points of sale”, is related to

replacement tire market share. However, the nature of the relationship may not be perfectly linear. That is, a certain proportional increase in “retail points of sale” may not result in the same proportional increase in passenger car replacement tire market share.

5. 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. Vehicle manufacturers typically use multiple sources for their tires and appear to be highly price sensitive. 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?

1. Goodyear is the second largest tire manufacturer in the world, behind Michelin which manufacturers and markets the Michelin and Uniroyal/Goodrich brands.

2. 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 (case Exhibit 2). It is noteworthy, however, that Michelin with its Michelin and Uniroyal/Goodrich brands combined capture 30 percent of the OE tire segment (case Exhibit 2).

3. 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


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increases in each category when sales of its Kelly-Springfield brand is included (see case Exhibit 5).

4. 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.”

5. 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.


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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?

1. 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.

2. 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.

3. 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.

4. Broadened distribution through Sears is bound to 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. Is this the time to create channel conflict when replacement tire unit volume is “flat?”


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D. What are the strategic implications of broadened distribution of Goodyear brand passenger tires through Sears Auto Centers?

1. 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.

2. 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. It is also noteworthy, however, that


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Sears’ share has declined from 6.5 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.

EXHIBIT 3 Estimates Of Passenger Replacement Tire Sales Sold By Sears Auto Centers

And Goodyear Retail Outlets in 1991

Given: 1. Sears Replacement Tire Market Share: 5.5% (Case Exhibit 5)

2. Goodyear Replacement Tire Market Share: 15.0% (Exhibit 5)

3. Sears Auto Centers: 850 (stated in the case)

4. Goodyear “Retail Points of Sale”: 7,964 (Case Exhibit 6)

5. Replacement Tire Unit Volume: 155.4 million (case Exhibit 3)

Average Replacement Tire Volume Through Sears Auto Centers:

[155.4 million Tires x 0.055] / 850 = 10,055 tires Average Replacement Tire Volume Through Goodyear Outlets:

[155.4 million Tires x 0.15] / 7,964 = 2,927 tires

3. It is also important to give attention to how the Goodyear Company, Sears,

and Goodyear dealers might view the strategic implications of broadened distribution. Selected viewpoints are outlined in Exhibit 4 below in terms of upside potential and downside risk.


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EXHIBIT 4

SELECTED VIEWPOINTS ON BROADENED DISTRIBUTION THROUGH SEARS

Goodyear Tire & Rubber

Company Perspective Sears Roebuck & Company

Perspective Franchised Goodyear Tire

Dealer Perspective Upside Potential 1. Provides access to tire buyers who are loyal to Sears and capture some of the 2 million worn-out Goodyear tires being replaced at Sears

Upside Potential 1. Will carry the No. 1 tire brand in the U.S. thus enhancing the “image” of Sears Auto Centers.

2. Provide access to 5.5% of annual replacement tire volume captured by Sears.

2. May allow for incremental tire volume from vehicle owners with Goodyear brand OE tires who need replacements (Goodyear already believes that 2 million worn-out Goodyear tires are being replaced at Sears) and who are Goodyear brand loyal.

Downside Risk 1. Could lead to strained trade reductions with franchised Goodyear Tire Dealers. They might:

Downside Risk 1. Goodyear brand tires could cut into Sears private label tires (i.e., Weather Beater). This is an issue to the extent profit margins are better on private label tires (which they generally are.)

Downside Risk 1. Broadened distribution through Sears eliminates franchised dealer “exclusivity”. It also allows for the potential of further price competition.

a) Begin carrying more private labels b) Withdraw from the franchise and become multi-brand independent dealers.

2. Sears replacement tire market share decreased from 6.5% in 1989 to 5.5% in 1991. In fact, the chain/department store tire share has also declined (see Case Exhibit 1). Is this the channel (store) to be in?

2. Potential for lost sales is very real, particularly where Sears has a strong market presence.


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E. What effect, if any, does the number of brands and specific

brands sold through Sears have on the distribution decision? Why?

1. 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.

2. 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.

c) Sell certain brands through Sears and others through dealers, i.e.,

Sears 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 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


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When making brand (model) decisions, one should be sensitive to the fact that franchised Goodyear Tire Dealers would like to have a full range on the price-quality continuum. Also, given Aquatred’s recent introduction, should this brand retain some exclusivity?

MARKETING MORAL

1. To the extent that a marketing manager has alternative channels to reach

prospective buyers, the decision facing the manager is one of selecting the channel that:

Provides the best coverage of the target market sought.

Satisfies the buyer requirements of the target market.

Maximizes revenues and minimizes cost of distribution.

2. Dual distribution is a means to reach different market segments. However, dual

distribution can affect trade relations with channel members and lead to channel conflict.

3. Market evolution evident in changing retail distribution structure often requires

modification in a firm’s marketing channel policy. 4. Marketing channel decisions often involve product policy decisions as well.

When using different channels, a major product policy question is “who gets what?”


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Epilogue

Goodyear elected to broaden its distribution coverage by selling Goodyear brand tires through Sears in March, 1992. Goodyear also elected to supply Sears with the Arriva brand on an exclusive basis and the following brands and models: Corsa GT, four high performance Eagle models (Eagle GT+4, Eagle GA, Eagle VR, and Eagle ZR), and two Wrangler models for light trucks (Wrangler AT and HT). Goodyear dealers would sell the Aquatred brand on an exclusive basis as well as the brands/models sold by Sears, except the Arriva. All other brands/models would be retained exclusively by Goodyear retailers. Commenting on the decision, Stanley Gault, the Goodyear chairman and CEO, said the decision to move toward mass merchandising channels “can only further strengthen the Goodyear brand and Goodyear itself.” On June 11, 1992, the California Department of Consumer Affairs accused Sears of systematically overcharging automobile repair customers at its 72 Sears Auto Centers in the state. Four days later similar accusations appeared in New Jersey and several other states. On September 2, 1992, Sears agreed to pay an estimated $15 million to settle charges in California and 41 other states, as well as settle 19 related class-action suits. Denying any charges, it was estimated that Sears would pay over $46 million in damages. The damage to Sears’ reputation and the effect on Goodyear tire sales was modest. In early 1995, Goodyear executives and the tire industry analysts were still debating what effect, if any, Goodyear’s decision to broaden its distribution through Sears had on Goodyear’s market share. According to Modern Tire Dealer, an industry trade publication that collects and reports market statistics, Goodyear’s share of the U.S. passenger car replacement tire market rose 1% in 1992 to 16%. This 16% figure remained unchanged in 1992 and 1994 according to Modern Tire Dealer. Goodyear executives dispute this figure saying its market share rose 2% for 1994. Either way, the 1% to 2% market share gain is less than Goodyear had probably hoped for from broadened distribution through Sears. (Source: Based on “Goodyear Plans To Sell Its Tires at Sears Stores,” The Wall Street Journal, March 3, 1992; “Goodyear Brand Tires To Be Sold By Sears,” Modern Tire Dealer – Newsfocus, March 1992; “Sears Will Pay $15 Million Settling Charges,” The Wall Street Journal, September 3, 1992, “And Fix That Flat Before You Go”, Stanley,” Business Week, January 16, 1995.)

Goodyear Sol

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