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Goodyear Tires Case Analysis

MKTG 3349 April 3, 2013 Morgan Francy Kelsey French Merrill Grace Hartline Paige Witthar

1. How would you characterize the competitive environment in the tire industry in 1991? World tire production in 1991 was approximately 850 million tires. North American production accounted for 29%, Asian production was 28%, and Western European production accounted for 23%. The tire industry is divided into two, broad segments: original equipment (OE) tires and replacement tires. The OE segment accounts for 20-25 percent of tires sold annually and these unit sales are trending downward. The replacement tire segment accounts for 70-75 percent of tires sold each year and this unit sales trend is flat. Passenger car tires account for 75 percent of annual sales and the remaining 25% go to commercial and miscellaneous usage.

Although 10 tire manufacturers account for 75 percent of worldwide production, only three firms account for 60 percent of all tire sales sold. These three firms are 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 U.S. market leader in both the OE and replacement segments.

Even though the OE segment is smaller, it is viewed as strategically important by tire manufacturers because prominence in the OE segment provides volume related scale economics in the production of tires and it is believed that car owners satisfied with their OE tires on new vehicles will buy the same brand when they replace their worn tires. It should be noted though 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 if they are significantly more expensive. Demand in this market is directly

related to the average mileage driven per vehicle, therefore, the longer a tires treadlife the less they need to be replaced.

Competition in this industry is intense in both the passenger OE and replacement tire segments. Competition in the OE segment revolves around the major vehicle manufacturers and supplying some or all of their tire needs for the new model year cars and trucks. Competition in the replacement tire segment occurs across the marketing mix. Major tire manufacturers compete on the basis of product variety and innovation, retail points of sale, price and promotion

2. What is Goodyears relative competitive position within the tire industry? Goodyear is the second largest tire manufacturer in the world, behind Michelin which manufacturers and markets the Michelin and Uniroyal/Goodrich brands. 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. It is noteworthy; however, that Michelin with its Michelin and Uniroyal/Goodrich brands combined capture 30 percent of the OE tire segment.

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 increases in each category when sales of its Kelly-Springfield brand is included. Goodyears relative competitive position is also due to the fact that they have the broadest line of tire products of any tire manufacturer and have

the broadest retail coverage with almost 8,000 retail points of sale, most of which are company owned or franchised.

3. 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? Currently, Goodyears distribution strategy is an administered vertical marketing system in which they control the flow of products from their production facilities to the end-user. Due to the changing retail environment, non-company owned or franchised tire company stores are capturing a larger percentage of replacement tire volume therefore, it might be a good idea for Goodyear to sell tires at Sears. Recent data has shown that salespeople can influence a consumers choice of replacement tires at the point of sale. Therefore, if Goodyear were to move into Sears as a new distribution channel, they would need to create a system to ensure their brand would get sold to consumers.

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. This will allow Goodyear the ability to increase its retail coverage but potentially decrease their control over marketing practice and reduce the exclusivity of the brand. Second, distribution through Sears suggests that Goodyear is exploring a dual distribution strategy in which different channel would reach different customers. Broadened distribution through Sears should increase the volume of sales for Goodyear, but possibly it could create channel conflict and affect trade relations with franchised Goodyear Tire Dealers.

4. What are the strategic implications of broadened distribution of Goodyear brand passenger tires through Sears Auto Centers? When considering broadening distribution, Goodyear will need to consider a vast array of potential strategic implications. If the target market 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. However, if the target segment is typical vehicle owners with worn-out tires, then cannibalization of Goodyear dealers tire sales is more likely with entrance into Sears. If this occurs, franchised Goodyear dealers will be very angry about this broadened distribution.

It is reasonable to conclude from the case that replacement tire buyers are highly price conscious, and prefer choices with 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. Before making the move into Sears, Goodyear would need to verify that Sears could provide credible salespeople to sell the product, otherwise their product will lose credibility.

As stated earlier, broadened distribution could provide tires to the loyal Sears customers therefore, the cannibalization from Goodyear dealers is minimized. While it is known that on average, a Sears outlet sold some 10,055 replacement tires in 1991 compared with 2,927 replacement tires sold through Goodyear tire dealers. Revenue and

outcomes data are truly inconclusive as to how Goodyear entering Sears will change Goodyear tire dealers sales.

5. What effect, if any, does the number of brands and specific brands sold through Sears have on the distribution decision? Why? The number of brands and specific brands sold through Sears has a very important effect on the distribution decision. The Goodyear Company and Sears might benefit more from having Sears carry the full line of Goodyear brand tires. However, franchised Goodyear Tire Dealers would benefit from fewer brands being sold through Sears in order to give them a point of differentiation to attract customers. If certain brands are sold through Sears, they might lose their status as the premium quality such as the Eagle brand which is of high quality. However, brands such as Decathlon and T-Metric are more mid-priced brands so they might make more sense for the Sears market and limit the Sears offerings to keep franchised dealers happy.

6. Should Goodyear broaden its distribution through Sears Auto Centers? If yes, what brands or models should it sell through Sears? If Goodyear broadens into Sears Auto Centers, they will be able to expand Goodyears presence into a new market and open the door for other potential deals with similar retailers. However, at the same time they might should not expand because it will allow them to maintain more positive relationships with their franchised Goodyear dealers, reduce the chance of cannibalization and Goodyear can maintain control over the brand and its products.

Despite the drawbacks, Goodyear needs to broaden its distribution into Sears Auto Centers. They should provide some brand models exclusively for both Sears and franchised Goodyear Tire Dealers. For example, Sears would only be able to sell Eagle, Decathlon, and T-Metric brands. In recent years, consumers have become more price conscious and less brand loyal so allowing Sears to sell the Dechathlon and T-Metric brand which are midpriced brands will help cater to the customers. We would want to keep the number of brands sold in Sears limited as to not confuse the customer with too many choices. Goodyear Tire Dealers would have the Aquatred on an exclusive basis and other top quality brand models. This would help to eliminate the issue of product cannibalization between Sears and the company-owned Goodyear Auto Service Centers and franchised Goodyear Tire Dealers. Due to the 3.2% decline in market share and the nearly 2 million Goodyear tires being replaced annually at a Sears Auto Center, we believe that allowing Sears to carry specific brands of Goodyear tires will help to promote through cross brand recognition between Sears and Goodyear.