Goodyear: Aquatred

The year is 1992 and Goodyear is planning to release its new tire the Aquatred. The new tire is a premium tire which reroutes water away from the main tread making it have superior traction in wet conditions. With the launch of this tire coming up Goodyear has some challenges they need to figure out, where should they price the Aquatred? Which type of distribution model should they use? To figure this out we will first need to discuss the existing market and modes of distribution. The tire market can be segmented in three ways. The first way is by tire, either by performance or broad-line tires. Performance tires were more expensive but gave the consumer more traction and control. Another segment was by either OEM or replacement tires. OEM tires are those which are included when a new car was purchased and a passenger replacement tire are those which are bought after initial tires are worn out. The last segment was by major brand which was about 36% of the market, smaller brand which had 24% or by a private label which held a 40% share. Goodyear was a major brand and made about 65% of its revenues off of replacement tire sales, with the rest coming from OEM sales. The US replacement tire market in 1991 accounted for 8. 6 billion dollars. The Aquatred tire is to be launched in the replacement market because it would take a few years to develop a contract for OEM sales. This would be too long of a wait because competitors had their own versions of the Aquatred due to release sometime within beginning 1993. Replacement tires were distributed to consumers through a variety of ways. One way was when the tire manufacturer sold direct to large chains and wholesalers who resold the tires at retail, car dealers and other secondary outlets; this accounted for 40% of Goodyear’s sales. Another 10% of sales were sold to large chains and wholesalers who sold only to secondary outlets and did not sell retail. The rest of Goodyear’s sales were from retail outlets which made up 50% of replacement tire sales. Traditional retail outlets for replacement tires consisted of six different channels: Garage/service stations – offers auto services, sold both private and brand label tires, sales have been in decline recently due to lower cost higher volume outlets. Small independent tire dealers – have one or two locations where they sell and install tires while also offering auto services. Offer a variety of brands but make the most revenue off of private labels Manufacturer-owned outlets – owned and operated by tire manufacturers, offered one brand of tire and performed auto services. Warehouse clubs – low price with limited tire brand offering, did not offer auto services just tire installations. Mass merchandisers – retail chains which sell tires as well as other auto merchandise. Carried multiple brands and offered auto services. Large tire chains – usually had 30 – 100 outlets within one geographic region, carried many major brands and private label tires, they were low price – high volume outlets. Goodyear did not distribute its tires through all of these retail options. They only distributed their tires through independent dealers, manufacturer owned outlets and directly to government agencies. Their direct competition Michelin sold its tires mainly through large chain dealers and warehouse clubs. The small independent dealers accounted for 50% of Goodyear replacement tire sales revenues while manufacturer owned outlets accounted for about 30%. There were 4400 small independent dealers which carried the Goodyear brand, however only 2500 of these dealers were considered active by Goodyear which was only about 57%. To be considered active a small dealer must generate consistent levels of sales, maintain major Goodyear retail displays and offer the full line of Goodyear tires. A reason why only 57% of small independent dealers were active is because many of them were unhappy about how Goodyear owned about 1300 manufacturer outlets throughout the country. This gave some of the small independent dealers a disincentive to push Goodyear products. We can say this because the margins that small independent dealers averaged 28% on Goodyear tires, 25% for other major brands and about 20% for private label tires. Another reason why small independent dealers were unsatisfied was because wholesalers and large chain stores would occasionally acquire Goodyear tires and then advertise Goodyear merchandise even when they did not have any in stock. They would then sell the consumer another tire, this tactic was called the bait and switch and it found Sears on the wrong end of two law suits from Goodyear. Even though the margins for tires for independent dealers were at a pretty reasonable level they derived almost half of their revenues from auto services such as oil changes, tire rotations and minor engine work. This was because consumers buying tires often referred to it as a grudge purchase. The â€Å"average price† of a Goodyear tire in a small independent dealer was about $75 per tire. However, Goodyear and the entire industry found that its sales were much higher during promotional periods. This led to the over promotion of tires and now has left the consumers expecting some sort of deal when tires are purchased. Many of these promotions were often something like buy three tires and the fourth is free. In this case that means that 4 tires were really being sold for about $56 ($225/4 tires) compared to the $75 average. This type of marketing structure led to the expectation by consumers that they should be getting a deal on the tires that they purchase. Another sale tactic which sold tires to the consumers was a manufacturer guarantee, which would often guarantee the life of the tire between 60,000 and 80,000 miles. This made consumers feel as though they were getting a quality tire at a reasonable price, which in hindsight pushed the independent dealers to sell more of the inexpensive tires that came with the manufacturer guarantees. The Goodyear Aquatred tire was going to be released in 1992, and Goodyear needed to know how to price it and which channels to distribute it through. The Aquatred tire was to be positioned at the top of the line broad-line segment. This was because the Aquatred differentiated itself by having the â€Å"Aquachannel† which was a deep grove down the middle of the tire and channeled the water out from underneath it to avoid hydroplaning. When tested in wet conditions this tire stopped cars going at 55 miles per hour a whole two car lengths shorter than its all season tire competition. Goodyear was claiming that when the Aquatred was 50% worn it was still as effective as a brand new all season tire. The Aquatred tire was to be released with a Goodyear 60,000 mile guarantee. Goodyear’s suggested retail price of the Aquatred was $89. 95 for a black sidewall and $93. 95 with a white sidewall. Analysis – Where distribution lays right now for Goodyear, mainly small independent dealers and manufacturer outlets, it would be within their best interests to lower the price of the Aquatred tire. I know that this is a premium tire, but at the current retail prices that Goodyear is suggesting they would be positioning themselves out of their market place. Their pricing of the Aquatred tire is about $35 ($56 compared to $90) higher than a tire with a similar mileage warranty. I would lower the price of the Aquatred to somewhere in the $80 – $87 range so when there was a promotion it would reflect $60 – $65 range. This would show the consumer that the extra money is for the quality of the tire and for the enhanced safety of the passengers. Another key concept would to under no circumstances sell to wholesalers and large chains, this trend is continuing to eat away at their core channel of distribution (small independent dealers). Another thing I would do is make the manufacturer outlets stock only the full lines of Goodyear at their stores when there weren’t any small independent dealers within the region. Otherwise, I would use the manufacturer outlets to sell more of the Goodyear niche products to try not to directly compete with the nearby small independent dealers. Another way I would try to please Goodyear’s small independent dealers would be to have the manufacturer outlet’s retail prices be higher but still competitive with them. I believe that this tactic will raise the amount of active independent dealers for Goodyear up from a lowly 57%. To help the sales of the independent dealers I would run an advertising campaign that emphasized the safety of the Aquatred in harsh conditions. With the main objective of the ad saying something like ‘isn’t your family’s enhanced security worth an extra $20? ’ I would also commit more ads to the southern half of the US where there would be no need for all season tires, and more of a market for the Aquatred. I would still advertise in the north of the country, there is just more value in the south due to the lack of snow. These are my recommendations for Goodyear.