Tire Pricing: A Taboo Topic
When tire dealers get together in an open forum, they can talk about almost anything. Stiff competition. Eroding or improving supplier-dealer relationships. The effect low-cost Chinese tires are having on their businesses.
They generally can be as pointed and as politically incorrect as they want to be. Leave out profane language, and their opinions are at the very least respected by the others in attendance, and at most greeted with wholehearted acceptance.
But you can’t talk about pricing. Every year, successful tire dealers share their secrets at the Global Tire Expo’s seminar of the same name in Las Vegas. The moderator voices a disclaimer at the beginning of the seminar: You can’t ask questions about pricing.
There is a reason it is a taboo subject. Even talking about price may be interpreted as price fixing, which is illegal. And the government may be listening.
The U.S. Federal Trade Commission (FTC) defines price fixing as “an agreement — written, verbal or inferred from conduct — among competitors that raises, lowers or stabilizes prices or competitive terms.” Antitrust laws require that each company establish prices on its own, without agreeing with a competitor.
Here’s the FTC’s reasoning. “When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.”
It’s interesting how much the U.S. government’s rationale for imposing tariffs contradicts this reasoning, but I digress.
The importance of pricing strategy by you or your suppliers cannot be overstated.
According to the FTC, an agreement among competitors to fix prices is almost always illegal, whether prices are fixed “at a minimum, maximum or within some range. Illegal price fixing occurs whenever two or more competitors agree to take actions that have the effect of raising, lowering or stabilizing the price of any product or service without any legitimate justification.”
The government doesn’t have to uncover direct evidence of guilt to find parties guilty of price fixing, either. An illegal price fixing agreement can be determined from circumstantial evidence.
“For example, if direct competitors have a pattern of unexplained identical contract terms or price behavior together with other factors, such as the lack of legitimate business explanation, unlawful price fixing may be the reason,” says the FTC. “Invitations to coordinate prices also can raise concerns, as when one competitor announces publicly that it is willing to end a price war if its rival is willing to do the same, and the terms are so specific that competitors may view this as an offer to set prices jointly.”
That is why tire dealers at the very least don’t discuss pricing in an open forum. It is also why tire manufacturers have to be so careful when they announce price increases. The flurry of tire price increases in the first five months of this year is a case in point.
Even though raw material costs have risen dramatically in the previous 12 months, each tire manufacturer had to be cautious when announcing a price increase.
Goodyear Tire & Rubber Co. was the first tire manufacturer to announce a price hike this year. It went into effect Feb. 1. (At the time of the announcement, Goodyear Chairman, CEO and President Rich Kramer said he anticipated a $1 billion increase in raw material prices in 2017.)
As a Tier 1 company, Goodyear set the tone for the price increases that followed, not only by its competitors, but by support suppliers who also have to deal with rising raw material costs.
With the legality of these necessary price increases determined, there remains one sticking point to the increases. Will they stick?
“Dealers continue to believe that the largely implemented price hikes from leading tire manufacturers will end up sticking,” says Nick Mitchell, managing director, research analyst for Northcoast Research Holdings LLC.
However, because inventories are bloated from what Mitchell calls “weak sell-out trends in the first quarter of 2017,” some dealers are lowering prices to move inventory. That’s a business decision only they can make.
The importance of pricing strategy by you or your suppliers cannot be overstated. Cooper Tire & Rubber Co. instituted an early price increase, at least compared to its competitors, and as a result suffered a decrease in unit sales volume compared to the same period last year. ■
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