Not dead, just different
This month we are going to delve into how retailers feel about private brand tires. I talked with dealers about the current trends and the future prospects of private brand tires, and there are certainly strong and differing opinions.
Some dealers I spoke with have been in the tire business more than a few decades, and believe me, they have opinions. When I think of strong opinions, I’m reminded of a quote from Major League Baseball hall of famer Yogi Berra.
Known for his wacky quotes, Berra once described back-to-back home runs hit by Roger Maris and Mickey Mantle as “It’s déjà vu all over again.” But the overall impression I got when I interviewed manufacturers, distributors and retailers about the current state of the private brand tire business is that business is not the same.
Though the private brand tire game and the rules have changed, they are not affecting everyone the same. Some dealers have retained an advantage in their markets, while others are suffering. Most everyone I spoke with recited some degree of history regarding private labels. It’s as though they were longing for simpler times. The mere fact that everyone wanted to give a slight history lesson indicated to me that all recognize that it’s not what it once was.
For years, private brands were a strategic part of a tire manufacturer’s marketing and production goals. Private brands kept factories running. Private brands added to capacities and helped keep manufacturing costs down.
As America expanded its highway system and as people moved to the suburbs, driving habits changed — more people were driving more cars more miles year after year.
As distribution channels developed it made sense to develop and sell private brand products through a variety of the distribution channels. And it worked.
Today, however, with a considerable increase in car companies marketing a wide variety of vehicle types with a wide variety of options requiring ever-increasing sizes and styles of tires, SKU proliferation has affected tire manufacturing.
The manufacturing costs and complexities of tire factory production runs make it impossible to support and supply the necessary requirements for building multiple private brands in ways it was done in the past.
Therefore, over the last number of years, many tire companies have de-emphasized private brands and have committed the necessary resources to more adequately marketing their primary name brands.
This trend, along with the relatively recent actions by Goodyear Tire and Rubber Co. to exit the private brand business, has left a supply gap for the independent retailer and distributor seeking private brand products.
In an effort to close the supply gap, retailers and distributors have gone overseas to seek supply at the lower end of the pricing structure.
Simple logistics dictate that buying tires from the other side of the world will have its share of difficulties. Pricing fluctuations, raw material costs, transportation costs, tariffs, rapidly changing SKU demand, etc., are bumps in the road that have made smooth transitioning difficult at best. The economic recession hasn’t helped, either.
There are a lot of dots to connect to replace a private brand with a brand or brands from overseas. In fact, it is unrealistic to think replacing an established — in many cases, decades-old — private brand with a “container program” from a supplier and a country unfamiliar with branding and channel management.
With all the shuffling of molds and setting up and building new factories overseas, there was a real disruption in product flow. To this day, it has not sorted itself out. The private brand business is still in a state of flux.
This flux has lead to what has been identified as a “supply-constrained environment.” Nowhere is this constrained supply more evident than in the private brand and low cost import segments. Producers in the United States have abandoned the entry-level price point market due to labor costs and lack of profitability, leaving a sizable gap to be filled by overseas producers. Though the units flowed freely at first, there was a real lack of channel management.
In baseball, every team and every player is seeking the slightest advantage since it can mean the difference between winning and losing. Tire dealers are no different. They are always looking at stocking the right mix of tires, and the right mix incorporates a wide variety of factors in any given market.
A healthy mix of tires is some combination of branded products, associate brands, low cost imports and private brands.
Modern Tire Dealer defines the brand categories as follows...
Private brand tire: marketed and owned by a company or organization other than the one that manufactures it.
Associate brand tire: marketed by the manufacturer under a brand name other than the manufacturer’s chief label or labels.
Low cost imported tire: manufactured overseas and marketed as a direct competitor to private and associate brand tires.
Looking at the most recent MTD Private Brand Study, we see that independent tire dealers indicate that “price” and “profitability” are key factors in their decisions to handle private brands.
In the survey, 95.7% of respondents indicated they carried private brands.
The trend toward “branded” products by major tire manufacturers is having a major effect on the independent tire dealer, and this effect is predicted by some to accelerate. One individual I spoke with who is pro-private brands feels the lack of adequate supply is going to hurt the independent dealer.
Independent dealers have long recognized the additional profit potential of private brand tires. As I stated earlier, tire dealers, like baseball players, are always looking for the slight advantage, the advantage that translates into more gross profit on a per-sale basis.
I’ve observed over the years that a private brand tire sale with appropriate add-ons can be the healthiest gross profit sales ticket of the day. Private brand tires have played an important part of this gross profit formula for most independent tire dealers over the years, and the current supply-constrained environment — with fewer available private brands — has the potential to bring adverse effects to tire dealers’ bottom line.
As dealers are aware, a shift in product mix combined with a shift in SKU profit margins can add up quickly — good or bad. I have spoken to several private brand distributors and retailers, and the message can be summed up as follows: The game has changed, supply is tough and the rules are different.
Here are a few direct quotes from well-known and respected retailers and distributors. They prove there are very conflicting opinions on this subject.
“The private brand business is dead.”
“Our private brand business is strong and growing.”
“I’m selling more name brand tires and making less.”
“I’m selling more name brand products and making more.”
One distributor said, “We had become too dependent on a private brand that was slowing dying. There was a lack of sizes, it was hurting our business.”
(This distributor has shifted its thinking, re-aligned its product mix and is aggressively attacking the marketplace, recouping lost sales and gross profit with less emphasis on private brands.)
The two dealers making the differing statements about the state of private brand business are both correct when viewed from their individual situations. One dealer was aligned with a manufacturer that has exited the private brand business and the other is aligned with a manufacturer that remains strong and committed to the private brand segment. The one dealer is attempting to re-align with another manufacturer and is finding it difficult as a result of tight supply, territory agreements and the various needs of his specific business.
A quick observation, however, points to a rather obvious conclusion. The current state of private brands is far from their former profile. At one time there was a more substantial difference in acquisition costs, and the private brand sizing matched up or aligned more closely with the major brand on a size-by-size, style-by-style basis.
With SKU proliferation being what it is today, it’s impossible to mirror a major brand. Much of this has changed, along with a wide variety of other factors that shifts and realigns the private brand business to the point where it is considerably different than it was historically and even recently.
As a result of several major manufacturers severely reducing or eliminating their private brand production, the demand exceeds the supply. We are currently operating in a supply-constrained environment. Simple economics says that pricing will increase, and it has. But the acquisition cost between private, associate and major brands has shrunk in many cases, further eliminating the advantage that dealers have long enjoyed when selling private brand tires.
Other factors affecting private brand supply include demand for replacement tires in China, India and other emerging and surging countries, which means that fewer low-cost private brand radials are finding their way to the U.S.
So, as Yogi Berra would say, and has said, “You can observe a lot by just watching.” As we watch the shifts in worldwide supply and demand, as we watch the shifts in SKU proliferation, as we watch major manufacturers shift away from private brands, it appears that the private brand business is in a state of flux — not dead, just significantly different.
However, things in flux, like our industry and private brands, tend to stay in flux. I predict that the private brand business will rebound due to the high levels of acceptance by tire dealers and consumers. It’s a simple case of supply and demand, and the demand is there.
There are approximately 975 million tires in service in the U.S., and approximately 25% of these tires will be replaced this year. The brands may be different, the gross profits may be different, the process may be different (Internet, Facebook, Twitter, etc.) and the results may be different. Those working the retail sale counter still influence 85% of the transactions that take place in a brick and mortar store. Let me repeat that: 85% of all the tires purchased will be influenced by the counter staff.
It will be the job of the counter staff to give the customer awesome service, to get the right tire on the right vehicle with the right profit with the right attitude. The consumer has and will continue to trust the opinion of the independent dealer, whether the tire is a private brand or an associate brand or one of the tiered brands.
Wayne Williams is president of ExSell Marketing Inc., a "counter intelligence" firm based in La Habra, Calif. He can be reached at email@example.com.