Despite a shrinking market, fallout from an economic recession and
tough price competition from overseas, the private brand tire segment
still offers dealers the potential for added profits and exclusivity in
their own markets.
The private brand segment has seen easier
days, to be sure, but it is still relevant in today’s marketplace. With
the improved logistical capabilities of private branders and consumers
that are perhaps more cost-conscious than ever before, getting up to
speed on this market could be good for business.
There’s no
doubt that marketshare of private brands is decreasing. According to
RMA figures, private brands held a 22.1% share of the P-metric segment
and a 21.8% share of the LT-metric side in 2004, compared to 13.9% and
15.7%, respectively, in 2007.
It’s important to note that
accurately tracking the segment’s marketshare has become difficult,
according to Phil Caris, Cooper’s vice president of sales and
marketing. “Traditional private brand business as we know it has gone
down, but to what degree is difficult to understand because some of the
private branders have moved their product to non-RMA members,” he says.
“Some of the reporting and visibility is different than it used to be,
so it’s tough to have a firm grip on the true number. Rather than a
clear-cut decline, it’s been more of a shift.”
Contributing Factors
Prior to the economic recession, private branders like Hercules and Del- Nat each reported steady business in this segment.
A
spokesperson from Hercules says the company’s business remains solid,
with a focus on improved sourcing and competitiveness in the
marketplace. “In late 2008 and into 2009 Hercules has continued to
bring new products to the market offering value, exclusivity and profit
potential to our dealer network.”
“Our business was going well,
although Del-Nat was beginning to shift more business overseas due to
lack of interest from domestic manufacturers,” says Denise Rawls,
marketing manager for Del-Nat.
As the economic slowdown took
effect, Del-Nat saw “demand for low cost or entry level tires increase
dramatically and we saw the very profitable light truck segment
decrease,” Rawls says.
As demand for low cost tires grew, so did
the number of overseas brokers offering tires in the U.S., with little
regard for volume buyers, a factor that largely contributed to the
changing face of the private brand market.
“Del-Nat was forced
to seek out overseas suppliers willing to give us tires in our brands
at lower costs than our traditional suppliers,” Rawls says.
“While
a large percent of our private brand product is produced in the U.S.,
we also purchase from overseas manufacturers,” says Hercules. “Over the
last few years many overseas suppliers have made extensive investments
in plants and equipment. The quality, design, technology and
operational efficiencies are equal to – in some cases, greater than –
domestically located manufacturing facilities.”
Such overseas
suppliers easily found their way into the North American market as once
active contract producers – including Goodyear, Michelin, Continental
and Bridgestone – trimmed private brand production in order to free
capacity for their high margin/high value flag lines. Only Cooper
remains active as a domestic resource.
“We have been able to
step in and pick up some business as certain manufacturers exited the
private label,” says Cooper’s Caris. “While private brand marketers are
the ones who are responsible for setting up their logistics and
networking to get the product out to their customers, the reputation of
the manufacturer from a quality, reliability and timeliness to market
perspective is also important.”
As with other tire segments, SKU proliferation has added some challenges to the mix in the private brand market.
“SKU
proliferation continues to add complexity to our product strategy,
which results in the need for an increased investment to stay current,”
says a Hercules spokesperson. The company plans to launch five new
lines in 2009 and early 2010, in addition to the six lines introduced
last year.
“Because of SKU proliferation, a private brander
needs to make an investment not only in inventory, but also in terms of
a mold investment and how they invest in their brand,” says Cooper’s
Caris. “It has challenged private brand marketers, like everyone, in
terms of how they manage their product portfolio. For example, a number
of years ago, every offering a private brand marketer had may have been
in its own proprietary brand. What you might see now is a combination
of the use of proprietary lines within a private brand, plus the
utilization of shared lines across different brands.”
For
private branders, it boils down to coming out with the right product at
the right time and being more selective – not being able to have every
answer for every customer, Caris notes.
On the other side of the
coin, Del-Nat’s Rawls explains the benefits of SKU proliferation.
“While the major manufacturers focus on niche, emerging or high volume
sizes, the private brands can step in and fill the need for diminishing
and lower volume sizes,” she says. “This means that as the average
vehicle age increases, and the OEs are creating new sizes, we can still
provide tires to that often forgotten market of older vehicles.”
Benefits to Dealers
Tire
dealers who do their homework could come out ahead in the private brand
arena. With many consumers currently looking for less expensive
options, stocking private brands could provide a dealership with an
added tool that direct competition may not have.
“Many consumers
may identify the major brands, but that doesn’t mean they are
purchasing them,” according to Hercules. “When faced with the need to
replace tires, consumers are becoming more responsible for researching
their options prior to purchasing, and in many cases, are reconsidering
their brand preferences along the way.
“We have found that when
people are shopping on price alone, the name is of no consequence,”
says Rawls. “For the most part, consumers accept that private brand
does not mean inferior quality, just a better value. If the retailer is
doing a good job of packaging his brand, in our case, Delta and
National, as a high quality product that also delivers high value, then
yes, private brands can sell very well during a recession.”
Dealers
considering this segment must understand their business model, as well
as the needs of the consumer base they’re marketing to, says Cooper’s
Caris.
“A private brand can play a nice role in terms of giving
the retailer a little bit of exclusivity in being able to manage the
price point and profitability of the brands they offer,” he says.
“Chances are, dealers would be able to get the type of returns they’d
like to because of the exclusivity and the fact that they’re not
competing against all retailers with like for like brands. It can
become more of a store brand for a retailer, as opposed to having to
share brands across the marketplace.”
Dealers should also
consider which private brand marketers will be able to offer the
logistical support they need in terms of getting the product to them,
be it through one of their distributors or through their own delivery,
Caris notes.
Also important when selecting a private brander is
choosing one with the product that will meet customers’ needs. “You
want to know that your private brander is keeping up with shifts in the
market, plans ahead to meet changing demands, and has a strong sourcing
and marketing team with the retailer’s independence and success as
their primary focus,” says Del-Nat’s Rawls.
Moving Forward
The
recent U.S. International Trade Commission decision regarding
Chinese-produced passenger tires could have a large impact on the
private brand tire market. As of press time, the decision, which was
forwarded to President Obama for consideration, would place a
three-tiered additional duty on the tires based on their value – 55% in
the first year, 45% in the second year, and 35% in the third year.
The
duty plan was not sought by the United Steelworkers, which petitioned
the government for a rollback in the number of consumer tires imported
from China. On June 18, the ITC ruled in favor of the USW by a 4-2
vote. That same 4-2 majority made the more recent duty recommendation.
The fees would presumably make the retail cost of Chinese tires more
expensive in the U.S.
While the USW hailed the rollback, and the
subsequent duty decision, several tire companies have said such action
would harm, not help, U.S. consumers.
“As part of the U.S.
Coalition for Free Trade in Tires, we are very disappointed, not just
for the many small and medium sized businesses represented by the
coalition, but also for the American consumer,” says Del-Nat’s Rawls.
“Consumers are struggling as it is and now they will have to pay more
for their tires, as well. We hope when the president takes into account
the broader interests of American consumers and small businesses, he
will decide against restrictions, like was done in the past.”
In
addition to Del-Nat, the coalition is made up of American Omni Trading
Co., Dunlap & Kyle Co., Hercules Tire & Rubber Co., Orteck
Global Supply & Distribution Co. and Foreign Tire Sales Inc.
Despite
the numerous challenges that have already faced this segment, as well
as those on the horizon, Cooper, Del-Nat and Hercules each see a
positive future for private brands.
“While all private branders
face challenges, Hercules is poised for growth,” a spokesperson says.
“Private branders that choose to invest and cultivate their brands will
see the market continue to expand and allow their dealer base to
flourish in the coming years.”
“Our estimate is the private
label segment will decline at a slower rate; we don’t expect to see the
type of declines that have been experienced over the last 10 years,”
says Caris. “This is a piece of the business that is going to continue
to have a significant place within the North American tire business and
we’re committed to working with private brand marketers that we’ve
aligned ourselves with.”
“We may see a few private brands
disappear, and the days of domestically produced private brands may be
nearing their end, but there is a place for private brands,” says
Rawls. “It all goes back to the retailer. Retailers who recognize the
many benefits of marketing their own brand – and believe in that brand
– can keep private brands strong in the marketplace.”