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5 Questions With … Paolo Ferrari, chairman and CEO of Pirelli Tire North America

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Paolo FerrariPirelli Tire North America chairman and CEO Paolo Ferrari spoke with Tire Review at February’s Aston Martin On Ice event in Crested Butte, Colo. Ferrari gave us an in-depth look at the work he’s undertaken over the past two years and what the future holds for the company.

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TR: You’ve been optimistic about the U.S. economy. What’s that mean for Pirelli?

Ferrari: We’re coming out of two years of a rough market. The market was down in 2012, was basically flat in 2013, but thanks to the last few months they were good because we were down 4%-5% in September and October so it’s picking up. All of the signs are for the economy to pick up. But, we’re waiting for our market to pick up. There were very good signals in December. I’m not going to say the market has recovered until I’ve seen 2-3 months straight of growth because we haven’t seen that in a long time.

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So I was expecting to see that December was good, January to be inline and good also and February is not over yet, so we’ll see what it is. Generally, it wasn’t that exciting due to the weather. So, in my opinion, we’ll see a weak February and March will be the true month to see if the market will recover or not. I expect it to recover and be a very good month. Within this context, over the last two years, we’ve outperformed the market. In the premium segment, we grew two to three times faster than the market – so we gained marketshare. Which is very positive.

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TR: What will you offer dealers as far as resources to grow with the Pirelli company?

Ferrari: The most important thing that I focused and worked on when I joined two and a half years ago, was to give them a very good and consistent supply chain. They need to be comfortable that when they’re placing orders, Pirelli will deliver the tires in a timely manner and as close as possible to 100% fill rate and that we would do that every month. Not one month or two – every month. That was the biggest project for me to do in the first few months that I was here.

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Then we pushed a lot on trade marketing. We launched a lot more initiatives with them, promotions for them and for the consumers, a lot more visibility on the brand digitally has also helped.

If you think about it, we’re working on all the major levers of a business. The industrial part – we had a factory in Rome, Ga., but it is relatively small – so we built a big factory in Mexico. Supply chain is giving dealers tires consistently. Original equipment — they have more stock of Pirelli cars out there. Trade marketing and digital initiatives. We work across the board starting with the most urgent things: supply chain and the factory. As soon as we had that in place [we ramped up the other levers.] It didn’t make sense to ramp up marketing if we couldn’t supply the tires. Once we had the factory and the supply chain in place, we started upping our marketing dollars and that has paid off as far as our premium marketshare.

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TR: The next steps for Pirelli would be…?

Ferrari: In the next years, we need to make sure all of those platforms continue to deliver and live up to the expectations. One thing that I haven’t mentioned that we’re doing is introducing new product. We introduced a couple of new products in the past few years that ranked number one and number three on Tire Rack. So we need to clearly ramp up the factory – it’s now two million tires, it needs to get to five million – that will improve our footprint and supply chain. We need to keep consistency with the supply chain and slightly improve it. It’s one thing to improve it from 60% to 85%, another thing to get from 85% to 95%.

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We need to do a good job capitalizing on original equipment. Right now, we have put together a new geo-marketing platform that tells us and the dealers exactly which car part in their zip code that they serve is there and how many of these cars were fitted by model and by size. So, we go to them and say listen, you’re not stocking or buying the right tires for the kind of car part that you have. We’ve done that for six months now and we need to further refine it.

And we need to keep on scaling up our marketing. We’re investing today three times as much marketing money as we did before I came. We got the money from our shareholders because we were delivering on results. We were delivering on marketshare. Despite the incremental marketing dollars, we’re actually making more money in absolute terms and percentage terms. It’s a virtuous circle that keeps on growing. In the next two years, we’re going to have all the Pirelli strategy levers coming together at one time. We’ll have a lot of OE positions, a big factory, we’ll have new replacement products and more marketing money. Everything will help build the top line, the bottom line because Mexico is going to be an efficient factory, and the cash flow because the shorter the supply chain is going to release our working capital. Why source it from Brazil when it’ll take 40 days when we can source it next door. The execution is in our hands, but we’re building on platforms that we’re building already. We just need to ramp it up.

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TR: What are you doing in terms of consumer marketing?

Ferrari: We focus on premium segments and premium areas. We can target our money much better through digital. We have a big digital budget, which is targeted to geographical areas and to the right segments. Within the digital, we tap into all or our assets. Motorcycles, Formula One, the tires themselves, the calendar, the lifestyle and fashion; compared to other tire brands, we have a lot more territories that we can build on digitally. We see that because we measure the engagement on social media. Engagement is highest in Formula One. Clearly, the Formula One base in the U.S. is not as strong as in Europe, but those guys are really engaged. On the fashion calendar, it’s the same thing. You talk to people you wouldn’t normally speak to about tires and Formula One. We bring them in, engage them, then talk about the rest.

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TR: Sounds like you’re building a community. How are you going to turn customers into advocates?

Ferrari: Like with all the other levers, we have to take it to the next level. We have our own database with our own consumers and we do targeted emails. I think we want to take that to the next level and bring it to a club or a community. Considering the different segments we have, we probably won’t be able to have just one club. If I think about the next level of digital marketing for us, it is even more inclusive engagement with our own community.

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We started from a base that wasn’t exciting. When we have 50, 60% fill-rate in the market, that’s not good. You need to make it better, which is not easy, but if you can make it better, the result is immediate. When you engage in digital activity, you see that Pirelli is a fantastic brand, but we didn’t even have a local Facebook page in the U.S. We didn’t have an Instagram page. We weren’t doing a lot of the normal paid media things. This was all low-hanging fruit to us so we did them.

TR: Marketing seems to be a huge part of Pirelli’s future.

Ferrari: There are many differences between the U.S. market and the European market. One is that luxury brands tend to be more conservative in the marketing of their promotional activities because they’re luxury. In the U.S., you see a lot of luxury brands do a lot of trade activities but we didn’t do any of that. Simply by engaging our sales team with rebate activities and various promotions, people were reactive to it. Of course, we’d never do cheap trade marketing promotional stuff. Whatever we do is linked to the premium brand. So if we do an incentive trade for our dealers, we’ll bring them to the Sistine Chapel in Rome, the Formula One Grand Prix in Monte Carlo or some other exclusive places. They’re promotions, but they’re in the world of premium.

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Same thing with consumer rebate. You have to do them with other premium brands for destinations that are very exclusive. So you can cope with the luxury of your brand and your equity with a promotional program, which in the U.S. is key because the U.S. is a deal-making country. Even rich people want a deal. That wasn’t in the plan before I came, we put it in the plan and now it’s working.

The U.S. is still the most competitive and rational market in the world. If you pull the right lever, especially with the very sophisticated customers that we have in the U.S., the business steers in the right direction. And if you don’t, the business steers in the wrong direction.

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TR: What will set Pirelli apart in the future?

Ferrari: Everybody wants to be in that segment, but nobody concentrates solely in that segment like we do. Some of the efforts that our biggest competitors do is fine on the premium, but they still have to produce all of the other tires for all the other segments in order to fill out the factory. So, the branding, the operations, the marketing is diluted. We’re premium, we don’t have to fill out our factories with long-run products. Our factories are premium, they’re flexible so we can solely concentrate on premium products.

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TR: The U.S. is coming out of a recession. Things must look good for premium marketers …

Ferrari: The premium market is there to stay. Look at the American OEMs like Ford. Ford itself, we don’t necessarily consider it a premium brand. They have their own Lincoln brand. But if you look at the models, they have great models. And they’re putting more and more technology into them. They want cars that want cars usually 17-inch, 18-inch and up. We’re in that market and that market is growing. Ford themselves are pushing into campaigns to bring consumers back to their dealers. Their latest campaign was if you take care of your car at the dealer, the car will take care of you. Tires are part of that scheme. It’s definitely a trend that is here to stay.

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Some other brands think that if you work hard enough, you will gain fitment in the prestige market. This is not true because we’re working now with these guys. We’re ahead of the curve. We keep ahead of the curve. Will they gain fitment? Yes, but the bulk will stay with us and some of our key competitors.

The smarter, more sophisticated dealers across the U.S. understand that they have to give value to the consumer, which is not necessarily just price. Will they have to stock a “cheaper” brand, yes. There will always be a consumer that is disengaged and doesn’t care. But our segmentation studies show very well that a big chunk of our consumers are tire enthusiasts or image conscious. Those are the two key segments that we focus on. Together, according to our study, those account for 50%. We all want to be in this segment and the dealers want to attract this segment.

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