Bright Future Ahead?
It’s easy to forget sometimes that private branders even exist. They are rarely involved in controversy, are often not thought of as being on the cutting edge, and, for the most part, seem to remain in the background of a very public industry.
But nothing could be further from the truth. Some private branders are so large and offer so much in the way of products and support that they are virtually on par with the major manufacturers. Others have focused on creating complete marketing packages, with tires playing a smaller – albeit important – role. Still others remain more traditional, preferring to be smaller, but highly profitable.
All, however, have one common denominator and fill an important role – providing high quality, higher margin and extremely competitive product alternatives to tire dealers.
Because they are often overlooked, little consideration is given to how industry events – consolidations, fill rate problems, the rise of alternative distribution channels, product proliferation and stratification, controlled distribution and the Internet – impact their businesses, and impact dealers who rely on private branders.
In these exclusive interviews, to be presented over two issues of Tire Review, we asked the top executives of the major private brand tire companies to give us their views on these subjects, and discuss how they plan to move into the future in an evolving market.
In recent years, tire maker cutbacks on private brand manufacturing have hurt a number of private branders. Tire company consolidations and plant rationalization have had a serious impact on capacities, raising concerns with tire dealers. How do these issues bode for the survivability of private brands? What are you doing to strengthen your position to help assure your brand’s survival?
Wire/Treadways: I think it’s fairly obvious that recent plant rationalizations have had an impact on many of the smaller private brands. But they have also caused manufacturers to look at their own flag and associate brands. The real issues are SKU proliferation and minimum production runs. The solution to this problem is the same for everyone – volume. The larger private brand distributors with multiple brands have an advantage because we have greater volumes to work with. And, we have opportunities to use generic products across some of our lines, which creates larger production runs. But we are not immune from the issue, and over the past year we have made a concerted effort to minimize the number of SKUs in our brands. Without a doubt, the industry has not heard the last of this, but I believe that our brands are all in a very solid position.
Brown/Heafner: Due to the need for improved manufacturing efficiencies, the "threshold volume" requirement from the manufacturer continues to rise. Domestic manufacturers are beginning to look at private brand production in the context of their multi-brand strategy. For private branders to obtain capacity with a domestic manufacturer, it is becoming increasingly important that the private brander be a part of, and in support of, this overall multi-brand strategy. Additionally, we’re seeing the manufacturers using their own associate brands for the price point position occupied by private brands with their direct accounts. Each of these factors will continue to place more and more pressure on the private branders and lead to further consolidation. And those that rely primarily on regional wholesalers are going to find it more and more difficult. These businesses are coming under significant pressure as a result of the competitiveness of the market – not just in price, but also in delivery and value-added service requirements – cost of operations, capital requirements, and the need for financial and technological expertise.
Helker/Del-Nat: This has obviously had a dramatic impact as manufacturers look to control their distribution. Fortunately, we have aligned ourselves with manufacturers that are dedicated to private brands and/or still need private brands as a large portion of their manufacturing base. The one key thing is growth. We’re selling more units than ever before. This we must continue for us to remain attractive to manufacturers.
Ganz/Galaxy: You are absolutely correct in reference to the impact of consolidations and rationalizations. At one time, this did cause us to have concern. By changing our contracts and procedures, we no longer found this to be an issue due to the fact that 50 percent of our business is to original equipment manufacturers of heavy machinery. We have strengthened our position by having the factories sign long-term contracts. Our long-term survivability is not an issue. While working with numerous factories, we’re able to control the design and workflow extremely well. I do suspect that the survivability of other private branders may not be as good.
Anderson/Hercules: On an overall basis, I think the private brands have maintained market position. To survive and be successful, private branders must understand the needs of the manufacturer, which, today, is capacity utilization with longer runs, planning, and mold acquisition. It is important that private branders work with the manufacturer to improve efficiencies and, thus, become a better customer. This also entails the proper selection of a supplier. Our arrangements are long-term and with those suppliers who have historically shown an interest in private brands. Loyalty is probably spelled V-O-L-U-M-E. Production allocation has to be earned.
Day/TBC: So long as private brands provide value to tire wholesalers and retailers, and remain attractive to consumers, the marketing concept will not only survive but will grow and prosper. Having said that, we certainly are alert to the changing conditions in tire manufacturing. One thing in our favor is that we have signed 10-year supply agreements with our two largest suppliers, and we have relationships with other supply sources worldwide. Keep in mind the value-added elements we bring to our manufacturing partners. We own our own molds, relieving the manufacturer of that investment. We take our products end-of-line so no inventory investment is required. And due to the strength of our business, our cash flow enables us to discount our product purchase bills, thereby relieving our manufacturer of credit risks and accounts payable pressures.
Zegans/Reynolds: Although manufacturers have had cutbacks that have severely affected private branders, we feel positive for the future. Private and associate brands still account for a large percentage of the replacement market. The relationships we have developed over a 30-year period with our business partners – customers and suppliers – plus controlled distribution will serve us well in the future. Don’t get me wrong, there are problems. We have to work hard every day to combat these negative forces on all fronts.
Thomas/Spartan: There will always be private brands. And if they don’t want to build it domestically, there are plenty of overseas manufacturers who will build it. Private brands represent over 50 percent of the replacement tire business. A number of that magnitude is not going to go away. In the last two or three years there have been some 30 factories opened in China. There are a lot of people out there who will build product if others don’t want to. In days gone by, a lot of people, including ourselves, had all their eggs in one basket. It was a way of life. There were times when it worked very well for us, and there were times when it didn’t work too well. What we’re doing now is having complete tire lines built by different manufacturers – four tire brands built by four separate manufacturers in complete tire lines. When there is a shortage in a line or in particular sizes, we’ll have the other three suppliers.
The biggest advantage private brands offer a tire dealer is territory protection and/or market exclusivity. In this era of tire size and type proliferation and reduced manufacturing capacity, how much longer can private branders offer territory protection? Will some be forced to merge or join forces to secure additional manufacturing in order to meet burgeoning dealer product needs? Will private branders be forced to niche themselves – provide only certain types and/or sizes of tires – in order to survive?
Wire/Treadways: The issue here is not how long a private brand can offer exclusivity, because without exclusivity a private brand can not survive. The issue is to make sure that we’re getting adequate volume in return for that exclusivity. There may be some instances where some of the smaller private brand companies attempt to work together or even develop some niche business, but the reality is that you need volume to survive.
Brown/Heafner: Consolidation is occurring among private branders. We’ve seen some brands disappear. Some manufacturers have purchased private brands they were manufacturing and brought them back as an associate brand. We’ve seen mergers and acquisitions among private branders. This consolidation activity will continue, but should not affect the ability to offer exclusivity on a particular private brand for a particular market. Market area protection will continue to be very important to dealers, and private branders will have to continue to provide this advantage. However, companies with multiple private brands may find it more economical to have a shared line between brands within certain segments, such as ultra-high performance.
Ganz/Galaxy: We’re very interested in making sure the dealer not only has the ability to sell our tire, but can also make as much profit as possible selling our products. Down the line, I do sense the smaller and larger private branders will be forced to merge. In joining forces, they will help secure their future and help meet their manufacturing requirements. You ask whether private branders will be forced to niche themselves. We provide that now. We consider ourselves one of the premier niche manufacturers with our tires and wheels. Our mission statement says "to be the recognized industry leader in select niche markets where Galaxy can bring added value to its customers by providing purpose-built products." We believe the industry will continue to go towards niche marketing as more manufacturers see this as a revenue-driving area. The manufacturers will unite to search for ways to increase profitability. You’ll continue to see mergers or mutual agreements that will enhance both companies.
Helker/Del-Nat: We can offer territory exclusivity and protection as long as we get the necessary market penetration. Fortunately, with the private brand unit growth, we have been able to maintain and grow the market penetration. No doubt we’ll see private branders merge. It’s happening as we speak, and there will be more. If and when this happens, particularly to the larger private branders, death will be right around the corner. We must continue to be a full program supplier in order to remain viable. Our wide variety of products is what makes us attractive to our members. Without that, we are no different than anyone else.
Anderson/Hercules: Private branders will continue to offer territory protection and market exclusivity as a means of differentiating themselves from the associated or controlled brands. However, the commitment to giant territories without adequate volume commitment from the dealer cannot persist. The market assignment must fit the potential of the dealer. As I said earlier, the definition of loyalty is volume, and this same loyalty must be between the dealer and the private brander. There will be mergers, as there has already been among private branders. And some of this is being forced by the manufacturers. However, this will probably have a greater impact on territory agreements since mergers, in many cases, end up with neutral product lines or overlapping lines and territory arrangements. Niche markets do offer private branders an opportunity, but I do not believe private brander can survive by simply being a niche supplier.
Day/TBC: The private brand segment is going to pursue opportunities to consolidate just like every other element of the tire industry. We’ll do this for the reasons you mention, as well as for more traditional reasons – opportunity for growth, economies of scale, diversification and the rest of it. But in our part of the industry, it’s our intention to be a consolidator, and we certainly do intend to meet our dealers’ product needs. Of course, territory exclusivity is a function of more than simply supply. It requires unique products and sizes, along with marketing discipline.
Zegans/Reynolds: We see consolidations happening in the private brand arena, and we are looking to strengthen our relationships in markets across the U.S. Territory protection is the single most important thing we offer, and it will continue to be important in the future. I think that niche offerings may work in certain areas.
Thomas/Spartan: There will always be people who want to come to the biggest replacement market in the world. So there is always going to the opportunity to buy. I don’t think anybody is going to be frozen out. The private brand arena is all about the dealer making a profit, and the major brand arena is all about units. But there is a conflict between selling units and making a profit. The reality of both of those is taking care of the dealer in a timely fashion. The major manufacturers have no sense of urgency about anything. There is a sense of urgency with the tire dealer because that urgency is what puts money in their pockets.
Tire manufacturers have created programs which require certain purchasing commitments. How have these "affiliated" or "alliance" programs impacted your private brand business? How have these kinds of programs helped or hurt dealers? And how have they helped or hurt the viability of private brands?
Wire/Treadways: I’m sure that these programs have had some effect on private brands, but they also impact a manufacturers flag brand program. The foundation for all successful private brand programs is exclusivity, and the formula for the dealer is very simple – exclusivity equals profitability. These programs do not offer private brands, they offer "public brands." In almost every instance, a dealer’s most profitable program is their private brand line. Why would a dealer want to entrust their most profitable product line to a manufacturer that sells every Tom, Dick, or Harry or, more appropriately, every Sam’s Club, Sears, or Ford dealership in their area? Our philosophy is that we offer quality products, at competitive prices, in exclusive marketing areas, which allows our dealers to obtain long-term profitability.
Brown/Heafner: Each of the four primary domestic manufacturers now has a multi-brand dealer program. They’re attempting to address various price points through their product portfolio, thereby minimizing the need for the dealer to bring in lines from another manufacturer. While the dealer may be able to gain more "support" than ordinarily available, some independence may be lost. Each dealer has to carefully analyze their individual situation and make their own assessment as to the value of the manufacturer’s program. We believe these programs will negatively impact the private brand segment, resulting in more pressure and further consolidation. When the final 1999 numbers are in, we expect to see some erosion of the private brand share of the market with gains in the flag brand and associate brand segments. And we believe this trend will continue.
Ganz/Galaxy: The larger manufacturers have turned to purchasing programs that require certain commitments and allotments because they can’t afford to reach out to the smallest of dealers. Plus, smaller dealers are looking for ways to be different from large merchandisers. This has increased our ability to help smaller dealers because we’re committed to allowing smaller orders, and we can make it cost effective and profitable while giving him the service of our larger distributors. These "affiliated" programs have hurt the smaller dealers, but they’ve helped us. Larger dealers will also increase their use of private brands in order to maintain protective territory without jeopardizing their other marketshare.
Helker/Del-Nat: These programs have impacted our business quite a bit. As manufacturers tie major and associate brands together with commitments, they’ll eat into private brands. Initially, their incentives appear to help dealers. Ultimately, the tire dealer needs to determine if he can live with being controlled and the threat of building a brand only to have it given to someone else. We have members in these programs. Our strength is product mix, exclusivity and ownership rather than control. Our members have a financial interest in Del-Nat and a voice as a stockholder.
Anderson/Hercules: The major brand strategies currently in the market today have been developed from weaknesses, not from strengths. A program developed from weakness probably will not succeed. If a dealer ties himself to a program built out of weakness, and the program isn’t supported by the manufacturer, he may have bet his future on a program the manufacturer will no longer support. It’ll be interesting to see how the manufacturers will enforce these rules with larger retailers, and whether this will create some legal problems. Dealers should differentiate themselves by selecting brands – including private brands – that fit the market segments they’re trying to reach. In this way, dealers will build the brand equity in their businesses, and not in a manufacturer’s brand over which he has no control. It’s important that the independent dealer not surrender his independence, success and survival.
Day/TBC: When it is in the manufacturer’s best interest to sell you brands they control, it’s in your best interest to sell brands you control. We’re very aware of these programs, and we know that they are, at least to a degree, aimed at us. We meet them head on by constantly improving our key services to the dealer – product quality and selection, superior delivery and exclusive territory.
Zegans/Reynolds: Controlled distribution groups can be good. However, membership in a strong private brand group can be just as good. In fact, maybe better because the dealer buys what he wants, when he wants it.
Thomas/Spartan: These programs are either going to work because the manufacturers are going to enforce them, or they’re not going to work because they aren’t going to enforce them. These programs require you to buy over 50 percent of your product from one manufacturer. After you do that, you certainly can’t participate in any of the other major brand programs. If a major brand requires that, then you better be looking at a private brand.
How have the capacity and fill rate problems faced by the major brands in 1998 and 1999 impacted the private brand business? How has this situation been a blessing or a curse?
Wire/Treadways: The capacity/fill rate problems have certainly had a major impact on the private brand business. If you’re one of the brands that was cancelled, or had SKUs eliminated, then the result was very negative. From our standpoint, we look back on this event as very positive for our company. At this time, it’s somewhat hard for me to accept that, because we lost a lot of business due to the lack of product. But the other side of that coin is that we now have quite a few less competitors in the private brand arena.
Brown/Heafner: The impact of the supply issues really depends on which manufacturer the private brander was aligned with. Not every private brand manufacturer had supply problems last year. Dealers will do what they have to do to survive, and if it means bringing in a different product in order to maintain their sales and customers, they’ll do it. And there is no guarantee that when supply returns, the dealers business will return as well. If you look back through the 90s, or even further back, one manufacturer or another has had supply issues almost every year. To protect our affiliated dealers, we are multi-sourced so that generally, we have alternative products to offer in the event the fill-rate becomes a problem in a particular line.
Ganz/Galaxy: This has been a non-issue for us as the fill rate problems have not been as significant an issue as it was in the medium truck, light truck and passenger businesses. I think you’ll find this to be a blessing for private branders as their customers were forced to take any product just to keep their fleets moving, thereby creating an opportunity to introduce other products.
Helker/Del-Nat: Fortunately, due to our alignment of manufacturers, we had very few problems. Overall, with the majors, we think it has affected dealers aligned with them quite a bit. From the calls we get and the new distribution, it has been good for us. But, we don’t depend on that situation to continue. We cannot exist on the weaknesses of competitors.
Anderson/Hercules: Fill rates have been a problem in the private brand business, as well as other controlled and house brands. In our case, our major suppliers have treated us fairly, and have worked very closely with us in planning production to meet our needs. The curse may be that we have not been able to take advantage of the shortfall in the market since we have been committed to protecting our current dealers, and not reallocating scarce product for a short-term opportunity sale.
Day/TBC: For us it’s been more of a blessing than a curse. Of course, not everyone has strategic alliances, multiple sourcing, a 1,600,000-square-foot warehouse, a large inventory investment, unique product designs or owns its own molds. We had good fill rates in 1999. Not as good as we wanted, but all things considered, they were good. As long as we can exert the discipline we need to maintain good supply to our customers, capacity issues represent another positive differentiator between us and other suppliers. But it isn’t easy. We work constantly with our manufacturing partners, letting them know what we expect from them.
Zegans/Reynolds: Capacity and fill rates were horrid in 1999. Many new products were not produced and SKUs were decreased drastically. This situation was particularly hard for us and our manufacturers. We now see light at the end of the tunnel. We have good production and new products coming on line. We have great customers that stuck by us throughout the year, and new one’s coming on board.
Thomas/Spartan: I think it definitely impacted the private branders. You’d be stupid not to build tires you get the best recovery from versus the ones you get the least recovery from. It was a wake up call for some folks. I think it will make people stronger, and the big boys will come looking for customers when they get their act together. But they won’t get an audience. There’s no trust with these people anymore. They have broken too many sacred bonds and stepped on too many people’s toes. And I don’t think you can say this tire company or that tire company did it. The problem is none of us know who the middle management people are anymore. It’s like a revolving door. We used to be able to pick up the phone and talk to people who were in those jobs for a long period of time. We knew each other and we had a relationship. Now there’s nothing but a bunch of kids running a business they don’t know anything about. There’s no stability, there’s no friendship anymore.
The second half of our exclusive interviews with top private brand executives will appear in the May 2000 issue of Tire Review.