The past few years have proved tumultuous for almost every American, and hardest hit was the middle class. Today, even though the middle class American continues to struggle, there may be light at the end of the tunnel, and that’s positive. It’s time to capture those dollars as confidence in the economy increases. However, the downturn has caused the average American to change the way they look at their household budget. People are looking to spend less and save more. As consumption habits change, is your business keeping up? The economy is showing growth – albeit slow growth – consumer confidence is edging up, spending is on the rise, unemployment while still high is at least stabilizing, wages are slowly increasing, housing is on the upswing, manufacturing is coming back to the states, and stock markets are bouncing back. Each of these metrics individually point to an economy on the rise; taken together, they’re quite encouraging.
Still, there’s a bad taste in everyone’s mouths; we’re not out of this yet and the lasting impact doesn’t appear to be the best of news.
That gut instinct is valid. The economy is recovering, but it’s a slow, rolling simmer instead of a quick bounce-back. There are drags, and no agreed-upon way to speed growth. Lawmakers on both sides have strong opinions on how to fix things, but constant in- fighting and a lack of clear leadership is leaving businesses, citizens and media frustrated, flustered and confused.
Americans know that there is a problem. An overwhelming majority believe that Congress should focus on the U.S. economy in 2014, according to a recent National Retail Federation (NRF) survey. The Retail Insight Center’s monthly consumer survey indicated that between 45%-55% of American households, regardless of income, think that Congress’ attention should be building a stronger, sustainable economy.
Even though the state of the economy is ever-present in everyone’s minds, citizens have very little confidence in Congress to hand- le the problem. In January 2014, only 13% of Americans approved of the job Congress is doing, according to a Gallup poll.
“The blue-collar guy making $11.62 an hour is in trouble anyway. He’s getting hammered whether it’s a gallon of milk or diapers for his kids or a gallon of gas for his car,” says Barry Steinberg of Direct Tire in metro Boston. “But what we’re also seeing is that guy who’s living in a million-dollar house in the suburbs, who works for one of the banks and is making six figures with three kids in college – he’s the guy we’re seeing come in here looking to spend even less money because he is stretched so thin. At both ends of the spectrum, the economy has had an effect on a lot of different people.”
This economic situation is having a tremendous affect on all levels, from the poor to the rich. But the weight has especially changed the purchasing habits of the middle class American, once considered the bulwark of the economy.
“We’re finding that the average household today is crushed a little financially,” adds Steinberg.
Another recent Gallup study found that 62% of consumers today choose saving over spending. Because of this, the middle class consumer is using the Internet more than ever to learn more about products before they purchase or they are buying online at a lower price than in a store. Today’s consumer is on the hunt for deals, and they may no longer care about brands. Generics or off brands no longer carry a stigma, and top brands no longer carry the same influence they once did.
But make no mistake: this is not necessarily all about price. Where the value proposition used to be getting the most bang for the buck, today’s consumers tend to want to spend less for an acceptable level of bang. Today the concern is with getting the best deal – particularly on products they consider true commodities – and they turn to the Internet among other places to find coupons, pricing information and other ways to cut costs. As a result, they are looking at tire purchases in a completely different way. Now, the tire industry is faced with a challenge: how do we learn and adapt to these changes?
Weakening of the Middle Class
In late April, the New York Times reported that the American middle class is no longer the world’s richest.
“While the wealthiest Americans are outpacing many of their global peers, [our] analysis shows that across the lower- and middle-income tiers, citizens of other advanced countries have received considerably larger raises over the last three decades,” reported the Times. Harvard economist Lawrence Katz told the Times: “The idea that the median American has so much more income than the middle class in all other parts of the world is not true these days.”
This New York Times report followed another from earlier this year titled, “The Middle Class is Steadily Eroding, Just Ask The Business World,” in which the Times’ Nelson Schwartz reported that businesses with products aimed at the middle class were failing fast and that companies selling either premium or low-priced goods and services were thriving.
Direct Tire’s Steinberg finds this trend to be true.
“The dream of owning a home, having two kids, two cars and a job forever is tougher now than ever,” Steinberg says. “The middle income clients look to stretch their dollars on all their purchases, especially the ones they have not budgeted for such as tires and auto repair.”
According to the NRF, 55% of adults age 18 and up are spending less overall. Less than 20% of adults claim that their spending plans have not been affected by the adverse economic conditions.
“It is stylish to save today,” Steinberg says. “The entire world is looking for faster, better and cheaper.”
To adapt to this, many businesses are pricing themselves as “the cheapest in town.” Direct Tire takes the opposite approach, selling its story and experience.
“We never talk about price because anybody can be the cheapest. That does not impress me and I think the public is a little too smart to buy into that,” Steinberg says. “We’ve been touting our ‘More than Service – Customer Service’ message for almost 40 years.”
And yet, Steinberg is concerned. Considered among the leading tire dealers in the country, even he is having a hard time keeping up with customer’s demands for faster, better and cheaper.
“Clients today in the middle- and upper-class are very savvy and want it all. They can be somewhat relentless when demanding the very best in service and the best price. It’s a tough combination to sustain over the long haul. They want you to have the inventory they need at the best price, open when they need the service, endless warrantees and, again, they want it cheap,” notes Steinberg.
The conversation with Steinberg came back to one thing – price. “Customer service has certainly taken a back seat to price. I’m afraid to admit that. They may still want service,” he says. “But price is king.”
A Rise in Available Information
Mark Morrison, owner of Tires First in Columbus, Ga., has branded his buisness as having the best price in town.
“We’ve started offering major brand tires at a very low gross profit on the front end and are working on the backside to make that up,” says Morrison.
He understands that consumers are spending less and that brands mean very little to customers when price is their prime focus.
“We had a lot of customers that used to buy and run nothing but Michelin, for example,” says Morrison. “Now that they can’t afford that, they have to step down. It’s the same situation with a friend of mine that owns a store down the street. He says his foot traffic is the same, but instead of people going in there and buying Chivas Regal scotch, for example, now they’re buying Cutty Sark.”
They’re still buying, though.
Morrison, like Steinberg, knows that he has to keep up with customer’s shifting demands.
“We are really trying to improve in the service department as far as doing more inspections, we even offer a courtesy inspection,” says Morrison. “In the past, I’d say five years ago, we wouldn’t even do a free alignment inspection or anything.”
The price-conscious consumer is not the only thing that has contributed to the brand dilemma. Certainly price has a lot to do with new purchasing habits, but in order to understand the complete picture, it takes an understanding of how the availability of information has changed purchasing.
The tire industry is doing business in an age where information about products is only a thumb scroll away on their phones. There is a wealth of knowledge and information available on the Internet. Couple the now enlightened customer with their budget restrictions and the rising cost of living, and the result is somewhat of a perfect storm. “Brands worked really, really well when people didn’t know very much,” says Don Schultz, professor emeritus of service at Northwestern University.
“When people didn’t know very much, they would go to the dealer and ask the dealer what kind of tires should they have, or what kind of repairs should they have on their car, and so on. They relied heavily on information that came from the manufacturer, and relied very heavily on the information that came from the dealer,” continued Schultz.
Customers can now find that information and more from tiremakers online as well as from Internet tire sales outlets like Tire Rack. Consumers can easily arm themselves with detailed pricing options, even though one is a suggestion (MSRP) and the other doesn’t carry the overhead weight of a bricks-and-mortar business. On top of manufacturer information, customers are searching for what other customers are saying in the form of online reviews, comments and ratings.
According to Tire Review’s 2013 Tire Market Study, 55.6% of customers will listen to dealer’s recommendations; however, within that factor both Steinberg and Morrison have noticed an emerging trend.
“People are definitely calling us with online pricing and information about tires,” says Direct Tire’s Steinberg. “We love those phone calls – online shoppers are easy to read. They’ll tell us the entire description of the tire. Then, there are the people that come into the store with their mobile device and say ‘I can get this tire for $139, can you meet the price?’”
Schultz believes that what is happening today is one of two things: “Either consumers discount all of the information out there or they simply say it’s all the same. The easiest thing for a consumer to do is say that all brands are basically the same.”
These are tough words for major brands to stomach. Huge ad budgets dedicated to impressing customers is no longer the way to earn brand equity when a customer assumes that all the information is the same. And at the industry level, many feel that there has been a general failure to educate buyers about the real value of tires.
“There’s not a whole lot of risk in whatever you buy today because the government, through regulations and various other things, has taken away all the risk. It’s hard to buy a bad product anymore,” says Schultz. “So, consumers just revert to the basic approach that most everybody takes – what’s the lowest price and who’ll give me the best deal.”
Not only does the Internet offer consumers the ability to research products and pricing, it gives them the ability to find the absolute best price and then immediately purchase the product. And Schultz notes that Northwestern University’s research paints a new picture where middle class Americans are quick to flock to the Internet for purchasing. “People aren’t having real difficulty going online,” says Schultz. “It’s the middle class who are feeling the pinch and saying how else can I save some money – and shopping on the Internet is what they’re doing.”
Schultz suspects a bleak future ahead, whether its bookshelves or blackwalls.
“I think what you’re going to see is more and more people say ‘Why do I need to give the retailer the margin?’ Why can’t I just get it direct and have them ship it to me and I’ll get it put together or installed,” theorizes Schultz. “That’s a big issue here.”
The answer to the question “Why give the dealer the margin?” stems from the essential question that all dealers must ask themselves, “What value do I give my customer?” “You have to think about where’s the real value in this stuff,” offers Schultz. “The value is getting people to converse with you and talk to you and tell you what their problems are, so you can maybe try to figure out how you can solve them.”
The challenge is to think about business as a solution to a customer’s problems and not as a means to move product.
“No one has really stepped back and said, ‘Hey, what would happen if we got out of the economies of scale business, and what if we got into trying to figure out what consumers really want and what they need and what we can provide to them?’ Because it’s all focused on the product, there’s very little focus on the customer.”
What Schultz is not suggesting are massive discounts to accommodate for customer’s budgets such as the ongoing “buy one suit, get three free,” advertising campaign that Joseph A. Banks runs.
“You’ve got to figure either the first suit is a rip off because they’ve got to cover the cost of the other ones, or they were overpriced to start with,” says Schultz. “I mean some of the deals just seem too good.”
“I think the marketers create problems for themselves. It all goes back to the same basic problem, and that is that every marketer is under pressure to generate short-term sales.”
A Solution Model
Customers are teaching business owners more than ever, and the successful dealers will take the information that they learn and turn it into valuable solutions for them. Even as tire buyers are searching for a “solution” to their tire needs, and they want “price” and “convenience,” they trust their dealer’s opinions and suggestions. They want to know more about every product, they want choices, and they will do enough research to be completely comfortable in their decisions.
Now, take that knowledge and create a solution of value to the customer.
“We talk to customers about their tire needs and we try to find out what their driving habits are, how long they’ll keep the car, what kind of driving they do,” says Direct Tire’s Steinberg of the way he tries to sell to customers. “Are they a skier? Do they go up north? Do they commute to work? How many miles a year do they drive? How long are they going to keep the car? Do they have a budget in mind? If they have a certain brand of tire on the car, what did they like or not like about them?”
Solutions are really what the American consumer is searching for. Tire companies and their independent dealers must now change the question from “What can we sell?” to “What can we solve?”
That’s where businesses and marketers miss the mark, especially on social media, notes Schultz.
“Most of the things that are being done today are all about outbound and one-way. ‘I want to tell customers about this. I want to send this out.’ The value of this stuff is getting people to converse with you and talk to you and tell you what their problems are, so you can try to figure out how you can solve them.”
In other words, find ways to talk with them instead of at them.
This may seem like a premium model – and it is. It’s also the reason why low-priced brands or even private brands are successful today. While the major brands publicly dismiss them as Tier 3 or worse, the fact is many of these brands – deliver what consumer’s ask: An “acceptable bang” for an acceptable amount of money.
The IBM Story
In speaking with Tire Review for this feature, Schultz was reminded of similar pivot that occurred with the software company IBM.
“Twenty years ago, IBM was in the computer business,” states Schultz. “What they said was that their future can’t be in making computers, it had to be in something bigger – software solutions. So IBM shifted their business almost entirely away from making computers – the margins for which have fallen through the floor – to producing applications, servers and accessory equipment.
“Kodak was an incredibly successful company, but they failed to recognize that they weren’t in the film business, they were in the picture-taking business. Nokia thought they were in the telephone business,” he recounts. “I think what you have to do is step back from that and ask what business you are really in. What do we do and how do we do it, and are there other things that we can do with the same resources going forward in the next three, five, 10, 15 years?”
The average consumer is concerned. Today’s American consumer, particularly the middle class, takes an “all things being equal” approach to major purchases.
Without evidence of a substantial performance difference between products or the outcome of ownership, any consumer will take the least painful (to the wallet) route. Does a 80,000-mile treadwear warranty really matter? What about tires that tout 10% better fuel economy vs. a previous model? How about those that deliver better traction and handling? Or are all tires ‘round and black’ and inconvenient big dollar purchases?
Sure, there will always be brand-focused buyers – and there will always be Walmart customers – but they have fast become the minority.
The New Consumerism goal is to save money by learning as much about a product as possible, find the best prices and then find the least invasive way to purchase that product – online if necessary.
While that might seem a difficult nut to crack, there are ample opportunities for tire dealers to step in and become a solution.
It takes a different frame of mind concerning business and it having a conversation.