After processing Goodyear’s options I feel it is best for Goodyear not to partner with Sears. When considering this partnership it is important to understand the tire industry, specifically the replacement tire market.
The tire industry is divided into two end-use markets: The original equipment tire market (OEM) and the replacement tire market. The replacement tire market is of most importance in this case because that is Sears target market. The two markets are broken down as follows:
The Original Equipment Market:
OEM tires are sold by tire manufacturers directly to automobile manufacturers, and they account for 25% - 30% of tire unit production volume each year. The Goodyear Tire
& Rubber Company is a perennial OEM leader, in 1991 they captured 38% market share
. Firestone and Michelin each held 16% OEM market share.
The Replacement Tire Market:
The replacement tire market accounts for 70% - 75% of the total number of tires sold each year. Demand for this market is directly related to the average mileage driven per vehicle, and it should be noted that the better the tires are made (longer treadlife) the less they need to be replaced. Goodyear is the perennial market-share leader in the U.S. replacement tire market.
Consumer buying behavior
is very important when considering whether or not to partner with Sears. When it comes to replacement tires, consumers have in recent years become more price sensitive and less brand loyal. It was previously believed that car and truck owners who were satisfied with their original equipment tires would buy the same brand when they replaced them. This is still true to an extent, but surveys have shown that dealers (salespeople) were able to influence a car owner's choice of replacement tires, in relation to both brand and type of tire. Most consumers don't have strong tire brand preferences, making it fairly easy for the salespeople to influence tire purchase. It is also note that it was difficult for car owners to comparison shop on the basis of tire quality and tread durability because of the lack of common terminology, which could explain why some have resorted to price comparison shopping.
It is easy to see that the channels of distribution for the replacement tire market are changing and evolving. Following are some advantages and disadvantages for Goodyear’s channel of distribution strategy:
They have the most retail points of any major tire brand in the United States, with close to 8000
They produce tires for virtually every type of vehicle
They are diverse in their brands giving buyers options
They don't typically sell Goodyear brand tires through discount multi-brand dealers, mass-merchandise chain stores, or warehouse clubs
This case presents us with a few different possibilities for Goodyear. They could sell only the Eagle brand through Sears, sell all Goodyear brands through Sears, make one or more brands exclusively through Sears, keep things as is, not selling any tires through Sears.
Finical analysis is of much importance in explaining why I chose to keep things as they are. Goodyear's principal business is the development, manufacturing, distribution, and sales of tires throughout the world. As stated in the case, in 1991 tires and tubes represented 83% of Goodyear's corporate sales of $10.9 billion, their corporate wide earnings in 1991 were $96.6 million, and their sales within the United States accounted for 58% of the company's revenues.
Goodyear's 1991 Corporate Sales
Goodyear Corporate Sales in 1991 $10,900,000,000
Tires & Tubes (83% of sales) $9,047,000,000
Goodyear's 1991 Corporate Wide Earning and U.S. Sales Revenues
Goodyear Corporate Wide Earnings $96,600,000
U.S. Sales Revenues (58% of Revenues) $56,028,000
Goodyear's average market share in the replacement car market of passenger car tires, light-truck tires, and highway-truck tires is 16%. In 1991 there were 155,400,000 replacement tires sold in the United States. Goodyear's 16% market share of the total number of tires sold equaled 24,864,000 million tires (155.4 *.16). If the tires sold at an average retail price of $150 (between the $125-$175 dollar price for Goodyear tires), then Goodyear in 1991 grossed retail sales of $3,729,600,000. Notice that there is no money paid to outside dealers because they are selling their products directly through their own franchises and Goodyear Service Centers.
It seems the biggest concern that Goodyear has with their current system is that in 1991 approximately 2 million Goodyear tires were replaced at Sears Auto Centers around the nation. So it would be a common goal for Goodyear to set to sell an additional 2 million tires annually in the replacement tire market if they decide to sell their tires through Sears. If they do decide to sell the tires through Sears, they will have to be prepared to pay a dealer margin of 35-40% on each sale. In the table you will see that if they sell just 2 million more tires in the replacement market than they did in 1991 at a price of $150 / tire, and paying a dealer margin of 40%, Goodyear will actually make in gross sales approximately $2 million less than they did in 1991.
Goodyear 1991 1992 Prediction if Goodyear sells through Sears
Number of Tires Sold 24,864,000 26,864,000
Average Retail Price / Tire $150 $150
Gross Retail Sales $3,729,600,000 $4,029,600,000
Dealer Margin N/A (no dealers used) 40%
Net Retail Sales $3,729,600,000 $1,611,840,000
Difference 1992 – 1991: -$2,117,760,000*
*this estimate does not include cannibalism of Goodyear franchisers in the surrounding areas
Just by the finical predictions alone, it would be wise to not go into business with Sears, but there are other reasons as well. For example, the case stated that many dealers featured and pushed their private-label “off-brand” tires because they could obtain higher margins. This indicated Sears’s sales people would be more apt to selling the Sears name brand rather than Goodyear’s.