Giving Dealers a Raw Deal
As Goodyear learned, manufacturers ignore the needs of distribution partners at their own peril.
By Kevin Kelleher

(Business 2.0) – In 2000, when Firestone recalled 6.5 million tires linked to SUV rollovers, it was easy for Goodyear to make a convert of Bob Davis and his New Hampshire Firestone dealership, Yudy's of Portsmouth. After all, Davis was being besieged by angry customers, many hoping to scam free replacements for bald treads. To save his business, he took down his Firestone sign and hung up Goodyear wings.

But just 18 months later, Davis went back to Firestone and its corporate parent, Bridgestone, tainted image and all. That's because working with Goodyear was even more maddening. "You'd buy a tire from them one month, and the next month the price would be 20 percent lower or higher," he says. Davis was also unimpressed by Goodyear quality, and annoyed by pressure to buy more tires than necessary. "Bridgestone has better product, stable prices, and a good delivery system," he says. "It was just too hard to do business with Goodyear."

Manufacturers have to make money for the independent businesses that resell their products. But Goodyear dealers, citing unfair pricing, unreliable order fulfillment, and poor product quality, say Goodyear has fallen short. The company says it has 5,300 authorized dealers, about the same number it had in 1994. But dealers, who sell nearly three of every five replacement tires in the United States, are clearly pushing other brands. From 2001 to 2003, overall U.S. replacement tire sales grew by more than 7 percent. During the same period, Goodyear's replacement tire sales—which account for 70 percent of the company's revenue—actually slipped by 11 million units, or 14 percent. At the industry median price of about $50 a tire, that's a loss of $550 million in retail sales. "Goodyear took its eye off independent dealers," says Dave Zielasko, editor of industry journal Tire Business. "But independents are the company's greatest sales force."

How did one of the most recognized brands in American corporate history turn off the very people who handle the bulk of its sales? The answer has its roots in a decade-old case of what marketers call channel conflict. With the proliferation of retail formats—from discounters and convenience stores to warehouse clubs and online shops—distribution channels can sometimes cannibalize one another. In a classic example, after European toy company Meccano began selling Erector sets at discounters, kids salivated over fancy displays at high-end dealers, but their parents bought at Toys R Us. The same thing happened at Goodyear: In 1992, after assurances to its dealers that it would not sell through discount merchandisers, Goodyear announced a distribution deal with Sears. Similar pacts with Wal-Mart and Sam's Club followed, pitting dealers against the nation's most powerful retailers.

Deflated Dealers

Goodyear once boasted the premier tire reseller network in the United States. In the 1970s and '80s, it earned dealer loyalty through aggressive pricing, on-time deliveries, and marketing fueled by the famous Goodyear blimps. When James Goldsmith launched his hostile takeover bid for the company in 1986, dealers led the outcry against him.

Pressured to boost sales after taking on $1 billion in debt to thwart Goldsmith's bid, Goodyear had little choice but to sell through mass merchants. Many tire manufacturers now do the same thing, but dealers say Goodyear has gone about it the wrong way. For one thing, they complain that Goodyear's "fill rate"—the number of tires dealers receive divided by the number they ordered—has been as low as 50 percent, making it difficult for dealers to compete. (Ninety percent is considered standard.) In addition, to sell more tires, the company until recently offered bulk discounts to its biggest retailers and wholesalers. The result was pricing insanity: Some smaller dealers were paying more for tires than what Sears charged at retail. Yet dealers were expected to honor warranties and recalls. "Goodyear opened a Pandora's box," says Larry Hauck, owner of Wells Tire of Alton, Ill., an exclusive Goodyear dealer until the late 1990s.

Still, there are proven strategies for managing channel conflict. In the 1990s, for instance, Toro began distributing lawn equipment through Kmart but supported independent dealers by giving them exclusives on high-end mowers. When cosmetics maker Mary Kay started selling on the Web in 1997, it appeased its direct sales force—the venerable "beauty consultants"—by helping them set up their own online stores. In the tire business, Michelin has a knack for making catchy ads that boost brand image and bring customers into dealer shops. Bridgestone improved tire quality after the 2000 fiasco and is known for empowering its account reps to solve invoicing and other problems that can delay shipments. "To resolve channel conflict, a manufacturer has to share its power," says Anne Coughlan, a marketing professor at Northwestern's Kellogg School of Management.

In fact, tire dealerships have more leverage over manufacturers than ever: Last year, dealers' share of passenger retail tire sales was 59 percent, up from 54 percent in 1990, according to Modern Tire Dealer magazine. Yet these days it's harder to find a shop that carries Goodyear exclusively. Says Manny Dracakis, president of All-American Tire & Service in Cincinnati, a former Goodyear dealer: "After someone punches you in the face a few times, you say, 'Enough is enough.'" In the last few years, Dracakis has been selling Goodyear tires only when customers absolutely demand them.

Bouncing Back

Under CEO Robert Keegan—who since taking his post in 2003 has brought Goodyear back to a semblance of financial health—the company is finally owning up to its dealer problems. "We lost sight of the fact that it's in our interest that our dealers succeed," says Jack Winterton, Goodyear VP for replacement tire sales.

Keegan is also attempting to mend fences. Dealer sales are now organized through a handful of wholesalers to unify pricing, and fill rates have improved. Most important, however, Goodyear delivered a hot product exclusively through dealers: Sales of the Assurance tire, launched in March, are exceeding forecasts, and Keegan expanded production from one plant to four to ensure a steady supply. He's also reaching out. "They've invited me to four focus groups in the past two years," says Tim Schierl, CEO of Schierl Tire in Wisconsin. "That never happened before."

Goodyear's reputation among dealers, damaged over many years, will take time to restore. "We still have a long way to go on this," Winterton admits. Wells Tire's Hauck would agree. A Goodyear reseller for 35 years, he's the kind of once-loyal dealer that the company says it wants to woo back. Recently, though, Goodyear kicked him out of its dealer network. The reason? He wasn't buying enough tires. Says Hauck, "I just don't understand why they would cut the legs out from under people who have been loyal to them all these years."