Cooper in crisis
|Date Published||September 4, 2006|
Cooper Tire & Rubber Co.'s tire dealer customers no longer are sure what the future holds for the company.
The Findlay-based manufacturer has posted losses for five consecutive quarters and faces more uncertainty in the aftermath of the Aug. 3 resignation of its top executive, Thomas Dattilo, who led many changes in production, image and marketing strategies.
``They tried to create a new image and really just failed and just increased their costs,'' said Steve Craven, owner of Craven Tire & Auto in Fairfax, Va. ``If they had focused on controlling costs and producing a value, high-tech product, I think they would have succeeded tremendously.''
A new course
The 2003 launch of the Zeon 2XS ultra-high performance tire marked a pivotal point for Cooper. Although he acknowledged Cooper was playing ``catch-up ball,'' Carl Casalbore, then-vice president for retail sales and HP tire development, said, ``Within two to three years we will be innovators in a number if not all these fields.''
Cooper even toyed with its conservative image in marketing the new tire, asking: ``Is this the same Cooper Tire we've known all these years?''
The following year, Cooper officials introduced an effort to push all Cooper brand products to premium status. The company unveiled a multimillion-dollar ad plan with the tagline, ``Don't Give Up a Thing.''
``We're going to treat that (Cooper) brand like a precious jewel,'' Pat Brown, currently vice president of global branding and communications, said at the time. ``We are going to make this a premium brand that it truly is today.''
In 2004, the firm sold its Cooper-Standard Automotive business for $1.17 billion and planned to invest the proceeds overseas, particularly in China. Since then, Cooper bought 51 percent of Shandong Chengshan Tire Co. Ltd. and an 11-percent share of Kumho Tire Co. Ltd.
It already had formed a joint venture with Kenda Rubber Industrial Co. Ltd. to build a plant in China, scheduled to open by year-end 2006 or early 2007 with output of 1 million to 2 million tires.
The company also introduced a ``hip'' logo-the first such change in 50 years-and iPod-like ads meant to appeal to a younger generation. ``We think these spots will launch a new image for our company and our brand,'' Dattilo said at the time.
The firm also became the official tire supplier for the new A1 Grand Prix international racing series for three years. Cooper used this year's race in Shanghai to launch its brand in China as ``KuPo.''
Concerns and challenges
As Cooper pursued its changes, however, market forces weren't being very cooperative and dealers and analysts had their own concerns about the effectiveness of the transformation.
Raw material prices started their upward march, and North American replacement tire demand has fallen. Goodyear has handled the situation by slashing its private label tire production this year by a third, or 8 million units. But Cooper's stake in private labels is so high that it can scarcely afford to do the same.
``Cooper is so strong in private brands, but how they're going to continue to make private brands as strong as they do in this country at the pricing levels, I don't know, because there's a lot of Chinese and Korean stuff being dumped pretty cheap into the country,'' said Larry Lesieur, operations manager at wholesaler Maynard & Lesieur Inc. in Nashua, N.H.
Those imports are indeed a significant concern for Cooper on many fronts, others said.
``The quality of the imports has increased over recent years, so the distributors and the dealers have an easier time using that product, believing or trusting it, and that puts a little pressure on Cooper as well,'' said Tony Cristello, an analyst with BB&T Capital Markets in Richmond, Va.
Barry Steinberg, president of Direct Tire & Auto Service in Watertown, Mass., said lower-cost imports are turning the once-lucrative high-performance segment into practically a commodity. He recalled a recent customer who ordered expensive custom wheels for his BMW. When Direct Tire tried to sell him equally premium tires, he balked at the price and opted for an inexpensive offshore brand.
Steinberg said Cooper was right, if a little late, to enter the high-performance tire segment. However, he believes the focus should have been on its bread-and-butter broadline-non-high performance, basic tire-business.
``It just costs so much money to enter (the high-performance tire) market, it is now at a point they're not competitively priced,'' he said.
Back to broadline
Craven also said Cooper should refocus intensely on broadline to return to stability. He claimed the campaign to market Cooper as a premium brand has not yielded positive results.
``When they tried to go into this premium brand image, it just wasn't going to work,'' Craven said. ``They just raised the price of the product over the last two years. It's to the point where, for us, a customer could, for $5 to $10 more, go into a Dunlop (brand tire).''
Factor in that the Cooper brand isn't well known in the high-performance market, and it became a hard sell. Craven Tire still is technically a Cooper dealer, but Craven said he hasn't bought any Cooper products since Jan. 1 because of pricing and supply problems.
He said Cooper's image as a third-tier, value producer with folksy traits dealers had long appreciated seems to have diminished in recent years.
``Dattilo tried to take it out of that,'' he said. ``In other words, he tried to be a big player instead of just focusing on keeping the dealers happy and making the company profitable.''
But not everyone agrees with Craven.
John Farkas, president and owner of Interstate Tire Distributor Inc. in Commerce, Calif., fully backs Cooper's strategy. While he hopes Cooper returns to the black soon, he said he thinks the firm's troubles are more a problem of timing than incorrect strategy.
``Timing, like anything else, is essential in our business,'' he said. ``You can get caught in a time cycle that will affect you negatively and I think Cooper got caught in that time cycle.''
Farkas said Cooper realized it had to be in performance products, yet increasing that production cost it capacity in other segments. Then rising raw material costs hit.
``When you put all these things together, it caused the stock to deteriorate,'' he said. ``And I guess the board felt maybe it was time for a change (in management).''
The effort to take Cooper premium also was a necessary move, Farkas said. He doesn't envision the Cooper brand competing against Bridgestone, Michelin or Goodyear, but said it could compete well against Firestone, Dunlop and Toyo, among others.
``I would hate to see them going backward now,'' he said. ``Broadline is very important, there's no question about it, but broadline is a shrinking market and will continue to shrink as the high performance (H-rated and above) product lines will continue to dominate.
Interim Cooper CEO Byron Pond said he plans to continue the tire maker's premium marketing strategy.
``The brand was undervalued in years past, and we have worked very hard to achieve the recognition of `major brand status,' '' he said in written responses. ``The majority of dealers are positioning Cooper as a major brand and enjoying the profits. Those who aren't are missing out on a great opportunity.''
Pond also indicated the firm's strategy of moving beyond broadline will continue unchanged.
``Demand for broadline tires has declined rapidly in the past few years and that decline will continue,'' Pond said.
The executive said Cooper is committed to having quality products for all light vehicle and truck segments, and its dealers understand the company's strategy.
On the financial front, Cristello said Cooper needs to improve its inefficient production or be better able to offset it with increased revenue.
``They certainly will have to become more aggressive in sourcing product from overseas and attempt to adjust the higher operating costs that they have here in North America,'' the analyst said. ``They're just at a competitive disadvantage now.''
Cristello said Cooper needs to make some tough choices soon, including cuts in North America and more deals in Asia. He believes Cooper needs to close a plant in North America. ``It's not a question of if; it's a question of when.''