Conti Exec Discusses Success, Future Plans

After nearly a decade of decline, Continental Tire North America finally got into the black in 2007, success driven by a new focus on products, delivery and dealer relations. At its recent Gold Dealer meeting, held during a Caribbean cruise, Continental Tire North America outlined its expansion plans for the program. Andreas Gerstenberger, executive vice president of sales and marketing for CTNA’s consumer tyre group, sat down with Tire Review to discuss the company’s turnaround and future growth plans.

Since Continental bought out General in 1987, there have been numerous management changes. Now things seem to be clicking. What do you have in place now that you didn’t have before?

“The first thing that’s important, if you want to have stability in a team, is figuring out together what your strategy is in a given market. For a long time it wasn’t completely clear within the Continental group what the position of Continental Tire/General Tire should be in the US market.

“Different directions and strategies were implemented with the management that was in place in Europe and the US. I think that what changed specifically in the last three to five years was that – at least on the passenger tyre group as well as with manufacturing, logistics and original equipment – we determined together, with our headquarters in Germany, what our strategy and position should be within the US. Some very tough decisions were formulated and executed in a strategic manner.

“The restructuring initiative that we had in the last three to five years in the US, of course, led to certain instability. For example, on the manufacturing side, we had to discontinue production in Mayfield, Kentucky., and two years ago in Charlotte. We had to work all of that out. It was the same within my team, on the sales and marketing side. If you look at the team that I’m responsible for in the US and Canada today and you compare it to what it was five years ago, more than 90 per cent of the people are new, either coming from outside of the company or in new positions from within the company. That means that we had tremendous change on the manufacturing, product and marketing sides, but also with people.

“Once our strategy had been formulated and implemented, we saw the first signs of consistency, of stability, and of comfort with what people were doing. That was new and different than what they did before. And it was also true on the customer side, obviously. For many years our customers didn’t know what our target or our role was in the US. I think today, after formulating internally and communicating externally, it is very clear what we want to accomplish in the US. Our strategic initiatives are basically not changing anymore.

“That also is true at the top management level. We had a lot of change in top management, which had an influence on strategy, consistency and stability. That is now behind us. With Alan Hippe and also now Matthias Schoenberg and myself being in place for some time, I think we have formed a management team that gives stability and consistency internally to the employees and externally to the customers.

“It’s important to emphasise that stability and consistency is only possible, from my point of view, if you have a clear strategy and you break down and communicate that strategy internally and externally as many times as you can, involving your team, other teams and our customers.”

2007 was the first time CTNA had made it into the black in a decade. Explain what took place to reach that goal.

“Low-cost production, product portfolio, people, and now processes – research and development, logistics, IT, controlling and finance – basically you talk about the entire company. If someone asks me if there was one component that made us break even last year, my answer is no. It was an entire comprehensive setup and execution of a strategy of the entire team, not of one person or one aspect.

“Since Alan Hippe has been in charge, we defined a strategy together, and we defined work packages for each and every area in the company. This was a comprehensive, 360-degree package that touched on every point in our company, whether it was products, promotions, production, processes, people – and every team contributed because we developed it and executed it together.

“One key part of the strategy was to work on our costs in the US. On the manufacturing, side – cost and technical capability – we were not competitive. That’s the reason why we went through very hard negotiations with the union a few years ago.

“On the marketing side, three, four, five years ago, our product portfolio was not sufficient to cover the basic needs in the US. We had a very OE-driven product portfolio in the Continental and General brands. We also had, like many of our competitors, a very high percentage of private brands. So we basically discontinued the private brand business, which accomplished last year. That was very tough, but it was necessary in terms of having a competitive and profitable product portfolio.

“Another key component was revitalising our General and Continental brands from an OE-driven portfolio to a replacement-driven portfolio with 80 per cent market coverage. All of those products were developed with our colleagues in Europe. We Americanised the German engineering to really address the US market needs. When 2008 is over, we are going to be very close to 80 per cent market coverage for Continental and General brands.

“When that’s done, then you have the base, the cake. Then you can add cream to the cake. And the next cream we want to add is to show two or three dedicated, Continental-brand, North America-specific lines at SEMA this year. That will take the Continental brand to the next level within the US market, which is going to have a very strong line-up in OE and replacement. The Continental brand is a global brand and a flagship of our lines; it got us where we are. This brand will always be heavily OE-supported, however, we are extending our replacement SKUs and products, which is different than we did in the past.

“This success here in the US wouldn’t have been possible without the support of a strong company in Europe. Support also means accepting that certain markets are different from the market as a whole. Not everything is the same between Europe and the US, and it took us some time to accept that on both sides of the Atlantic.”

Three years ago, CTNA started the Gold Program with a much smaller group of dealers than today. Now you have more than 1,000 dealers in the program. What allowed for so much growth in such a short period of time?

“Again, it started with a strategy. One key component of the marketing side of our strategy was a focus on retail. Continental does not own any controlled distribution in the US, as we do in some European countries. So if we wanted to grow our customer base, which was heavily focused on wholesale distributors, we had to go into retail. How do you go into retail if you don’t own retail? You have to work with independent dealers who are out there, and offer certain benefits to them in order to hook them with your business model.

“That’s what we have done with the Gold Program. And that’s not unique in the industry; our competitors also have programs, but they are partly in a different situation. Goodyear or Bridgestone, for example, own controlled distribution, retail outlets.

“Once we focused on retail, we thought about what was required for a successful retailer in the US. Number one, of course, is profitability. The dealer wants to be profitable, and suppliers want to work to help a dealers become more profitable. But there are other components that make a retailer choose certain suppliers. The product portfolio is key – you have to have lines that are retail-friendly. That’s why we transformed to the so-called power line concept.

“Every line we have launched and will launch is a deep line with 80 per cent market coverage as the target. That means that if you have that line as a retailer, you can cover various segments with one line, one name – like Altimax on the General side, the ContiProContact on the Continental side – and you don’t have to worry about needing three or four brands or lines to offer your customers a complete product screen. If you want to be in retail, you have to have a retail-driven product portfolio.

“The next thing is you have to offer programs and promotions that give the retailer the opportunity to convince consumers to choose one tyre over the other. That’s the reason we developed the Gold Program. It’s our answer to excite retailers to deal with us. We work together with the wholesaler and the retailer to pull us through the entire supply chain.

“We started with a two-level program a few years ago, with rewards for dealers who reached sales of 600 and 1,200 units. But with feedback from U.S. customers, we realised that 600 was too high of a number to grow the program, for a smaller dealer to reach or even to try. The idea of the new 300 level is to get a dealer started because we feel that if you start with us you will automatically see the benefits of the program. And then you can reach, with the help of a distributor, the next level, which is now 700. When you’re at the 700 level, the Select and the Elite levels, which are at 1,200 and 1,800 units, are not that far away anymore. Our ultimate target is to have as many dealers as possible in the 1,800 and above level.

“With the launch of the new program, we added 300 new Gold dealers in the first few months, ending with 1,000 at the close of 2007. We grew 30 per cent in three months. Our objective for 2008 is to have 1,500 Gold dealers by the end of the year, so we are already more than halfway there.”

The General brand was once given up for dead in the market, but over the last three years there has been a strong commitment to the brand with new products and promotion. Talk about how this came about and the success CTNA has had with General.

“It all starts with strategy. And part of that was to grow our business here in the US and to be more retail-focused. If you want to do that, you have to decide if you’re going to market as one brand, as two brands or with multiple brands. We knew we needed to cover different price points and segments. If you want to do that with one brand, you’re limited as far as growing to a certain point. There are competitors that are basically featuring one brand, but they also have a limited market share.

“We believe that with a dual-brand strategy, at this point in time we are doing fine. In our strategy, Continental is somewhere around 50 per cent of our US business at this point in time, General between 35 per cent and 40 per cent, and the associate brands – not private brands – are around 10 per cent or less.

“In the US, our strategy was to clearly define Conti as our flagship, our premium line that’s strongly supported by OE. On the General side, we had to make the decision of whether to continue with it or not. When we did the market study and talked to customers about the growth plans we had, we came to the conclusion that we needed a strong second brand. General has a heritage in the US. It had an awareness out there, which after we analysed it with focus consumer groups, led to us to the decision to grow the General brand.

“Three, four years ago, the General brand product portfolio was a very old one, and it had a lot of gaps in market coverage. So we needed to completely revitalise the General brand. We started with the passenger side and the Exclaim UHP tyre, and on the light truck/SUV side we started with the Grabber UHP. Both were the first completely new lines in the General brand. Based on very positive feedback, we were encouraged to continue this path. Then came the powerline, the Altimax, which we launched two years ago. Also on the light truck/SUV side, last year we announced the Grabber HTS.

“The base of General brand is now completely revitalized. We have met that strategic objective. The Altimax, Altimax Arctic, Exclaim UHP, Grabber UHP, Grabber AT2 and the Grabber HTS are now completed and in the market and doing well.”

With the emphasis you’re placing on winter tyres, do you see that as a growing trend in North America?

“Yes, absolutely. Megetrends in the automotive industry are impacting us and one of those is not a new trend, it’s just an accelerated one: the safety trend. This has to do not only with tyres, but with brakes, rollover protection, TPMS, etc. On the tyre side, clearly that includes handling and braking performance, among other features.

It has been physically proven that all-season and summer tyres significantly lose grip around 45˚F. That has to do with the compounds used and the tread design.

“We have been very successful with winter tyres in Europe, and we are trying to do the same in the US and Canada with the Altimax Arctic. The mindset that snow tyres are the same as winter tyres is still in the minds of consumers and requires a very long-term, focused education process, which we cannot do alone. We are trying to get some buy-in from the RMA, so this education process will become almost like a safety campaign that’s also supported by our competitors.

“We are working diligently with our distributors and retailers to take winter tyre line offerings into their programs. Not every distributor in the relevant geographical areas is doing that. The winter tyre market in the U.S. is smaller than that in Canada or Europe, but it has a growth rate that is predicted to be 5 per cent or higher for the next five years. So it makes sense from a safety perspective and a market growth perspective to be aggressive in this segment.

Are fill rates going to significantly improve? Is it possible to hit a “required fill rate” so it’s no longer an issue for dealers, whatever that “required” percentage may be?

“Among all our lines, at this point in time, we have an average fill rate that is not sufficient. That is not new for us. Unfortunately, it has continued to be a challenge we have had to face for the last few years and are still facing. We certainly are not alone with fill rate concerns.

“But just because everybody else has those issues doesn’t mean it isn’t something we need to work on. We have a clear internal target for fill rates that we want to accomplish. First, we needed the product. To do that we needed to simplify the product lineup and streamline our process in the plants. In North America, we restructured our manufacturing by taking two plants out of the supply chain and investing heavily into the Mt. Vernon, Illinois, plant, a planned total investment of $170 million. We are currently negotiating with labor representatives at our Mexico plant to gain more cost-efficient processes.

“So that was the first phase. The next phase was our powerline concept, which made production easier, forecasting easier, and the selling process easier for the retailer, the distributor and, obviously, for us. Not all of that has been completely executed. We are still working on some things. I estimate that with all our efforts, it will take another two-plus years or so to be where we really want to be. That is not fast enough, and even though we have a lot of efforts and resources behind that, we will still face fill rate issues.

“I will not make the statement that everything will be blue skies and sunshine by tomorrow morning. But if we look at the average fill rate for North America-produced tyres, our fill rates are currently 80 per cent, 85 per cent or higher. The fill rates for European-produced products are, unfortunately, not on that level.

“We have a global supply situation in the UHP and HP segment. As a corporation, we simply underestimated the growth of that segment. The growth rate for the UHP segment in this year alone in the U.S. is predicted to be almost 10 per cent. We simply didn’t anticipate those growth rates. So that is a problem, but we are working on that and investing heavily in our UHP capacity.”

Some people have said that current fill rates were affected by your new relationship with Canadian Tire. How do you address that comment?

“Canadian Tire is launching the General Evertrack into the market nationwide. This is a sister line to the Altimax RT and HP, which we launched last year. The Evertrack is also produced in Brazil in the same plant as the Altimax. We had some issues a few weeks ago on the Altimax side and some people thought because we were launching with Canadian Tire that supply was being taken away from the US. That was not the case. What happened were some issues with raw materials and logistics. It was not a matter of Canadian or other customers being a higher priority than the US. And if there’s a problem within a plant, especially in Brazil where shipping takes 4-6 weeks, it takes some time to resolve.

“The fill rates in general between the U.S. and Canada are comparable. Canadian Tire is only focusing on those two lines, the Evertrack and Altimax lines. We are working to grow in Canada as well at the US, so there is no preferential treatment as far as fill rates go.”

CTNA is taking more of a consultative approach with its sales effort. Talk about that and what it means for dealers.

“Obviously you can only start those new strategies once you have established all the other components we have discussed. It doesn’t make sense to start consultative selling if you don’t have the product behind it, the plants aren’t up to speed or the marketing is not creative. Now we can go to the next level of selling our products, which are so much different than they were a few years ago. It’s logical now to go from a transactional sale into a consultative sale, which adds a 360-degree value for our customer.

“In the future, I see our salespeople being so well-educated and knowledgeable about the market of a given retailer that they are basically business partners, and not salespeople in the traditional sense. They are problem solvers, strategy consultants, pricing analysts, and marketing specialists who know more about the market than the retailer. That is obviously something that cannot happen overnight. You need the people and a process to educate them. We are in the process of figuring that out now. We think this will really differentiate us from the majority of our competitors. It takes cooperation from top management all the way down to make that transition. This is a huge effort, but I’m deeply convinced this is the right direction for us.

“We want to develop from within first. Some years ago, we were not able to do that. We are still not 100 per cent there yet, but we are very close. We are developing a lot of very bright people who are going to be the future leaders of this company. At the end of the day, it can’t be that Continental – or any other company – is run by one person. It has to be run by a team of people in cooperation with one another and are local. Things in the US are not the same as in Germany.” (Tire Review/Akron)