70 cents for every euro of turnover – Pirelli becomes tyre dealer in Sweden
It is believed Pirelli dipped deep into its purse to acquire Swedish tyre retail chain Däckia, which boasts 66 outlets and – according to Pirelli – 50 affiliated distribution partners. With a payment of 70 million euros the Italian firm offered the seller, a private equity group, 70 million attractive reasons to exit the tyre business. And now Pirelli has acquired a 100 million euro turnover retail chain in Northern Europe, with which the company sees itself buying its way into a “strong margin, high end market.” A template for such a model can be seen with the Finnish tyre maker and Pirelli competitor Nokian, who as a smaller but exceedingly successful niche market provider has focused virtually without exception on the snowbound regions of Europe and Canada and built up a strong retail chain in these regions, with which it intends to secure the company’s turnover, particularly in the local Scandinavian markets.
After Pirelli got its fingers burnt in the 80s with the acquisition and development of the Pneumobil retail chain, an entity that again and again required restructuring and its losses offset, there was well-justified hope that in future the tyre maker would stick to focusing the manufacture of tyres, and market these via specialist retailers.
At 70 millions euros, Däckia was by no means a bargain. A 100 million turnover doesn’t result in a 100 million purchase at Pirelli. The service and accessories businesses plus mark-up must be subtracted from this figure, and in a best case scenario a purchasing volume of 50 million may be expected. Therefore according to Pirelli’s information, the multi-brand provider Däckia must sell at least half a million passenger car tyres. How many of these can be “switched” to Pirelli-brand sales? In contrast to Nokian, Pirelli has no reputation as a winter tyre specialist in Scandinavia, therefore it’d be well advised to initially anticipate a small amount. And when the moment of truth arrives, it’ll be asked whether or not the investment paid off. And the answer will be as it often is: you can reckon yourself to be poor, but also rich. The question remains as to how many tyres Pirelli could have sold in Sweden without Däckia if just a fraction of the 70 million euros had been invested in marketing concepts with strategic partners there. And it will come as no surprise if Däckia’s profit – should it make one at all – is limited, as all suppliers will know that Däckia’s interest lies in selling Pirelli-brand tyres, and therefore sales of brands not belonging to the company will be seen as nothing more than forced turnover and not a particular focus for the chain.
The tyres sold in Scandinavia will predominantly come from the Voronezh factory acquired from Sibur. The strategy, distilled into a single sentence, is as follows: manufacture in low wage countries and sell the tyres in markets with high purchasing power.
Previously it was assumed Pirelli would trust in the appeal of its brand and concentrate upon the high quality of its technically sophisticated high performance tyres, and step by step edge away from the manufacture and marketing of so-called bread and butter tyres. Now, however, it all seems to be about being able to sell the Russian factory’s production capacity.
Is Pirelli’s move a sign of strength, that of a tyre maker who has plentiful resources at its disposal and is in a position to buy up market share? Or should this move be seen as a sign of weakness?
Let’s take another look at the competitor Nokian: Both the manufacturer and brand are recognised in Scandinavia and Russia as winter tyre specialists and are the undisputed number one in both markets. And Nokian possesses a management that knows these regions perfectly. It will be interesting to observe how the newly-acquired, Milan-directed retail chain will be run.
External observers can however only seldom comprehend strategic considerations, as the bases for decision making are hidden from view. Therefore they may look on with fear that Pirelli will lose faith in itself. And, admittedly, it does sound like preaching when Pirelli management recites its conviction that top quality and an outstandingly good brand are all its takes to succeed in the world. One thing is certain: Pirelli is an exceptional tyre maker and its management has demonstrated the ability to produce and market first-class products. It has shown how a world-class brand is looked after and kept modern. As yet, however, it hasn’t enjoyed success as a retail chain operator; rather, it has shown reason not to stage a comeback into this field.
The upside is, Pirelli is not alone in this. On the contrary, the company finds itself in good company with a couple of well-known competitors.