What effect will tyre labelling have on consumer tyre pricing?
Messe Essen’s Reifen 2012 expo was something of a première for the new EU tyre labelling legislation, since it was the first large gathering of the business since the voluntary introduction period began on 31 May. While the preceding year was filled with knowing winks, tapped noses and polite refusals to reveal label performance predictions, the curtain was well and truly lifted on labelling during the show. What was revealed by manufacturers’ stands visited by Tyres & Accessories was the varying, and not necessarily expected, approaches and explanations for each company’s views on tyre labelling. The experience was like seeing a dress rehearsal, appropriately enough for this voluntary introduction period from which T&A writes, except some major players looked to be still learning their lines, while some of the assumed understudies were more ready to take up the challenge than many assumed they might be. Another assumption that has the potential for being rebutted was that labelling will protect the price premiums of established, mature market brands; in fact, it has begun to look like labelling could shake up the existing three tier pricing model.
The price of a tyre in the European mass market currently spreads across a comparatively huge range. Analysts at Morgan Stanley Research show that the most expensive example of one popular tyre size (195/65 R15) for a Volkswagen Golf 1.6 TDi is about 120 per cent the price of the least expensive. The spread of prices is further evidenced by the fact that the most expensive tyre is around 60 per cent greater than the median price.
Somewhat (in)famously, there are estimated to be over 200 brands on sale in the UK, and considering that up to 60 per cent of tyres sold in the national market are made in China – usually in the bottom half of the price range – fierce competition already exists on price. The presence of a tyre label by law introduces a further point of sale dynamic, especially considering that budget tyres are achieving competitive results – meaning C and above – in one or both of the fuel efficiency and wet grip classes; at least according to the labels displayed at Reifen 2012. Much of the talk pre-labelling centred on how established brands could use the initiative to justify their higher price – in extreme cases, well over double the price – over those tyres coming from emerging markets.
After gathering evidence from labels across segments at Reifen 2012, industry observers are now suggesting that emerging Asian competitors could in fact improve their pricing thanks to the label-led impression that there is not as much difference between the tyres’ quality as was assumed before. But there are some nuances to this point of view.
What will be the effect on the premium car market?
If I have so far written mainly in terms of the mass market passenger car market, meaning tyre sizes up to around 16” and speed ratings of V and below, it is because the premium passenger car market is not expected to be affected immediately by pricing upheaval. Put simply, consumers who drive more expensive cars are also those least likely to consider price as important a factor in making a tyre purchase. Drivers inclined to drop a large chunk of change on a car with an expensive badge are also the most likely to be affected by the esteem in which they hold the brand of tyre, favouring traditional market leaders. Their trust in particular brands, allied to the sense that something that costs more is also inherently worth more, is likely to supersede label comparisons that suggest the price differential might not be backed by fuel economy and wet grip performance.
This is not solely down to brand snobbery. The original equipment fitments on premium cars are more or less exclusively the preserve of premium tyres. Going further, Morgan Stanley notes that the very top end of the premium car market has been supplied by “only the big five tyre makers” so far. In addition to conformity of brand equity between car and tyre, one major reason for this is the rigor of testing and the far larger number of performance indicators generally used for determining a tyre’s suitability for premium OE fitment.
To take an extreme example, Michelin’s 225/40R18 Pilot Alpin PA4 tyre was granted N-specification by Porsche, meaning it had to clear a high performance bar in dry handling and braking, longevity, hydroplaning, internal noise, ride comfort and many more in addition to fuel efficiency and wet grip. On the tyre label, this tyre is awarded EC. More than one Asian manufacturer of budget tyres at Reifen 2012 displayed comparably sized tyres that equalled and surpassed this rating.
This is unlikely to mean that the emerging brands will immediately compete in the aftermarket for such premium vehicles as a result of labelling for a two reasons: firstly, the technology used in Asia to achieve high ratings in the label’s performance criteria is currently thought to be a little short of that required to pass premium European car manufacturer’s criteria for OE fitment; and secondly the current equity in emerging brands is unlikely to impress high-end manufacturers or consumers.
Hankook is by no means among these emerging brands, but the highly respected South Korean manufacturer – seventh largest in the world according to T&A’s rankings – can consider the OE fitment of its Ventus S1 evo² on the more affordable, non-runflat fitted BMW 3-Series models as something of a breakthrough. One Chinese manufacturer claiming to supply a BB-rated 18” tyre is less than four years old. Though labelling may help emerging Asian brands improve their pricing as a result of narrowing perception of performance gaps, it seems there are currently too many hurdles for them to cause post-labelling flux at the premium car level.
Why are mass market vehicles more prone to pricing pressure caused by labelling?
In the mass market there is already much greater movement beyond the top five tyre manufacturers when it comes to original equipment deals. Could the label potentially make it more palatable to manufacturers of more price-conscious cars to fit lesser known tyre brands as original equipment, as long as the label suggests to the end user that the tyres deliver competitive performance? In the case of emerging Asian brands – as opposed to more established mid-range players – this seems unlikely. But given the wide range of comparatively young economy brands already selling into European markets, the label could reassure aftermarket purchasers that the cheaper tyre is “good enough” and perhaps convert a few more. This makes it quite likely that – contrary to pre-labelling assumptions – the brands marketing most aggressively on the label will be emerging players, seeking to show that the quality of their products is not that far behind that of much more expensive products.
The question of whether the label gives consumers enough of a reason to trust that the quality of cheaper but similarly-graded tyres is comparable to more expensive and established brands is explored elsewhere in this feature, though clearly it is pertinent to the pricing question. Lack of awareness is certainly something that may dampen the more radical and unexpected effects of labelling suggested here.
All the currently available survey data suggests that most people have yet to hear about the tyre label. As is explained in the article ‘Nobody’s Perfect’, consumer product testing magazine Which? spoke to 1,291 members of the public and 2,742 Which? members and “nine out of 10… weren’t aware of the scheme”. In addition to this, the consumer advice magazine said that “only half the people… who were aware… were able to identify the three ratings that will be included.” Surveys such as this provide some justification for the view expressed to T&A by more than one premium brand representative that labelling could end up being “a damp squib”, lacking the impact to create the potential pricing flux suggested by other industry observers.
Yet Which? also stated that seven in 10 people “said [labelling] would influence their buying decision”. The fact that all manufacturers acknowledge is that for the first time there is the potential for all consumers to factor in tyres’ performance characteristics into their purchasing decision without requiring further personal research. A dealer offering a premium tyre displaying a similar label to that on a much lower priced emerging brand tyre will have to engage customers in why it is worth their while to spend more for the premium product.
Labelling proffers nowhere for anyone to hide when considering the performance of the product; the label’s limitations notwithstanding, the competitive ratings of many emerging brand tyres could be seen to undermine assumptions of the more expensive premium brand’s inherent superiority. There is some evidence to suggest that consumers will be interested in characteristics not included on the label – “91 per cent of drivers… classed tyre wear as an important rating”, according to the Which? survey – but it seems likely that in a price-driven mass market dealers will have to work hard to secure the higher margins of premium brand tyres. The much closer proximity in perceived quality between emerging brand tyres and premium brand tyres as a result of labelling could put a great deal of pressure on dealers to reduce the premium paid for premium brand tyres.
So will the performance reassurances provided by the label on budget tyres force more expensive mid-range and premium brands to discount? The apparently over-performing emerging brands might create an issue for those brands termed the squeezed mid-range – amongst them some second brands manufactured by the big five. Structured in price to enter the market at a lower point than the manufacturers’ banner premium brands, the labels presented by these tyres will be interesting to see. Rated higher than the emerging Asian brands’ EE-plus grades and they run the risk of clashing with premium brand tyres’ CB-plus grades; rated at an identical level to the Asian brands, without the consolations of high brand equity, it would seem very difficult for them to command the mid-range prices their segment suggests.
All of this suggests that manufacturers with large sales of V and lower-speed rated tyres are, in the words of Morgan Stanley analysts, “the most exposed” to price pressure resulting from labelling. The company’s analysis of the market suggests that Michelin and Continental are the top five manufacturers most active in this category, with 70 and 65 per cent of consumer tyre sales coming from this segment. The analysts reason that should emerging brands’ rankings “be able to challenge the quality levels perceived by the consumer via the labelling system – as first feedback suggests it will – Michelin would have the most to lose”, while Conti is described as “relatively shielded” as a result of “higher winter tyre exposure and lower manufacturing costs”. At the other end of the spectrum, Pirelli is described as the least exposed to label-generated flux, since it derives only 45 per cent of its sales from this segment, and “is pro-actively moving away from the mass market. Of course, should the early indications of emerging brands’ tyre labels prove to be misleading when their entire ranges are fully labelled, premium players exposed to the mass market such as Michelin could benefit from labelling for the same reasons as discussed above.
Discussing the potential upheaval caused by labelling in the European mass market brings to mind the rather Rumsfeldian term “known unknowns”, since at this stage we know only a small portion of the full scope of tyre labels; few, if any, manufacturers claimed to have fixed labels for all their ranges at the curtain-raising Reifen 2012. We still have to see whether enforcement may flag up any anomalies in manufacturers’ labels. We still don’t know if emerging brands have performed as surprisingly well in the rankings as it appears they may have across their entire ranges. We still don’t know for sure how much attention consumers will pay to the label and whether they will assume the performance characteristics they present are enough to convince them of the quality of lower-priced tyres.
However, if any of the indications from reports and analyses of the Reifen 2012 debut prove accurate, the business could find that labelling proves a catalyst for greater and quicker change in the price segmentation of the European mass market.