Continuing its plan to focus on only the most profitable parts of its core business, U.S. tire maker Goodyear (NYSE:GT) is scrapping some of its North American private-label businesses. This seems like a sound decision, even though the 10 brands being cut contributed some $300 million to revenues last year. Goodyear's 8 million private-label units represented almost 8% of the North American total tire output in 2005, but they only accounted for 3.4% of the company's $9.1 billion North American revenues. Goodyear manufacturers about 50 private-label brands under names such as Roadhandler, Monarch, Lee, Douglass, and Star.
North American operations have been a drag on the company since it began its turnaround three years ago. The division has only recently begun to turn a profit, though the tire maker said that it expected operating income for this fiscal year would fall short of last year's performance due to slack demand and the persistent high costs of labor and raw materials. In 2005, operating margin in the North American division was a meager 1.8%.
Although the entire private-label tire market for passenger cars and light trucks carries a significant market share of 17.6%, according to IbisWorld, it already faces fierce competition from lower-priced foreign brands. Goodyear isn't losing much by abandoning the field in favor of its higher-margin premium tire lines. In addition, the move will doubtlessly please tire dealers, who've found that the discounted private-label tires eat into their profit margins.
Private-label tires are priced lower than premium tires because their technology tends to lag that of the premium brands by several years. While Goodyear sells much of its private-label brands through Wal-Mart (NYSE:WMT) and its Sam's Club discount warehouse, it also has a network of more than 10,000 distributors available to sell its tires.
Goodyear's focus on its premium tires should allow the company to increase its margins. Most tire manufacturers, including Bridgestone, Michelin, and Cooper Tire & Rubber (NYSE:CTB), have implemented price increases. Goodyear has been able to increase both prices and market share in the high-performance tire market. However, Goodyear tires are already considered premium-priced. With raw material costs remaining high, further price increases might erode market share and put the brakes on sales growth.
The largely unprofitable North American division has been a drag on Goodyear's operations. Eliminating it to remain focused on its most profitable lines should help the company stay on the road to a turnaround.
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Fool contributor Rich Duprey owns shares of Goodyear and Wal-Mart but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
