June 2012: Pirelli Desires To Extend To the Northern Countries

There are rumours that Pirelli made a substantial investment to purchase the Swedish tyre vendor, Däckia.

Däckia is one of the most promising tyre retailers in the Northern part of Europe with 66 outlets and about 50 affiliate distribution partners.

Pirelli tyres purchased Däckia for €70 million and it hopes to obtain in the near future a turnover from Däckia of €100 million.

With this move Pirelli desires to enter a quite strong and vast market that has a high product value. The strategy of the company follows, to a close margin, the strategy of one of Pirelli’s main competitors,

Nokian. Nokian is also an important tyre retailer, with a smaller sales percentage than Pirelli, but which has focused mainly on the northern areas of the globe to be its main retail regions, from which the most important are Canada and Northern Europe.

Pirelli tried a similar strategy before, in the 1980s, when the company acquired the Pneumobil retail chain. The retail chain was not as stable as the company believed it was and through time it required numerous restructures and strategies which implied a high investment from the company.

The price of €70 million for the acquisition of Däckia was not a bargain, in the least. Also, the €100 million turnover that Pirelli expects does not mean only a sale profit of €100 million.

From the actual turnover, the final profit is obtained after subtracting the additional services, the mark-up and the numerous business accessories. Currently, with the best active scenario the purchasing capacities that can be expected are of 50 million tyres, from which the percentage of Pirelli tyres that will be sold cannot be clearly estimated.

The main problem which Pirelli faces in the implementation of this strategy in comparison with Nokian is the fact that Pirelli does not have an actual image for winter tyres in the Scandinavian countries. As a consequence, Pirelli will most likely begin its northern debut with quite small numbers. Only in time will the company be able to correctly assess if the investment was profitable.

The tyres that Pirelli desires to sell on the Scandinavian market will be manufactured mainly in the Voronezh factory which was purchased from Sibur. The sales strategy that the company desires to implement is quite simple. The company wants to manufacture its tyres in rising economies where workforce costs are low and they can sell the production in mature economy markets.

This strategy comes somewhat as a surprise, as previously it was believed that the company would focus on selling the upper class tyre production, which are the tyres that have built Pirelli’s reputation. Nevertheless, it seems that the main focus of Pirelli is to cover the production capabilities of the Russian tyre factory.

Many might not agree with the current Pirelli strategy, especially since the company does not have a proper image in the northern countries and it does not have a proper management of the area and the strongest point of the company are its high performance tyres.

However, on the long term, the results cannot be properly determined and therefore discussing the issue at this point in time may be pointless.