Firestone: Is This Brand Beyond Repair?

It faces plummeting sales--and possibly sky-high legal costs

Bridgestone/Firestone Inc. (BRDCY ) CEO John T. Lampe was feeling pretty good for a change. As he stood in the Indianapolis Motor Speedway's famed Gasoline Alley just hours before the start of the Indy 500, racing dignitaries such as driver A.J. Foyt stopped by to shake his hand. Since Firestone is the event's exclusive tire supplier, for a change, no one could refuse his company's treads. Still, it wasn't much of a respite. Lampe spent much of the race trying to reassure his biggest dealers that Firestone will get past its year-long crisis.

Indeed, outside the famed racegrounds, Firestone's outlook is increasingly bleak. On top of the 6.5 million flawed tires Firestone was forced to recall last August, Ford Motor Co. (F ) announced plans on May 22 to replace another 13 million Firestone tires it believes are unsafe; a furious Lampe then severed ties with his biggest customer. Firestone's sales could plummet 20% this year, profits have disappeared, and both customers and tire dealers alike are fleeing the Firestone make, yet Lampe appears to have little clear strategy for stopping the slide. "You have a serious risk of the Firestone brand imploding," warns Lehman Brothers analyst Nicholas Lobaccaro.

"BANKRUPTCY?" How bad will the financial hit get? Cutting ties with Ford will cost the company 4% of its $7.5 billion in revenues--about 40% of its sales to car companies. And the U.S. division of the Tokyo-based Bridgestone/Firestone expects to lose $200 million this year.

But that figure may be low. Mounting damages awards from rollover suits and legal bills could easily top the company's $463 million legal reserve. And if the National Highway Traffic & Safety Administration supports Ford's recall, Firestone could find itself liable for much of the $3 billion cost.

For now, most think the company will survive. Bridgestone Corp. has $900 million in cash and good relations with its bankers, says Commerzbank Securities analyst Clive Wiggins in Tokyo. Still, if its legal woes worsen or its tire sales continue to falter, "at some point it behooves them to file for bankruptcy," Lobaccaro says.

But Firestone's dealers would like Lampe & Co. to do a better job of shoring up the brand. For now, his company's two-month-old ad campaign touting the safety of its tires is getting drowned out by Ford's recall and its accompanying ads. Says Steve Grey, owner of Grey's Wholesale Tire in Fort Worth: "The consumer has been overwhelmed with negative information about Firestone."

Indeed, even before the latest rift, sales of Firestone's replacement tires were down by 40%, says Lobaccaro. Since replacement tires are Firestone's most profitable line--making up about $4 billion of its revenues and nearly half its profits--that hurts. And consumer fears are clearly growing. "If [Ford and Firestone] don't have confidence in each other, why should we?" asks John Martin as he shops for a new sport-utility vehicle in East Boston. "If you're not certain of safety, you stay away."

Lampe counters that General Motors Corp. (GM ) believes Firestone's tires are safe and plans to continue using them. He's also crossing his fingers that NHTSA won't support Ford's allegations. But critics say Firestone can't wait for the government to give it a clean record. Michael Sitrick, chairman of Sitrick & Co., a corporate crisis management firm, says Firestone has spent too much time blaming Ford when it should be trying to convince consumers its tires are safe.

Lampe is also counting on building the parent company's Bridgestone name into a mainstream brand--a shift many analysts agree would help. But consumers may not be fooled. A March survey done by Total Research Inc., a firm that ranks consumers' perception of brands on a scale of 1 to 10, showed that Bridgestone sank to 5 from 6.7 last year. Firestone tumbled worse, from 6.5 to less than 4.

Even GM admits it would prefer the Bridgestone name for its 14 Firestone-clad vehicles. Says GM advertising general manager John G. Middlebrook: "As a marketer, I'd rather use the Bridgestone name just to take away the question in consumers' minds." Problem is, consumers may have that question pretty firmly planted already.

By David Welch in Indianapolis

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