Demand Trends Continue to Gradually Improve After Challenging Start

Nick Mitchell
Posted on November 8, 2017

According to the results of our survey, demand for passenger and light truck replacement tires improved in August. The latest performance marks the fourth consecutive month of healthier, albeit far from strong, trends after a very challenging start to the year. Anecdotal commentary from dealers indicates that demand was fairly steady throughout the month.

Not surprisingly, most of the dealers in our sample were upbeat that the posted volumes were in-line with or better than the metrics they put up in the prior year’s period, which was a strong month.

While demand trends continue to gradually improve after a challenging start to the year, it is clear that the domestic passenger and light truck replacement tire market is still growing below trend, especially considering the fact that the softness in the first half of the year likely resulted in some pent-up demand. As noted previously, our contacts have offered little explanation as to why the soft trends across the passenger and light truck replacement tire market persisted deep into the second quarter of 2017.

However, many have indicated that the improving momentum is more consistent with the favorable trends in many of the key drivers of intermediate-term demand, including a stronger consumer due to low energy costs and a solid labor market, favorable miles driven trends over the past 24 months (despite softer trends over the past 6 months), and an expanding car parc. While the sluggish sell-out trends in the first half of 2017 created a difficult operating environment in the short-run, the inability of any of our contacts to point to any structural factors that might be pressuring demand trends, in addition to the healthier, albeit far from robust, results over the past few months, leads us to believe that the odds are still high that the weak trends will prove to be transitory.

Regarding the inventory positions of our respondents, the healthier sell-out trends coupled with disciplined production schedules enacted by manufacturers in the second quarter of 2017 leads us to believe that progress is finally being made destocking the inventory buildup that occurred during the first few months of the year. In fact, we are growing optimistic that the bulk of the pricing volatility and weakness is behind us as we continue to hear from contacts in the industry that upstream promotional activity has stabilized following better sell-out trends in June, July and August, and that channel inventories are improving.

From a pricing perspective, our recent channel work suggests that the broader pricing environment weakened slightly in August, continuing the volatility that we have seen in prices since the end of 1Q17. The softer pricing environment, after two months of healthier pricing trends, seems to largely reflect the varying end-market promotions that dealers are using to gain share in their respective markets in a no-growth environment, as opposed to a fresh uptick in promotional activity upstream. In fact, we continue to hear from contacts in the industry that upstream promotional activity has stabilized following better sell-out trends in June, July and August.

In our opinion, operators that lead with a model that includes high quality of service at fair prices will be able to maintain their margin structure in this category, while those that sell on price alone will only opt to pass along the higher costs and neutralize the impact on gross profit. Until next time, keep the tires rolling out the door.

Monthly survey

A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the August 2017 survey are compared with those of August 2016.

Dealers are holding their breath going into the end of 3Q17

According to our survey results, 100% of passenger and light truck tire dealers believe that business will stay about level over the next six months, and none are worried that trends will improve or worsen. While the outlook of the dealers has fluctuated slightly over the past six months, we remain encouraged by the fact that none of the respondents expect trends to decline. The outlook for commercial truck tire demand was also neutral, as 100% of the dealers we spoke with see the business staying about the same in the coming months while none of the participants see business trends improving or worsening.

Replacement tire sales volume trends are healthier but demand is still growing below expectations

Consumer demand for passenger and light truck replacement tires increased in August compared to the prior year’s period. From a volume standpoint, the dealers reported they sold 0.4% more tires last month relative to the previous year’s period. August’s results are encouraging, and given dealer commentary that sales were steady throughout the month, which many expect to continue over the next few months, we are cautiously optimistic that sell-out volumes in 2H17 will closely resemble the healthier results in recent months rather than the lackluster volumes through the first five months of the year. The improving results likely benefitted from the release of some pent-up demand in markets that struggled in the beginning of the year, in addition to the benefits of lower unemployment, low fuel prices, and an expanding car parc.

Dealers reported disappointing demand trends across the other tire categories in the period, with flattish trends across the commercial truck category, while negative trends continue to persist in the retread category. The latter having been negative for most of the first half of 2017. In fact, the dealers who responded to the survey reported medium truck replacement tire volumes were at about the same level versus August 2016 following a modest decline in July. Retread units were down 3.5% versus the prior year’s period, which marks a decline in every month of 2017 so far, except for flattish trends in June.

Dealer costs remain the same in August

The tire dealers who responded to the survey noted manufacturer pricing on value and branded products, on a net basis, were about the same as they were in the previous year’s period. As noted previously, we are growing optimistic that the bulk of the pricing volatility and weakness is behind us as we continue to hear from contacts in the industry that upstream promotional activity has stabilized following better sell-out trends in June, July and August, and that channel inventories are improving.

Inventory levels are still a little high but on the verge of being right sized

Of the dealers who responded to the survey, 100% of them noted inventories of PLT tires at the end of the month were at an appropriate amount to satisfy demand (vs. 83% in July), while none noted that inventories were too high or too low. Dealers indicated that while weak sell-out trends in the first half of 2017 are partially responsible for the recent volatility in inventory levels, the improving sell-out trends as well as the diligent job manufacturers are doing of managing the supply are reasons why dealer feel more comfortable than at any other point this year.

The responses regarding inventory levels among commercial truck tire dealers indicated imbalanced inventories similar to what we’ve seen over the previous 12 months, as 100% of those surveyed noted that their inventory was too high, while none of the respondents indicated inventory was the appropriate amount or too low during the period. The dramatic sequential change is responses may have something to do with the ongoing uncertainty regarding the mid-February ITC ruling, which determined that no anti-dumping/countervailing duties will be levied against Chinese TBR manufacturers, and was recently challenged by the United Steelworkers Union. To this point, some dealers noted they are going to take advantage of the changing supply/demand dynamics and build up a safety stock in the event that the appeal is successful. That said, uncertainty about future demand remains the prevailing sentiment.

Repair sales increase year-over-year in August

The dealers indicated automotive repair sales trends increased in August, which is in-line with the increases in service revenues in six of the previous nine months (February was flat, May was down 2%, June was down 1%). Specifically, these dealers indicated service sales, which accounted for a net 41% of total revenues, were up 6% on a year-over-year basis in August. This compares to increases of 5% or more from October through January, flat trends in February, and a 1.8% and 2% gain in March and April, respectively.

Nick Mitchell is managing director, research analyst, for Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.

To read more Your Marketplace columns, see:

Higher-Than-Planned Inventory Levels are Hampering Dealer Channel

Weak Sales Trends Will Prove to be Transitory

Demand for Passenger and LT Tires Increased Modestly in May

Dealers Still Speculate Volumes Will Increase Going Forward

Related Topics: Nick Mitchell, Your Marketplace

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