According to the results of our survey, demand for replacement tires was slightly better than flat in July despite greater-than-normal volatility in the sample of responses. Indeed, from a volume standpoint the dealers reported they sold marginally more tires last month relative to the previous year, following a 1.1% increase in June and a 0.6% decrease in May.
The lack of a harsh winter has been a headwind to demand trends this year, especially given the tough comparisons from the previous two years, and lingering effects continued to weigh on results in July.
However, these headwinds were completely offset by the benefits of higher employment and lower fuel prices. Despite the recent slowdown in demand trends, we continue to believe that a favorable backdrop, including lower fuel prices, solid job growth, and healthy miles driven trends should lead to decent volume growth throughout 2H16, regardless of the tough comparisons from 2015.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the July 2016 survey are compared with those of July 2015.
Dealers’ still expect small gains
According to the survey results, 20% of passenger tire dealers believe business will improve over the next six months, and none believe that trends will worsen. The rest of the respondents, 80%, felt business will stay about flat with the previous year. This is the highest percentage expecting flat line trends in a handful of months, which reflects more dealers realizing tough comparisons naturally lead to slower growth. The outlook for truck tire demand was also mixed, as 67% of the truck tire dealers we spoke with saw business staying about the same and 17% saw business improving. The final 17% of participants believed truck tire demand trends would worsen.
Replacement tire sales volume trends were positive
Consumer demand for replacement tires was slightly positive in July compared to the prior year’s period. Dealers reported they sold slightly more tires in July relative to the previous year. While July’s performance was not a barn burner, we were encouraged that the dealers speculated volumes would increase going forward. Passenger volumes were the sole bright spot in the period, with trends turning negative in the truck category as the dealers who responded to the survey reported volumes were down 3.3% in July, after being up 8.7% in June and up 5.5% in May. Lastly, the survey respondents indicated volumes were also down 7.3% in the retread business after being up 3.5% in June.
Dealer costs declined slightly
Manufacturer pricing on branded and value tires decreased slightly in July, as some of the raw material relief continues to trickle through the supply chain, and incentives ticked slightly higher in an effort to balance inventory levels. In fact, the respondents noted manufacturer pricing in both categories decreased 1.7% during July.
Dealers believed inventory is still too high
Of the dealers who responded to the survey, 20% of them noted inventories at the end of the month were at the appropriate amount to satisfy demand (vs. 50% in June), while 60% noted inventories were too high (50% in June). The remaining 20% of respondents said inventories for passenger tires were too low (0% in June). The modest decline in the net figure suggests destocking attempts are having the desired impact. The responses regarding inventory levels among truck tire dealers indicated mixed results, as 50% of those surveyed indicated they had the appropriate amount of inventory, and 33% indicated inventory was too high. The residual 17% reported that inventory was too low.
Repair sales also declined slightly
Automotive repair sales trends declined slightly in July after a flat reading in June and positive trends in May. Service sales, which accounted for 12% of total revenues, declined 1.25% on a year-over-year basis in July, which compared to flat trends in June and an increase of 1.2% in May.
Nick Mitchell is senior vice president, research, for Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.
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