According to the results of our survey, demand for passenger and light truck replacement tires was up nicely in December. The latest results benefited from cycling easy comparisons in the Northeast, Great Lakes and Upper Mid-Atlantic regions of the country, including more normal winter weather.
In fact, nearly every tire dealer and distributor we spoke with in these markets cited the return of normalized winter weather in late November and throughout December as a huge tailwind to sell-out trends of replacement tires versus the prior year’s period. This tailwind bolstered the benefit of a better economic backdrop for consumers including higher employment levels and low fuel prices. The sharp move in raw material prices since 3Q16 combined with a handful of tire manufacturers already announcing sharp price hikes at the start of the year almost guarantees tire costs are going to be meaningfully higher in FY18.
We think the dealer community will be able raise prices to offset the cost pressures. Operators who 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 who sell on price alone will only opt to pass along the higher costs and neutralize the impact on gross profit.
The impact of a boarder adjustment tax would impact some manufacturers more than others, so the resulting price impact to tire dealers and consumers is a little less clear.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the December 2016 survey are compared with those of December 2015.
Dealers expect gains assuming normal weather
According to the survey results, 50% of passenger and light truck tire dealers believe business will improve over the next six months, and none are worried that trends will worsen. The rest of the respondents, 50%, felt business will stay about flat with the previous year. The outlook for commercial truck tire demand was also positive, as 50% of the dealers see business improving in the coming months and 50% see business staying about the same.
Tire volume trends end 2016 on a high note
Dealers sold about 1.8% more tires in December relative to December 2015, following a slight increase in November and flat performance in October. Medium truck replacement tire volumes were up 0.4% in December after being flat in November, while retread units were down 11% after being up 10% in November.
Dealer costs increase from the prior year’s period
Dealers noted manufacturer pricing on branded and value tires increased in comparison to December 2015, as raw material prices come off of their respective lows and manufacturers start to adjust for higher raw material prices. Specifically, branded tire costs increased 1.5% and value tires increased 2.3% versus the same period a year ago.
Moving forward, cost pressures will continue to build. In fact, we have heard from contacts that multiple Tier Three/Tier Four Asia-based producers announced price hikes of 3% to 6% effective at varying points in 1Q17. Goodyear, Cooper, Bridgestone, Nexen and others also announced broad-based price adjustments of up to 8% across the majority of their U.S. product portfolios.
Cleaner inventory levels help price adjustments stick
Fifty percent of the dealers noted inventories at the end of the month were at the appropriate amount to satisfy demand (vs. 50% in November), while 50% noted inventories were too high (vs. 50% in November). It appears that inventory levels remain fairly controlled. Commercial truck tire dealers indicated more mixed results than we’ve seen over the previous few months, as 25% of those surveyed noted they had the appropriate amount of inventory, 25% of respondents indicated inventory was too high, and 50% thought inventory was too low.
Repair sales increase in December
Service sales, which accounted for a net 26% of total revenues, were up 7% on a year-over-year basis in December, which compared to a 7% increase in November and October. ■
Nick Mitchell is a managing director, research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. He covers a variety of subsectors of the automotive industry.
How dealers view near-term business
Dealers AUG SEP OCT NOV(R) DEC(P) DEC(15)
Will improve 80% 25% 50% 50% 50% 17%
Will worsen 0% 0% 0% 0% 0% 0%
Will stay level 20% 75% 50% 50% 50% 83%
Will improve 75% 50% 50% 100% 50% 33%
Will worsen 0% 0% 0% 0% 0% 50%
Will stay level 25% 50% 50% 0% 50% 17%
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