According to the results of our survey, demand for passenger and light truck replacement tires deteriorated slightly during December versus the prior year’s period, snapping the streak of better sell-out trends that we saw in October and November.
While the unit volume figures were weak, we were encouraged that most dealers cited tough comparisons and two lost selling days for the soft results. In fact, the anecdotal commentary captured in the period suggested that underlying demand trends were healthy in the final month of the year after adjusting for the unfavorable calendar shift.
Despite the deceleration in sell-out trends in December, we were pleased with how the final quarter of 2017 shaped up relative to our assumptions at the start of October. The fourth quarter was the only quarter of the year that the dealers who participate in our survey reported seeing volume growth.
More importantly, our latest checks indicate the momentum spilled into 2018, aided by the harsh winter weather that has hammered much of the Northeast, Upper Mid-Atlantic and Great Lakes region. We also saw mix trends improve for the quarter, with Tier 3 brands performing the worst, which is in-line with the mega-trend of the market shifting to HVA (high value added) fitments.
Our channel work also indicates that the improving sales momentum and weak sell-in trends in December, magnified by an unfavorable calendar shift, helped reduce channel inventories at the end of the year to the lowest level in at least 12 months. With demand trends improving and channel inventories in better shape, we are growing optimistic that the bulk of the elevated promotional activity upstream and pricing volatility at retail is behind us.
Not surprisingly, the better fundamentals in the final three months of the year have positively impacted sentiment among the dealers and wholesalers. We are encouraged that the majority of individuals in the dealer community continue to have an upbeat outlook for volume trends going forward, driven by the following factors:
1. a favorable outlook for gasoline prices, as low fuel prices on an absolute basis should provide a tailwind to driving trends and consumers’ discretionary incomes;
2. renewed growth in the car parc, including an uptick in the number of cars entering the first replacement cycle;
3. the ongoing belief that there is a modest amount of pent-up demand on the sidelines, especially given the lackluster results through the first three quarters of 2017; and
4. the likely tailwind to consumer spending from tax reform.
We share their enthusiasm, as we continue to believe the lackluster volumes throughout the industry during the first nine months of 2017 were a function of transitory headwinds rather than emerging secular pressures. As such, we expect sell-out trends in 2018 will be more in tune with favorable macro conditions.
A number of independent tire dealers were surveyed concerning current business trends. The results the December 2017 survey are compared with those of December 2016.
Replacement tire sales
According to the dealers that we survey, consumer demand for passenger and light truck replacement tires declined in December compared to the prior year’s period. From a volume standpoint, the dealers reported that they sold 0.2% fewer tires last month relative to the previous year’s period. While the headline figure was weak, we were encouraged that most dealers cited tough comparisons and two lost selling days for the poor results. The latest performance snapped the streak of better sell-out trends that we saw in October and November.
However, we were pleased with how the quarter shaped up. In fact, 4Q17 was the only quarter of the year that the dealers that participate in our survey reported seeing volume growth. We believe the improving sell-out trends support our thesis that the lackluster volumes throughout the industry during the first 9 months of 2017 were a function of transitory headwinds rather than emerging secular pressures.
While we do not regularly survey commercial tire dealers, the conversations that we are having with contacts on this side of the business, along with USTMA data, suggest that demand trends remain very strong in the channel. With the economic data continuing to come in favorably, and the likelihood of an infrastructure bill in 2018, we are optimistic TBR tire dealers will have a nice year.
A look at mix trends
Generally speaking, the dealers continue to indicate that consumers’ preferences have shifted away from Tier III brands over the past three years. Respondents attribute a portion of the shift to the fact that they are having an easier time upselling customers given that consumers are less strapped for cash considering the tailwind from low energy prices and a very strong labor market. Some dealers indicated that the projected windfall from tax reform should allow for more trade-up activity in 2018. Additionally, many installers mentioned a mix benefit from a rise in the number of vehicles entering the first replacement cycle.
This general theme hit a little speed bump at the start of the year, as the drivers of the weak volumes from January through September also caused consumers to trade down. In fact, the major brands were ranked the worst performing tier five times through the first nine months of 2017. This countertrend reversed in October when volumes started to pick-up, with Tier I brands selling the best in October and November.
However, the premium product performed the worst in December. The dealers noted that consumers seemed to trade down during the holiday season, as budgets became stretched at the end of the year. The data supports this view, with Tier II brands performing the best. In our opinion, the fact that the trade-down phenomenon was not acute enough to push the Tier III category to the top of the list suggests consumers still prefer the high-performance qualities found among Tier I and Tier II brands. More importantly, we believe the recent shift in preference back toward the Tier I and Tier II product is another sign that underlying trends are starting to normalize after three challenging quarters.
Nick Mitchell is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio. He covers a variety of subsectors of the automotive industry.
Chart #1: Average tire tier rankings
Tier OCT ’16 NOV ’16 DEC ’16 OCT ’17 NOV ’17 DEC’17
Tier 1 brands 3 1 3 1 1 3
Tier 2 brands 1 2 1 3 3 1
Tier 3 brands 2 3 2 2 2 2
Source: Northcoast Research Holdings LLC
Chart #2: Snapshot of dealers' PLT tire volumes (year-over-year)
OCT ’16 NOV ’16 DEC ’16 OCT ’17 NOV ’17 DEC’17
Increase 35% 33% 64% 42% 43% 30%
Flat 31% 44% 18% 34% 30% 36%
Decline 35% 22% 18% 24% 28% 34%
Source: Northcoast Research estimates
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