What transpired in the tire industry in 2018 and what will happen in 2019? John Healy, a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio, and author of MTD’s monthly column Your Marketplace, took on our questions and offered his thoughts and predictions.
MTD: How would you summarize the tire industry in 2018?
Healy: The industry backdrop seemed to steadily improve throughout the year and culminated in a strong finish. Initially, the start to 2018 did not seem to pan out as many industry participants expected, given the various tailwinds present within the environment. Dealers expected the contribution of historically low unemployment/tight labor market, new tax legislation, post-recession highs in consumer confidence and a strong economy to act as tailwinds for sell-out trends (as well as the continued adoption/trade-up to HVA products).
Instead, the beginning of 2018 got off to a very choppy start and left many dealers questioning whether this was a shift in the industry landscape or just transitory pressures.
However, demand trends seemed to firm up throughout the year and an unexpectedly early start to the winter/unseasonable weather helped consumers remember how rough the last couple winters were and may have impacted consumer behavior in a positive way for sell-out trends in the final periods of 2018.
While sell-out trends are one piece of the story, another piece relates to changes in distribution. Moves by some of the “blue bloods” of the tire industry relating to distribution caused changes and a ripple effect to peers. These moves as well as issues encountered by American Tire Distributors (ATD) resulted in new partnerships formed and a decision to be made by dealers on how to source their product portfolio going forward. We look to 2019 to see what the absolute impact of these changes will be on the industry.
MTD: How have independent tire dealers been affected by President Donald Trump thus far in his administration?
Healy: Two words — complicated and beneficial. The complicated side of the equation relates to tariffs on raw materials and finished goods. These tariffs have caused changes on how distributors source product and also have caused the industry to evaluate price increases. Beyond these items, we view a robust economy and record low unemployment as a by-product of consumer and business confidence which ultimately resulted in better replacement volumes.
MTD: What are your 2019 predictions for Goodyear Tire & Rubber Co., Michelin North America Inc. and Bridgestone Americas Inc.?
Healy: 2019 will likely be a mixed year for each of these manufacturers with some bright spots and difficulties. On the positive side, we expect the truck tire market to be vibrant, the U.S. replacement market to be upbeat. On the challenging side, we expect weaker volumes in China in 1H19 to be an issue that manufacturers need to manage through.
Additionally, we see the OE side of things in the U.S. as softer, both from a market and a share shift standpoint (negatively impacting legacy industry nameplates like Goodyear, Michelin and Bridgestone). All these items considered, we expect dealer behavior to dictate the success or softness in the business for each of these manufacturers in 2019. With changes in distribution, how dealers buy and who they buy from will be key.
The question we ask ourselves is — is the brand or the distribution partner paramount to the dealer? 2019 will tell us more.
MTD: How would you describe the strategy of Monro Inc.? Is it succeeding?
Healy: Monro’s strategy mainly involves significant reinvestment into various aspects of the business (digital, consumer-facing initiatives, employee improvements, etc.) to help it break from challenged sales and historical under-performance against peers.
From our perspective, the strategy is showing very strong early signs of success, with high-single-digit same-store sales levels even in some months. At a high level, by continuing to give employees additional training via Monro U, reinvesting in store re-image initiatives, continuing to enhance its online presence, among many other efforts, should help them close the gap between competitors and should drive increased customer traffic with the ultimate goal of retaining those customers for many years to come.
The greatest threat to independent dealers in 2019 is further consolidation among the bigger operators.
MTD: What are your thoughts on Sears?
Healy: Sears is in an extremely precarious position, but all hope is not lost. I believe there is a chance for them to survive, but in a significantly reduced footprint and format from where they are now. I think they have the opportunity to exist for many years to come in their new concept — small format stores. However, for the company to thrive they really need to establish a product identity and try to garner relevancy with younger generations who will ultimately be the consumers of the future.
As it relates to Sears Auto Centers, time will tell, but we do not see meaningful evidence that a turnaround is in the cards as of yet. While a partnership with Amazon has been formed, we note this is not exclusive. Additionally, we think entities like Costco and Walmart seem better positioned to get a share of wallet from consumers who elect to get their tires at big box retailers.
MTD: What impact has tire manufacturers’ online tire sales had on the market?
Healy: Currently, tire buying research is done online but tire buying transactions are largely done in person, from our perspective. I do not think there are any notable impacts that these online efforts have had so far; they remain such a small percentage of overall activity and will continue to remain that way in the near-term.
However, I believe that manufacturers need to continue selling through these channels and other manufacturers will enter these channels, as well. As the more digitally savvy generations get older and begin commanding a greater percentage of consumer spending, these online sales channels will gain increased importance.
MTD: Do you believe online tire selling in total units will continue to grow?
Healy: It would be crazy to think otherwise, but I think the migration will be gradual but continual. It may take some time for these efforts to gain traction (many consumers do not know about this currently; many people prefer talking to a service tech in-person when getting tires), but they will undoubtedly have a place in the future of tire retailing. But I’m not sure to what extent it will ultimately grow.
MTD: The landscape of wholesale distribution changed dramatically in 2018. How soon before TireHub (Goodyear and Bridgestone Americas) and NTW (Michelin and Sumitomo Corp. of Americas ) iron out the logistics of their respective joint ventures?
Healy: I can’t speak to a timetable as to when everything will be ironed out, but things already seem to be progressing well and the only logistical issues that seem to be occurring based on our conversations mainly revolve around administrative issues, which are not difficult issues to overcome. Anecdotally, we would give the “new distribution entities” high marks in their early efforts to make the businesses stand up independently.
MTD: Can we expect more changes at American Tire Distributors?
Healy: It’s hard for us to see how the situation at ATD does not find a level of stability in the near-term followed by what would be some very natural evolution of their business. From our perspective, dealers still support ATD and service levels have been fairly consistent with previous standards.
That said, there are new owners at ATD and they will have a view on how the business should run and operate. We would not be surprised to see its facility structure adapted in some ways as new owners look to make more profit per tire and to steer the company toward efficiencies and maximizing returns.
MTD: Do you expect more changes in wholesale distribution in the U.S.?
Healy: I would say it just depends on how the tire distribution landscape plays out. NTW, TireHub and Max Finklestein have already formed their own distribution partnerships, so if other manufacturers continue to go that route pressure could remain on ATD. Operations seemed to be troubled even before many of these changes happened over the past year, so increased factors exacerbating ATD’s operational execution could lead to more changes. We have not seen the last of manufacturers creating their own buying groups/distribution channels, although I’m not sure of the timing of these actions.
Dealers should be paying attention to social media and online selling opportunities, including online scheduling offerings
MTD: What new technologies should tire dealers be paying attention to?
Healy: Dealers should be paying attention to social media and online selling opportunities, including online scheduling offerings. Reducing friction and ease of use should be a focus of all online offerings by dealers. Today a dealer’s online presence has a dramatic impact on their business. I feel dealers need to be mindful of their online reputation and be working to manage/improve it continuously because that has the ability to drive traffic trends.
Furthermore, dealers should be engaging potential/existing customers on social media channels to differentiate themselves from peers and keep their business in the back of customers’ minds. Dealers also need to begin offering online sales opportunities; although it will be a small fraction of overall business at first, it will gain increased importance over time.
Lastly, dealers should also be paying attention to the changes in the mobility ecosystem (self-driving cars, car sharing, etc.) and how those trends evolve because that will have a major impact on their end markets and the products this new ecosystem will demand. We have seen some dealers create programs to win business via offering discounts to Uber and Lyft drivers. From our perspective, these targeted campaigns could be a useful tool to build a new customer base.
MTD: What are your thoughts on autonomous vehicles?
Healy: From our perspective, increased use of mobility and ease of friction in transportation generates more miles driven. So if this historic relationship holds, more miles will be driven which means more tires will be worn, thus creating growth in replacement related volumes.
MTD: BKT recently announced it would build a plant in the U.S. Do you expect more companies to follow suit?
Healy: We expect more suppliers and manufacturers to move production areas closer to landing areas. As demand in emerging markets begins to mature and labor rates move higher coupled with increased costs to land a tire to shipment areas, the equation toward where to produce begins to produce different outcomes. We see this both in terms of new plants in the U.S. for manufacturers and also suppliers.
MTD: Who or what poses the greatest threat to the business of independent tire dealers in 2019?
Healy: The greatest threat to independent dealers in 2019 is further consolidation among the bigger operators. If these operations continue to grow larger, they will be able to leverage scale, pricing, geographic presence, capital expenditure resources, etc., to a much greater degree than small independents and this could cause them to have a tough time competing and lose share.
Additionally, larger entities are likely to be more capable to bring e-commerce offerings (e.g. mobile scheduling) to the consumer, which could be seen as a differentiator.
While the big keep getting bigger, we do recognize this business is about people, too, and it would not be unlikely for a consumer to opt to go with a smaller independent, even if price may not be superior, if they trust the service technician/business that stands out by offering not only great service but an exceptional customer experience.
MTD: What segment of the tire industry was the most interesting to follow in 2018 ?
Healy: Clearly the changes in distribution were the story of the year. Watching distribution evolve and new partnerships and paths forged is always exciting. We see 2018 as a year of change and 2019 a year of the impact. It will be interesting to see how brand market share changes as a result of these distribution shifts.
MTD: Thanks for your insights, John.