After a four-month streak of slight tire volume growth, the Northcoast Research Tire Demand Index took a big step backwards in September. And for better or worse, there’s no clear explanation for the month’s soft sell-out trends.
Analyst Nick Mitchell says the monthly index is built using the results of a monthly survey of approximately 100 tire dealers in the U.S. A number above 50 implies the market expanded on a year-over-year basis; a number lower than 50 means unit demand shrunk.
In September 2017, the index fell 16.4 points to 40.2.
“The sharp decline pushed the index back to the anemic levels seen during the first four months of the year (44.4). The latest print was 14.5 points below the average reading recorded since the inception of the survey (54.7).
“While portions of Florida and Texas were clearly negatively impacted by the recent hurricanes, the worst performing regions of the country were actually the Great Lakes, Northeast, and Mid-Atlantic.
“While some dealers in these markets have indicated that they are growing more concerned about the softer-than-expected sell-out trends since the start of the year, many noted that September’s results were negatively impacted by tough comparisons (recall Monro’s tire sales accelerated nicely in September relative to the first two months of the third quarter of fiscal year 2017).”
The recent trends have fallen short of Mitchell’s expectations, and he says the index “has suggested negative volume trends in four of the past nine months.”
The results “puzzle” Mitchell’s contacts in the industry, and they “run counter to what is typically found with this level of domestic GDP growth.”
And he remains optimistic that no one is pointing to structural factors in the industry as a pressure point. Mitchell expects a turnaround, and still thinks that “with a little help from Mother Nature,” stronger trends are possible for the fourth quarter.
As for pricing: “Our recent channel work suggests that the broader pricing environment at retail improved slightly in September, continuing the volatility that we have seen in prices since the end of the first quarter. It is worth noting that much of the volatility in pricing at retail in recent months stems from the diverse promotional environment in localized markets, which dealers are using to gain share in their respective markets in a no-growth environment. In fact, we continue to hear from contacts in the industry that upstream promotional activity has remained fairly consistent since the middle of second quarter.”
Pricing data over the past three months has shown “an unusual amount of volatility” in the SKU count by manufacturer, Mitchell says. He thinks it comes as a result of dealers and wholesalers applying a tactical approach to their inventories given the promotions and timing of pricing increases, as well as elevated channel inventory and volatile raw material prices.
Which tier is tops?
Generally, tire dealers continue to indicate that consumers have moved away from Tier 3 brands over the past 12 quarters. Some of the shift comes from consumers feeling less strapped for cash, and being more easily swayed to choose a higher-tiered tire.
But there was a speed bump in that story in September, too, Mitchell says. For the month, Tier 3 brands outperformed both Tier 1 and Tier 2 products.