Underlying consumer demand for tires remains healthy
You can’t get too much of a good thing, or so the saying goes. However, it appears that is exactly what happened to many tire dealers in January as the harsh winter weather actually pressured tire sales in parts of the country.
Specifically, dealers reported that the harsh winter conditions that have been driving consumers to replace their worn treads in recent months were so severe that many people opted to stay inside during the harsh weather. Consequently, traffic levels in the bays were pressured, which ultimately resulted in lower year-over-year unit sales in January.
The silver lining is that the weather did serve as a less-than-subtle reminder to procrastinating consumers everywhere that fresh treads are a must in inclement conditions, which resulted in strong tire sales among the people brave enough to venture out into the elements.
All things considered, we still think that the recent rash of rough weather will continue to drive tire sales once the environment thaws enough for people to drive out and replace their worn tires, despite the fact that the weather in February likely weighed on traffic trends as well. In our view, the fact that none of the tire dealers that we spoke with expect sales to take a turn for the worse over the next three months reinforces our belief that underlying consumer demand for tires remains healthy.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, results of the January 2014 survey are compared with those of January 2013.
Dealers see no reasons for pessimism
According to our dealer survey, 38% of passenger tire dealers believe business will improve over the next six months, while the rest think that it will stay about the same. Meanwhile, 51% of the truck tire dealers we spoke with see business improving, while the balance see business trends staying about the same. Just as important is the fact that none of the dealers that we spoke with envision demand trends deteriorating over the next six months.
Winter weather kept consumers at home
According to dealer reports, consumer demand for replacement tires slowed down in January. Indeed, the dealers in our sample reported that they sold 0.6% fewer tires in January on a year-over-year basis, which compares to the 0.8% increase reported in December and the 1.9% gain in November. The aforementioned weakness was not seen in the truck category as dealers reported that volumes increased 1.2% following a 4% increase in December. Meanwhile, volumes fell 5% in the retread business after declining 4% in December.
Retail prices fall, dealer costs remain stable
Nearly all of the dealers in our survey noted that manufacturer pricing was aggressive (vs. 44% in December). However, it appears that this aggressive behavior did not meaningfully affect dealers’ costs much as respondents noted that their effective cost for top-selling branded tires fell nearly 0.5%, while the value brands fell approximately 1%.
Truck tire inventories seen as optimal
Of the dealers that we spoke with last month, close to 38% indicated that they had the appropriate amount of inventory in stock for demand (vs. 45% in December), while the rest indicated that inventory levels were too high (vs. 43% in Dec). The inventory levels among truck tire dealers looked a little cleaner than their peers on the passenger side as 88% of the truck tire dealers we surveyed indicated that their inventory was optimal, while the balance of the respondents thought that it was too high.
Service work fares better than tire sales
The dealers we spoke with indicated that the severe weather conditions that swept across many parts of the country in January did not have the same adverse impact on service sales as what was seen in the tire business. In fact, sales in the service category, which accounted for almost 30% of the study participants’ total revenues, still rose almost 4% on a year-over-year basis following a 6% increase in December. ■
Nick Mitchell and John Healy are research analysts with Northcoast Research Holdings LLC based in Cleveland, Ohio. They cover a variety of subsectors of the automotive industry.
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