Consensus sentiment calls for a 1% to 3% volume increase at retail
According to our survey results, October was a big month for the tire industry as dealers reported the strongest volume growth that we have seen in more than a year. Additional commentary from dealers suggests that the cohort of consumers that had delayed big-ticket purchases during the run-up to the government shutdown at the end of September returned to the market late last month. While this dynamic may have optically enhanced the results that many dealers experienced last month, the survey results along with the anecdotal commentary we have heard from the channel, as well as the strong shipment data being reported by the Rubber Manufacturers Association reinforces our belief that demand trends in North America are in fact rebounding.
Following the conclusion of another decent month of business, the tire industry descended on Sin City during the first week of November for the annual Specialty Equipment Market Association (SEMA) Show. Generally speaking, the mood among attendees was positive, as the consensus sentiment calls for a 1% to 3% volume increase at retail in 2014. In addition to the future of consumer demand for replacement tires, the focus of our conversations centered on the direction of tire prices next year and the drama that is the Cooper/Apollo deal. Until next time, keep the tires rolling.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the October 2013 survey are compared with those of October 2012.
Dealers remain relatively upbeat
According to our dealer survey, 46% of passenger tire dealers believed business will improve over the next six months with 36% believed it will stay about the same, while the rest thought it will worsen. Meanwhile, 46% of the truck tire dealers we spoke with saw business improving, 9% envisioned it worsening, and the rest believed that business trends will stay about the same. The table highlights the outlook that the respondents have conveyed to us in recent months.
Tire sales gain 'traction' in October
According to dealer reports, replacement tire volume in October improved modestly from the demand levels in September. Notably, dealers reported that they sold 0.7% more new tires in October on a year-over-year basis, which compares to the 0.5% increase reported in September, which marked the strongest level that we have seen in more than a year. In addition, the volume growth in October means that the respondents in our survey saw three straight months of year-over-year sales increases... which was a first for this year. Truck tire volumes were strong as well, as dealers reported that their sales increased 2.3% following a 1.4% increase in September. In the retread business, volumes were up by approximately 8% in October after increasing 3% a couple of months ago.
Selling prices and costs continue to drift lower
Dealers reported that tire costs continued to trend lower in October, reflecting lower raw material costs and the residual pricing realignments associated with the expiration of the tariff on tires from China. Indeed, they reported that their effective cost for top-selling branded and value tires fell ~2% in September as manufacturers continued to offer more incentives than usual (70% of tire dealers indicated that manufacturer pricing was aggressive). Dealers opted not to pass along all of the savings to consumers as retail tire prices for premium tires fell 0.3% last month, while prices on value brands were off 0.7%.
Dealers are feeling better about inventory
It appears that tire dealers are relatively comfortable with the amount of merchandise they have in stock. Specifically, almost 45% of the passenger tire dealers we spoke with indicated that they had the optimal amount of inventory on hand (vs. 62% in September), while the rest believe they have too much inventory (38% last survey). For the fifth straight month, dealers reported much cleaner inventory levels in the truck tire business. In fact, all of the truck tire dealers we surveyed indicated that their inventory was at the appropriate level, which is something that we have not seen since we have been doing the study.
Service sales slump in October
After being a tailwind to sales for two straight months, it looks like service business took the backseat to tire sales in October. Indeed, sales in the service category, which accounted for more than 20% of the total revenues of the study participants, fell 0.4% on a year-over-year basis in October, versus a 3.4% increase in September and a 4.3% gain in August.
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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