Although still less than robust, tire sales show improvement
Dealers reported that new passenger tire sales in August improved modestly from July as sales of passenger units rose 0.1% year-over-year following a 0.3% decline. While we would acknowledge the fact that 0.1% is essentially flat with sales trends a year ago, it is nevertheless positive, which is something that we have not seen since February. Moreover, it is encouraging as the dealers that we speak with experienced a 1.1% decline just two months ago. Despite the fact that the sales data is less than robust, we view the incremental improvements very favorably. The anecdotal commentary we have heard from the channel about the release of pent-up demand, combined with the optimistic outlook of dealers and the strong shipment data being reported by the Rubber Manufacturers Association, leads us to believe that we are, in fact, in the early stages of a rebound in demand trends.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the August 2013 survey are compared with those of August 2012.
General outlook: pessimism vanishes
According to our dealer survey, 46% of passenger tire dealers believed business will improve over the next six months while 54% believed it will stay about the same. Meanwhile, 53% of the truck tire dealers we spoke with saw business improving and 47% believed that business trends will stay about the same. In short, the collective outlook of the tire dealers in our sample has become more optimistic.
New tire sales: tire volumes increased in August
According to dealer reports, replacement tire demand in August improved very modestly from the results that were experienced in July. Dealers reported that they sold 0.1% more new tires last month on a year-over-year basis, which compares to the 0.3% decline reported in July. More importantly, August is the first time that the respondents in our survey noted that year-over-year sales trends increased since February. Truck tire volumes were up as well, as dealers reported that their sales increased 1.0% following a 3.6% increase in July. In the retread business, volumes were off 0.7% in August after being down 4.0% in July.
Selling prices and costs continued to fall
Survey respondents reported that their effective cost for top-selling branded tires fell 1.1% while opening price point tires were almost 1.6% less in August. Not surprisingly, the lower effective costs are partially related to increased manufacturer promotional activity. For example, 73% of passenger tire dealers characterized manufacturer pricing as aggressive in August (up sharply from 50% in July), while 80% of truck tire dealers believed that manufacturer promotions have increased, which is in-line with 86% in July. The favorable costs that dealers saw benefited consumers as well, as retail tire prices for premium tires fell 0.4% in August, while prices on value brands fell 0.3%.
Inventories: tire inventories were little changed
Forty-seven percent of passenger tire dealers believed inventories were too high (vs. 41% in July), while the balance (53%) believed inventory levels were just right (vs. 59% in July). For the third straight month, dealers reported much cleaner inventory levels in the truck tire business, as 9% of the truck tire dealers we surveyed indicated that inventories were too high (vs. 29% in July), while 80% said it was just right (vs. almost 61% in July) and 11% actually said that they were too low.
Service revenues: sharp pick-up helps August sales
Results of past surveys showed that service business slowed down in June and July. However, it appears that it picked up sharply in August, as tire dealers noted that this category, which accounted for almost 30% of the total revenues of the study participants, increased 4.3% in August, compared to the 0.7% and 2.0% increases that they reported in June and July, respectively. ■
John Healy and Nick Mitchell are research analysts with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy and Mitchell cover a variety of subsectors of the automotive industry.