Lower gas prices remain key to releasing pent-up demand
Tire dealers reported that lackluster sales continued during April as passenger tire unit volume at retail was essentially flat. While the 0.2% decline that dealers reported is certainly an improvement over the 1.1% decline that was reported in March, it’s important to remember that Easter was in March this year, compared to 2012, when the holiday occurred in April. This calendar shift effectively gave dealers an additional selling day this year, which obviously benefited the reported numbers.
Conversely, this calendar shift means that March’s results were artificially depressed. While it’s tough to quantify the exact impact that this calendar anomaly had, one thing is certain: dealers have yet to see any pent-up demand released.
Looking ahead, we would expect to see sales trends improve — especially as gasoline prices have continued to fall (retail prices declined 3.7% from March and were 8.1% lower on a year-over-year basis), the noise surrounding the timing of federal tax refund disbursements becomes a memory and consumers become more accustomed to higher payroll taxes. That said, when pent-up demand is released we think it will look more like a rising tide than a tsunami. In fact, now that we are approaching summer, the hope for the industry has to be that gas prices will remain lower, which in turn will help stimulate driving. Indeed, increased summer driving could be more impactful than usual given our belief that tires are operating with less tread than at any point in the past and that the late winter experienced in many parts of the nation likely shortened their remaining life — although clearly not enough for consumers to buy tires en masse. 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 April 2013 survey are compared with those of April 2012.
General outlook: Dealers see better days ahead
According to our dealer survey, 36% of passenger tire dealers believe business will improve over the next six months with the rest believing it will stay about the same. It is interesting to note that none of the dealers that we spoke with expect passenger tire units to worsen. Meanwhile, 30% of the truck tire dealers we spoke with see business improving and 60% believe that business trends will stay about the same. The remaining 10% believe it will worsen.
New tire sales: Sell-out trends improve modestly
According to dealer reports, business trends improved modestly during April following a relatively lackluster month in March. Specifically, as mentioned earlier, dealers reported that passenger replacement tire sales were essentially flat last month — a 0.2% decline to be exact — compared to a 1.1% year-over-year decline in March. The results were mixed by category as truck tire dealers indicated that units were down 1.5% (vs. 2.0% drop in March), while retread dealers noted unit sales rose 1.5% (fell 1.0% during March).
Tire selling prices and tire costs: Prices hold steady
According to dealers, manufacturers appear to have remained competitive in their pricing to dealers, as 77% of passenger tire dealers indicated that manufacturer pricing has been more aggressive (vs. 76% in March), while 82% of truck tire dealers believe manufacturer tire prices were aggressive (vs. 62% in March). As it relates to cost, dealers noted that their cost for premium brand tires in March fell 1.1% from the prior month, while tires in the value spectrum dropped 1.4%. In a theme that has been consistent since the expiration of Tariff 421, dealers opted to pocket the savings. Indeed, tire prices were roughly flat on premium brands and rose 0.7% on value tires.
Inventories: Levels improve, but remain elevated
As one would expect, the improvement in sales helped dealers’ work down some of their excess inventory; however, the consensus opinion at the end of the month indicates that many dealers still have more inventory than they need. Indeed, 50% of passenger tire dealers believe inventories are too high (vs. 59% in March), with 35% believing inventory levels are just right (in-line with last month). Meanwhile, 14% of the truck tire dealers we surveyed indicated that inventories were too high (vs. 38% last month), while the rest thought they were just right (vs. 62% in March).
Service revenues: Cool spring helps drive service work
Last month, service work was a bright spot for tire dealers as respondents noted that this category, which accounted for almost 37% of the total revenues of the respondents in our study, increased 1.5% year-over-year. This compares to a 2% increase during March. We continue to believe that the strength of service work that dealers have experienced can be partially traced to the colder weather that most of the country experienced during April. Specifically, we think that the cooler temperatures likely drove a DIYer to a DIFM in April as many consumers were less inclined to perform basic maintenance work themselves. ■
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.
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