Last month we said the consumer could very well prove to be the story of 2013, which is a belief that was reinforced by many of the dealers we speak with. Our hope is that January’s results are not indicative of how this story plays out throughout the rest of the year. As we began 2013, January started strong as dealers saw an influx of consumers come into their shops as a result of the winter snow storms that swept across the country in late December and early January. Not surprisingly, the Northeast and areas of the Mid-Atlantic were the top-performing regions in our study while dealers in the Midwest also outperformed the broader market. That said, as we moved through the month business trends cooled and when everything was said and done dealers reported that unit sales dropped again on a year-over-year basis.
Many dealers attributed the weakness in January to — stop us if you’ve heard this before — a cash-constrained consumer that is unwilling to commit to a big-ticket purchase such as tires. The problem this dynamic presents for a tire dealer is that there are no signs that the consumer is going to become healthier anytime soon. Indeed, between the expiration of the payroll tax holiday and the delayed income tax refunds there is no telling how long it will be until consumers are ready to pony-up the money for new tires. Further complicating matters is the fact that rising fuel prices have emerged as a potential obstacle to consumer spending in recent weeks. In fact, through the first three weeks of February, gas prices are higher year-over-year (after being lower in January) and have risen 9% from January, which would represent the steepest sequential increase in almost two years.
Despite all of these potential headwinds facing the industry, dealers generally believe that the next six months will be better than the same time last year.
Monthly survey
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the January 2013 survey are compared with those of January 2012.
General outlook: dealers express optimism despite sluggish sales
According to our dealer survey, 42% of passenger tire dealers believed business will improve over the next six months while another 47% believed it will stay about the same. The remaining 11% felt business will worsen.
Meanwhile, 47% of the truck tire dealers we spoke with saw business improving and 18% believed that business trends will stay about the same. Thirty-five percent of truck tire dealers felt business will worsen.
While these numbers represent the most confidence that dealers have shown since shortly after Tariff 421 expired, we believe they are largely predicated on wishful thinking. Indeed, we have seen no quantitative evidence of improving trends — and anecdotally, dealers continue to express their angst over the weak consumer and the uncertainty of the economy.
New tire sales: 2013 gets off to a sluggish start
According to dealer reports, the snow storm that positively impacted tire sales near the end of December helped drive a strong start to the New Year. However, weak sales trends in the industry re-emerged as we progressed through January, which resulted in yet another lackluster month. Specifically, dealers reported that passenger replacement tire sales fell 0.9% year-over-year, which is in-line with sales results in December. Truck tire sales were weak as well, with dealers noting that sales in this segment declined 1.5% (vs. a 0.7% decline in December). Finally, retread sales were down 3%, versus a 0.8% decline in December.
Tire selling prices and tire costs: selling prices remain stable
Sixty-five percent of passenger tire dealers indicated that manufacturer pricing has been more aggressive (vs. 78% in December), while 77% of truck tire dealers believed manufacturer tire prices were aggressive (vs. 55% in December). Indeed, this aggressive pricing stance was apparent as dealers noted that their cost for premium brand tires in January was 1.6% lower than three months ago. In the value arena, dealers reported that low-cost brands are off 4.4% over the same time period. Whatever savings dealers may be getting from lower costs are not being passed on to consumers as the selling price of passenger tire prices has not affected the most popular selling tires. In fact, prices on both premium and value brand tires were essentially unchanged from December.
Inventories: dealers work down some inventory
Despite a snow-related sales pick-up at the end of December and the beginning of January, many dealers finished the month with more inventory than they needed. Specifically, 40% of passenger tire dealers believed inventories were too high (vs. 53% in December), while approximately 50% believed inventory levels were just right (47% last month). The other 10% believed inventory levels were too low. Meanwhile, less than 12% of the truck tire dealers we surveyed indicated that inventories were too high (vs. 38% last month), while 78% thought they were just right (vs. 62% in November). The other 10% believed levels were too low. While dealers worked down their inventory somewhat from December, we were surprised to still see so many dealers note that they had too much product for demand as we thought the sales lift at the beginning of the month would have allowed them to clean up their inventory levels.
Service revenues: service work also soft
Service work slowed in January as dealers noted that service work, which accounted for roughly 31% of the total revenues of the respondents in our study, was flat year-over-year. While this represents a very modest slowdown from the 0.6% increase that was reported during December, it is a sharp deceleration from the 5% increase reported in November. In our view, the soft service results reflect a cash-strapped consumer that is unwilling or unable to allocate funds for any nonessential vehicle expenses. ■
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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