Dealers Have Upbeat Outlook for Volume Trends Going Forward
According to the results of our survey, demand for passenger and light truck replacement tires at retail was essentially the same in February versus the prior year’s period, which mitigates some of the positive momentum the industry had built since October 2017.
While our checks in the previous month indicated positive momentum from October through January spilled into the early days of February, it is apparent that trends moderated very quickly before reaccelerating again during the third week of February. In fact, our contacts in the industry described the weakness in the first half of the month as “a blip” as opposed to a return to the stagnation that plagued the industry in 2017.
Overall, we were disappointed to see demand take a step backwards in February after several months of improvement off the lows that gripped most of 2017. That said, February is generally one of the slowest months of the year in terms of tire sales and we expect trends over the next few months to be much more of a bellwether for demand in 2018 as consumers begin to prepare for the spring and summer.
Commentary from dealers in early March leaves us feeling incrementally more positive despite the flat performance in February. Dealers indicate demand trends are being aided by the harsh winter weather that has hammered much of the Northeast, Upper Mid-Atlantic, and Great Lakes region and that, moving forward, the deteriorating road conditions caused by the freeze-thaw cycle in these key weather sensitive regions will provide a boost to trends through late spring.
Our channel work suggests channel inventories remain healthy after much of the excess was cleared from the channel in 4Q17. We continue to hear from contacts that manufacturers remain disciplined in their production schedules and are not chasing share with pricing. Some manufacturers are using promotions to move some of their lower quality/ low margin product, specifically, in the Tier 3 categories. This phenomenon may also be contributing to the slight rise of Tier 3 tires in terms of consumer preference since the beginning of 2018.
Aside from February’s results, the better fundamentals in recent months have positively impacted sentiment among the dealers and wholesalers. We are encouraged by the fact that the majority of individuals in the dealer community continue to have an upbeat outlook for volume trends going forward.
A number of independent tire dealers were surveyed concerning current business trends. The results of the February 2018 survey are compared with those of February 2017.
Replacement tire sales volumes are flat
Dealer feedback suggests consumer demand for passenger and light truck replacement tires was essentially the same in February compared to the prior year’s period. While last month’s checks indicated that positive momentum spilled into the early days of February, it is apparent that trends moderated very quickly before reaccelerating again during the third week of February.
The latest commentary from dealers in March leaves us feeling incrementally more positive. Despite the slide in February we believe the positive trends over the past six months are indicative that the anomalies that pressured demand in 2017 are unlikely to persist in 2018 and that it is likely that volume growth will return to levels typically seen at this level of GDP growth.
A look at mix trends in the market
The premium product performed the worst for a third consecutive month in February. Recall, the dealers noted in December that consumers seemed to trade down during the holiday season as budgets became stretched at the end of the year.
This phenomenon continued in the middle of February with consumers stuck in limbo between the costly holiday season and the relief of tax returns which were delayed into the second half of the month. The data supports this view, with Tier 2 brands performing the best.
In our opinion, the fact that the trade-down phenomenon was not acute enough to push the Tier 3 category to the top of the list suggests consumers still prefer the high-performance qualities found among Tier 1 and Tier 2 brands.
More importantly, we believe the recent shift in preference back toward the Tier 1 and Tier 2 product is another sign that underlying retail demand trends are starting to normalize after three challenging quarters. ■
John Healy is a managing director and research analyst with Northcoast Research Holdings LLC based in Cleveland, Ohio; He covers a variety of subsectors of the automotive industry.
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