There were some noticeable developments in the tire industry during October. Namely, tire dealers received modest price concessions from the manufacturers as raw material costs remained at favorable levels, and the benefits from the expiration of Tariff 421 accelerated (the post-tariff pricing was intact for the entire month).
The latter has significantly lowered the cost of tires in the value segment — in some cases by as much as 18%. Despite the lower acquisition costs, the retail market has remained relatively rational from a pricing perspective thus far, which has allowed the dealers to pocket the cost savings.
For now, everyone is waiting to see if someone blinks and invests these savings in price in an attempt to gain market share in their respective trade areas.
That said, it seems like the question will eventually morph into “when will they blink?” Considering the dealers that we speak with continue to indicate that demand for their products and services remains lackluster at best. Indeed, tire sales in October only experienced a modest year-over-year increase according to our research.
While October’s results marked an improvement from the soft demand trends witnessed in September, sales during the month likely received a benefit from a shift in the calendar of one fewer Sunday relative to the prior year.
Moreover, dealers in our survey have become less optimistic as their outlook in October focused more on the potential benefits from a more normal winter and less about the pent-up demand in the marketplace. In fact, our recent trip to the Specialty Equipment Market Association (SEMA) Show in Las Vegas revealed that many in the industry have a fairly pessimistic view on 2013 as they harbor concerns about the strength (or lack thereof) of the consumer, and fear that they will have to contend with negative mix trends associated with an aging car parc. Specifically, many light vehicles are entering the final replacement cycle, which typically occurs in year 11 or 12 of the vehicle life cycle.
During this phase, automobile owners tend to opt for a “low cost” option as they know they likely won’t drive the car through the expected tread life of the tires. While this phenomenon will not impact unit volume, it likely will place downward pressure on the average price point of tires sold. In short, tire dealers are not overly confident about operating trends going forward.
Monthly survey
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the October 2012 survey are compared with those of October 2011.
Dealers share a tempered outlook
According to our dealer survey, roughly 33% of passenger tire dealers believe business will improve over the next six months with another 47% believing it will stay about the same. Meanwhile, 31% of truck tire dealers see business improving and 46% believe that business trends will stay about the same. The table illustrates that in spite of the sequential improvement in unit and service sales, the percentage of dealers that expect business trends to improve dropped. Dealer commentary regarding business trends going forward are focused on the uncertainty surrounding the economy and hopes that we will see more normalized winter weather patterns this year.
Tire sales trends improve modestly
According to dealer reports, new replacement passenger tire sales in October 2012 rose 0.5% versus October 2011, which represents an improvement from September when our survey suggested that year-over-year unit sales declined 8%. We would point out that the sequential swing was likely exaggerated by the calendar, which moved a Sunday out of October and into September relative to the prior year. Indeed, dealer commentary suggests that demand trends were anemic, which was largely attributed to the uncertainty surrounding macroeconomic conditions, as well as the general and presidential elections. During the month of October, truck tire sales rose 0.7% while retreads increased 0.9% — both results were improvements from September.
Falling raw material prices and the expiration of Tariff 421 has reduced the cost of tires to dealers as these factors have seemingly caused manufacturers to become more aggressive with price.
Specifically, 60% of passenger tire dealers saw pricing as aggressive while 13% saw it as firm and the balance felt it was normal. Meanwhile, 33% of truck tire dealers saw pricing as aggressive while 50% noted that pricing was normal while the rest felt it was firm. That said, the aggressive manufacturer pricing seems to be less prevalent on branded tires, as tire costs in this segment fell approximately 1.2% in October 2012.
Conversely, the expiration of the tariff on Chinese tires clearly appears to be having a major impact on the value end of the equation. Specifically, dealers reported that the average cost of a value tire dropped approximately 10% in October. Moreover, more than 20% of the dealers reported a change in their top-selling tire brand to a Chinese model. As for the retail impact of the more aggressive manufacturer pricing, it appears that, thus far, dealers are pocketing the savings as retail prices only fell about 1% in both segments.
Too much inventory for demand
Ahead of Tariff 421’s expiration, dealers reported that inventory levels were too low, as many in the industry were reluctant to make tire purchases due to their belief that manufacturer price concessions were on the horizon due to the combination of falling raw material costs and the effect that an influx of cheap Chinese tires would have on the market. Now that these factors are playing out, the dealers that were working down their inventory have begun to restock their assortment. Consequently, no dealers reported that inventory was too low in October, compared to last month when 8.3% of tire dealers noted that their assortment of passenger tires was too low.
That said, tire demand continues to be weak and the number of dealers to report a glut of inventory remained high as 47% of passenger tire dealers believe inventories are too high (vs. 42% in September), with 53% believing inventory levels are just right. Among truck tire dealers, 31% of the respondents we surveyed indicated that inventories were too high (vs. 46% last month), while 69% thought in line with current business levels (vs. 45% in September).
Service business was in a tailwind
Dealers who provide service indicated that, during October, service generated 30% of total revenues. After falling 4% in September, service revenues increased roughly 5% in October.
However, we would be remiss not to point out that the calendar shift we mentioned earlier likely contributed to this improvement. Indeed, we feel that underlying demand trends for service work remain challenged. ■
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.
