All eyes were focused on the expiration of Tariff 421
We would first like to say that we are thrilled to share our views on the tire industry with the readers of Modern Tire Dealer. We hope that our commentary, which summarizes our research, including conversations with wholesale and retail tire dealers, will provide the same insightful look at the industry that Saul Ludwig shared for so many years, which helped make Modern Tire Dealer’s Ludwig Report a must read.
Introductions aside, this is an exciting time in the industry as demand trends at retail are stabilizing and the industry moves on without Tariff 421. We obviously don’t have to tell our readers how bad things have been in recent months. Despite the fact that gasoline prices jumped sharply in August, dealers reported that retail sales improved modestly during the period. The stabilization appears to have been driven by the fact that many consumers have deferred replacement tires so long there is simply not tread left on their tires, leaving them with no alternative but to pony-up the money for new tires.
From the wholesale perspective, the dealer destocking has continued with all eyes focused on September 26, a date that was circled on everyone’s calendar, as the industry waited to see if Tariff 421 expired. While most expected the measure to expire at this point, there are lingering questions whether a new tariff on Chinese tires will be included as part of a more comprehensive package to stop what the Obama administration claims are illegal subsidies by the Chinese government for its automotive and auto parts industries. Indeed, the U.S. filed an official complaint regarding this topic with the World Trade Organization last month. Either way, we think that once we get more clarity on the tariff situation, we would anticipate that wholesalers will be less reluctant to buy tires. Hopefully, this coincides with a rebound in consumer demand.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the August 2012 survey are compared with those of August 2011.
Passenger tire dealers remained optimistic
According to our dealer survey, roughly 60% of passenger tire dealers believe business will improve over the next six months while 20% believe it will stay about the same. Some 20% believe it will worsen. Truck tire dealers were not so optimistic, as 38% see business improving, which is roughly equal to the amount of dealers that see business staying about level. About 24% felt business would worsen. While dealers noted that promotions have been a crucial element to drive demand, business does not appear to have improved recently. Looking ahead, dealers hope that pent-up demand from delayed purchased combined with favorable winter weather will drive business. These outlook comments tend to be seasonally directed rather than year-to-year comparisons.
Unit demand was lackluster in August
According to dealer reports, on average, retail sales of new replacement passenger tires were down 1% when compared with August 2011, which represents a modest improvement from July when our survey suggested that unit sales were down 3%. . While unit sales were still down, the modest pickup is encouraging given that there is still a great deal of uncertainty in the economy and retail gasoline prices rose 8.1% in the month to $3.78, or 2.3% higher than August of last year. The sharp acceleration of prices at the pump likely shocked consumer confidence as it was the second sharpest sequential increase in more than three years. Truck tire sales were up 2% in August, which was consistent with growth rates in July, while retreaded tire sales grew 2% -- a deceleration from the 8% increase last month.
Tire prices were unchanged in August
In comparing August 2012 with July 2012, the average cost for a size 215/60R16 major brand tire was essentially flat, as was the average price. The average cost for a 215/60R16 private brand tire was down 1% while the average price was flat.
Pricing gets aggressive on passenger tire side
In August 2012, 62% of passenger tire dealers saw pricing as aggressive while 31% saw it as normal. Seven percent of the passenger tire dealers saw it as firm. However, 45% of truck tire dealers saw pricing as normal with the remaining 55% seeing it as aggressive. In general, we believe that tire prices are falling – a trend that many dealers expect to continue given the lower raw material costs. While raw materials such as natural and synthetic rubber are down drastically from recent highs, they have since seen some stabilization.
Dealers restock inventories in anticipation of the expiration of Tariff 421
The survey indicated that only 30% of passenger tire dealers believed inventories were too high (vs. 75% in July), with the other 70% believing inventories were just right. Among truck tire dealers, a mere 13% indicated that inventories were too high (vs. 37% last month), while the other 87% noted that their tire assortment was in line with current business levels. As expected, commentary from dealers suggests that the destocking is occurring in anticipation of the expi9ration of Tariff 421 on September 26. Additionally, we believe many dealers have been holding off on purchases as they have watched raw material prices drop.
Service business continues to show strength
Dealers who provide automotive service reported that 31% of revenues, on average, were generated by service during August. Dealers indicated that service business grew by 7% in August 2012 vs. August 2011. Service business has been a growth driver for dealers in recent months. Indeed, the results of our survey indicate that service business picked up sequentially, as it rose 6% year-over-year in July.
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.