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Lower raw material costs should have positive impact on your gross profit

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Lower raw material costs should have positive impact on your gross profit

I speak with several tire dealers every month. During the last three months, the ratio of dealers reporting weak business to improving business still not good — but a glimmer of evidence that a turn in business may be occurring. One month is certainly not a trend, but still, more dealers are seeing volume improve. On the other side of the coin, even those reporting better volume did not get better volume without a cost. Due to intense competition (both from other local dealers and the Internet) most dealers have been unable to fully pass on manufacturer price increases and as such, their gross profit per tire may have declined about $3 vs. what was realized in 2011. In light of the recent trends of lower raw material costs, you should be seeing more marketing specials/deals/promotions from your tire suppliers so there is the potential to see your gross profit per tire start to improve during the remaining months of 2012.

Monthly survey

A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the June 2012 survey are compared with those of June 2011.

Truck tire outlook continues to soften

According to our dealer survey, roughly 40% of passenger tire dealers believe business will improve over the next six months while 40% believe it will stay about the same. Some 20% believe it will worsen. As for truck tire dealers surveyed, 43% see business improving while another 29% see business staying about the same. Twenty-eight percent say it will worsen. Dealers remain concerned about the state of the economy and are a bit confused as to the lack of sales given the increasing miles driven and lower gas prices.

Volumes were flat: Looks can be deceiving

According to dealer reports, on average, retail sales of new replacement passenger tires were down 6% when compared with June 2011. The extent of the volume weakness comes as a bit of a surprise to some dealers as miles driven has been increasing. Consumers are delaying tire purchases and wearing treads thinner than ever as disposable income remains low and the economic outlook hangs in the balance as the election nears and Europe continues to struggle. Truck tire sales were down 4% in June while retreaded tire sales were down 2%.

Tire costs trend downward

In comparing June 2012 with May 2012, the average cost for a size 215/60R16 major brand tire was down 2% while the average price was flat. The average cost for a 215/60R16 private brand tire was also down 2% while the average price actually increased 1%.

Pricing seen as a normal to aggressive

In June 2012, 56% of passenger tire dealers saw pricing as normal while the remaining 44% saw it as aggressive. None of the passenger tire dealers saw it as firm. Similarly, 57% of truck tire dealers saw pricing as normal with the remaining 43% seeing it as aggressive.

Weak demand raises inventory levels

The survey indicated that 67% of passenger tire dealers believed inventories were too high, with the other 33% believing inventories were in line with current business levels. Roughly 67% of truck tire dealers we surveyed indicated inventories were in line with current business levels, while 33% felt inventories were too high. Despite tire manufacturer shipments being down 2% in June, retail tire sales were even weaker which caused inventories to rise. We expect inventories to be reduced going forward as dealers avoid holding stock in the face of the elimination of the Chinese import tariff and ahead of the election.

Service business continues to show strength

Dealers who provide automotive service reported that 36% of revenues, on average, were generated by service during June. Dealers indicated that service business grew by 3% in June 2012 vs. June 2011.     ■

Analyst Saul Ludwig is a managing director with Northcoast Research Holdings LLC based in Cleveland, Ohio. He concentrates on the tire and chemical industries. He has been writing for Modern Tire Dealer since April 1975.

For more Ludwig Reports, see:

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