Strong new car sales lead to better replacement tire demand
No snow — that was the problem for dealers in northern climates in December as retail tire sales at those dealerships were very weak. Some reported to me that comp store sales volumes last month declined by more than 15%. Wow. While dealers in more temperate climates didn’t have the snow issue, sales remained sluggish nonetheless as miles driven have continued to decline by about 2% vs. the same months a year earlier. While I still predict that 2012 volume at retail will improve, it is more likely to begin in 2Q12. As I noted last month, strong new car sales lead to better replacement demand, and it is the continuing strength in new car sales that leads to my guarded optimism for replacement tire sales this year. On the pricing front, I believe that there are no new price hikes on the horizon as raw materials have come down a bit. But conversely, I do not expect tire prices to recede. Manufacturers will cut production to prevent an inventory buildup as it is better for them to absorb costs of less than full plant utilization than to have too much inventory that invariably leads to price cutting. And as to the coming expiration of the Chinese tariffs in September, I do not expect them to be maintained at any level, even in this election year.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the December 2011 survey are compared with those of December 2010.
Optimism remains for the next six months
According to our dealer survey, roughly 56% of passenger tire dealers believe business will stay about the same over the next six months while 38% believe it will improve. The remaining 6% believe it will worsen. As for truck tire dealers surveyed, 54% see business staying level while 39% see business improving. Seven percent see business getting worse.
Passenger tire sales were weak, truck sales show strength
According to dealer reports, on average, retail sales of new replacement passenger tires were down 3% when compared with December 2010. Much of this slowdown is due to a mild winter which is lowering demand for snow tires. As one dealer stated, “Let it snow!” Truck tire sales jumped as volumes were up 5%. Truck tire sales have been strong as truck fleets are still making up for a lack of upkeep during the recession. Retreaded tire sales, which had previously been strong, fell 3%.
Tire prices continue to rise, but for how much longer?
In comparing the month of December 2011 with November 2011, average costs for size 215/60R16 major brand tires were up 1% while selling prices also were up 1%. The average cost for a 215/60R16 private brand tire was flat while selling prices were up roughly 2%. In December, tire prices yet again climbed, but how much longer will it last?
Truck pricing again seen as very firm
In December 2011, 56% of passenger tire dealers saw pricing as very firm while another 25% saw it as normal. The remaining 19% saw it as aggressive. Similarly, 62% of truck tire dealers saw pricing as very firm. Twenty-three percent of truck tire dealers saw pricing as normal and the remaining 15% saw it as aggressive.
Passenger tire inventories turn higher as sales fall
Forty-four percent of passenger tire dealers believed inventories were too high for current business levels, while 31% of surveyed dealers believed inventories were in line with current business levels. The remaining 25% of dealers felt inventories were too low for current demand. Roughly 62% of truck tire dealers we surveyed indicated inventories were in line with current business levels, while 31% felt inventories were too low. The remaining dealers (7%) felt inventories were too high.
Service business remains strong in slow growth market
Dealers who provide automotive service reported that 31% of revenues, on average, were generated by service during December. Dealers reported service business grew by 7%.
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.