Dealers Still Speculate Volumes Will increase Going Forward
According to the results of our survey, demand for passenger and light truck replacement tires declined again in April. Indeed, from a volume standpoint, the dealers reported they sold 0.9% fewer tires in April relative to the previous year’s period.
The soft results marked the fourth straight month of lackluster results, including three consecutive months of negative volumes. The weak results come despite weather patterns and the disbursement of tax refunds normalizing.
While the tax refunds normalized in April, it is worth mentioning that some respondents speculated that the late tax season resulted in consumers allocating more of their tax refunds to other big-ticket items and less to car repairs and tires, which could explain why the industry did not experience a sharp recovery in sell-out trends in April.
Additionally, the dealers were quick to point out the lost volume associated with the unfavorable shift in the timing of Easter. Dealers were unable to point to any specific cyclical or secular developments that might be pressuring sell-out trends. In fact, the majority of the dealers continue to speculate that underlying sales trends should benefit from a stronger consumer due to low energy costs and a solid labor market; favorable miles driven trends over the past 24 months; and an expanding car parc, especially the number of cars entering the first replacement cycle.
That said, the noticeable setback since the start of the year has left some dealers questioning whether their view of the market is correct. From a pricing perspective, the poor results in April, despite a more normal operating environment, seem to be the straw that broke the camel’s back. Recall that last month we estimated that industry-wide sell-in trends outpaced sell-out trends during the first months of the year, and flagged the risk that rising channel inventories could lead to higher promotional activity across the supply chain if volumes did not accelerate in April.
This concern appears to be manifesting as many dealers reported an uptick in volume-based promos upstream and rebates and price investments downstream in the middle of April. While the manufacturers continue to implement disciplined production schedules at domestic plants in order to control inventory levels downstream, we think the market needs to see an uptick in sell-out trends before the promotional activity moderates.
Regardless what the future holds, we believe the dealer community will be able to offset any net cost pressures through their own price adjustments. In our opinion, operators who lead with a model that includes high quality of service at fair prices will be able to maintain their margin structure in this category, while those that sell on price alone will only opt to pass along the higher costs and neutralize the impact on gross profit. Until next time, keep the tires rolling out the door.
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the April 2017 survey are compared with those of April 2016.Dealers still expect gains in 2Q17
According to the survey results, 33% of passenger and light truck tire dealers believe business will improve over the next six months, and none are worried that trends will worsen. The rest of the respondents, 67%, felt business trends will stay about level. While the outlook of the dealers has fluctuated slightly over the past six months, we remain encouraged by the fact that none of the respondents expect trends to decline.
The outlook for commercial truck tire demand was also positive, as 67% of the dealers we spoke with see the business improving in the coming months and 33% see business trends staying about the same. None of the participants believed commercial truck tire demand trends will worsen.
Volume trends decline again in April despite weather patterns and tax refunds normalizing
According to dealer reports, consumer demand for passenger and light truck replacement tires declined in April compared to the prior year’s period. From a volume standpoint, the dealers reported they sold 0.9% fewer tires in April relative to the previous year’s period. The soft results marked the fourth straight month of lackluster results, including three consecutive months of negative volumes. The weak results come despite weather patterns and the disbursement of tax refunds normalizing. Partially offsetting these headwinds were the benefits of lower unemployment, low fuel prices, and an expanding car parc.
Despite the lackluster results, we were encouraged that dealers still speculated volumes would increase going forward, as nearly all of them believe that there is some pent-up demand on the sidelines after a mixed 2016 and slow start to 2017.
Dealers reported mixed demand trends across the other tire categories in the period, with trends turning flat in the commercial truck category, and weaker results persisting in the retread channel. In fact, the dealers who responded to the survey reported that medium truck replacement tire volumes were about the same as the prior year in April after flat results in March and being up 0.9% in February, while retread units were down 5.5%, continuing a stretch of declines, including four of the past five months.
Dealer costs were slightly higher versus the prior year’s period
The tire dealers who responded to the survey noted manufacturer pricing on value and branded products, on a net basis, increased 1.3% and 2%, respectively, in comparison with April 2016. It is important to remember that the first price increase in the channel (Goodyear’s) became effective in February 2017, with the majority of manufacturers following suit in March and April. We will monitor upstream pricing closely moving forward as we have heard promotional activity picked up in the second half of the month.
Inventory levels were just about right despite weak sell-out trends, but dealers see risk
Of the dealers who responded to the survey, 83% of them noted inventories at the end of the month were at an appropriate amount to satisfy demand (vs. 83% in March), while 17% noted that inventories were too high (vs. 17% in March), while none noted that inventories were too low (vs. none in March). Some dealers indicated the weak sell-out trends year-to-date are partially responsible for inventories being too high at the end of the period, but manufacturers are doing a diligent job on managing the supply. However, dealers clearly recognize the risk is to the downside should sell-out trends continue to lag sell-in trends.
The responses regarding inventory levels among commercial truck tire dealers indicated more balanced inventories than we’ve seen over the previous few months, as 100% of those surveyed noted they had the appropriate amount of inventory, none of respondents indicated inventory was too high, and none thought inventory was too low during the period.
The net neutral results show inventories are balanced overall, but we believe the varying responses of the past few months can be directly tied to the mid-February ITC ruling, which determined that no anti-dumping/countervailing duties will be levied against Chinese TBR manufacturers. Keep in mind this ruling is being appealed by the USW and Pirelli. To this point, some dealers noted that they are going to take advantage of the changing supply/demand dynamics and build up a safety stock in the event that the appeal is successful.
Repair sales increase year-over-year in April
The dealers who responded to the MTD survey indicated automotive repair sales trends improved in April which marks an increase in service revenues in five of the past six month (February was flat). Specifically, these dealers indicated service sales, which accounted for a net 45% of total revenues, were up 2% on a year-over-year basis in April, which compared to increases of 5% or more from October through January, flat trends in February, and a 1.8% gain in March.
Nick Mitchell is senior vice president, research, for Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.
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