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Economic Stimulus, Reopenings Fuel Sell-Out Spike

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Healy

"The net number of respondents to our latest survey report they have experienced a year-over-year demand increase of 68%," says Healy.

The following MTD exclusive was provided by John Healy, a managing director and research analyst with Northcoast Research Holdings LLC, based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry and is the author of MTD's monthly Your Marketplace column.

In my last column, I wrote that retail sellout trends are improving. More recent conversations with dealers leave us with the impression that sell-out trends have continued to improve on a sequential basis and have continued to gain momentum — not only year-over-year, but also when compared to pre-pandemic levels.

From a volume standpoint, surveyed dealers are reporting unit sales increases of 14.6%, on average, compared to prior-year levels.

And the net number of respondents to our latest survey report they have experienced a year-over-year demand increase of 68%.

Economic stimulus has been a benefit, as consumers with more money in their pockets are investing in vehicle maintenance, including the purchase of new tires.

And we continue to hold the perspective that volumes in the long run will become more closely aligned with the current level of GDP growth — with the months ahead likely to improve even more as more people receive the COVID-19 vaccine, state and local economies continue to open and COVID-19 fatigue increases.

Moving forward, this will invite easy comparisons to past activity as we continue to lap the depths of the COVID-19 crisis.

Changing preferences?

Our latest survey shows that tier-two brands continue to see the most significant amount of growth, as reported by our contacts. This is a continuation of what we observed last month as consumers become more confident in their financial position and outlook.

Dealers also report that inventory levels are low, while price increases continue to be pushed through by many tire manufacturers.

We have seen throughout the pandemic that consumers seem to change their preference for certain tiers and products according to the current COVID-19 situation.

Reduced rates of COVID-19 infections and the vaccine roll-out will likely aid consumer confidence and could eventually spur a possible shift to more expensive brands.

We also believe consumers will seek a more balanced ratio of value to performance, whereas for many months, they have skewed toward value.

Miles are still up

We continue to track a number of data points to assess the health of automobile travel and note that since we have lapped the start of the pandemic, year-over-year comparisons are being drawn from pre-pandemic levels.

Apple’s Mobility Trends Report indicates that the number of people who are searching for driving directions remains up.

Mobility trends bottomed out with a 62% drop in April 2020, when indexed back to January 2020.

As of May 10, 2021, trends in the United States are up 29% compared to the baseline, while a month ago, they were up 39%. As noted in the past, there is a direct correlation between miles driven and the need for tire replacement.

Consistency is expected

When examining the landscape from a longer-term view, we see that many of the trends listed in past columns continue to hold.

We continue to believe that the pricing environment in North America will remain rational and in-line with raw material costs.

We expect tire manufacturers to remain very disciplined in their efforts to manage the trade-off between volume and price in order to optimize profit rather than market share.

We are pleased with the continued disciplined approach to production schedules we have seen at the manufacturing level. And global tire inventory levels remain relatively lean.

Moreover, tire dealers and wholesalers are being tactical with their approach to inventory allocation, in light of raw material prices, recent pricing actions on the part of tire manufacturers and possible legislative moves, like the application of tariffs on certain consumer tires.

Downstream players continue to direct orders in a way that helps them capitalize on the pricing spreads we currently see.

In addition, our dealer contacts maintain a very positive outlook for demand and volume trends going forward.

They remain excited about the role that the potential for more economic stimulus and continued consumer investment in vehicle maintenance will play in building even more sell-out momentum as the industry moves into the second half of 2021.

John Healy is a managing director and research analyst with Northcoast Research Holdings LLC, based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry.

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