Retail Sell-Out Levels Remain Healthy, Says Healy
This MTD exclusive is provided by John Healy, author of MTD's monthly Your Marketplace column and managing director and research analyst with Northcoast Research Holdings LLC, based in Cleveland, Ohio.
Recent commentary from our dealer contacts indicates that consumer demand for passenger and light truck tires at the replacement level continues to climb compared to last year. The net number of respondents to our latest survey reported they saw a 6% increase in demand year-over-year.
Our contacts noted that the increase in demand can be attributed to the “lapping” of the early months of the COVID-19 crisis, where some businesses at this time last year were still closed, despite the fact that demand was strong that month versus pre-pandemic levels.
Dealers also reported that economic stimulus checks have been a benefit as consumers continue to put more money into their vehicles, while paying up tire manufacturer-imposed price increases.
Retail sell-out remains healthy. Recently surveyed dealers reported unit sales increases of 5.7% last month versus May 2020, which is the second-largest year-over-year increase in sell-out trends ever recorded by our index. This follows the previous month, which saw record-breaking sell-out trends.
Vote of confidence
Our latest survey reveals that tier-two brands continue to experience the most significant growth among our contacts, which has been consistent with previous months.
This may be a sign that consumers continue to gain confidence in their financial outlook and are more willing to balance both performance and value when buying replacement tires.
We also note that tier-one brands have moved upwards in our rankings for the first time in 10 months, as this segment has been impacted most profoundly by COVID-19 shutdowns.
Dealers have told us that inventory remains low, as tire manufacturers continue to push price increases through. (A number of tire manufacturers have announced price hikes since the June edition of this column.)
However, some dealers tell us that escalating tier-one pricing has caused them to lose some replacement tire market share, as the price gap between tiers have grown.
As we have seen throughout the COVID-19 pandemic, customers seem to change their preferences for certain tiers and brands of tires depending on the current situation.
With high vaccination rates and broad re-openings throughout the country, we believe that more consumers will display a preference for tier-two brands.
That said, we continue to believe that the pricing environment in North America will remain in-line with raw material costs and other market factors and tire manufacturers will continue to demonstrate discipline and control in the efforts to manage the trade-off between price and volume - with the continued goal of optimizing profit instead of market share.
We also continue to be impressed by the extremely disciplined approach to production displayed by tiremakers, which enables global inventory levels to remain lean.
In response, tire dealers and distributors are being tactical with their approach to inventory.
This gives them the continued ability to capitalize on pricing spreads within the market, while remaining flexible in the face of additional price hikes.
Raws continue to climb
Looking at raw material costs, the “basket” of raw materials needed to build a standard replacement vehicle tire has climbed 34.8% on a year-over-year basis, while also increasing on a sequential basis by 2.5%.
This continues the trend of increasing raw material prices that began at the start of the year.
Holding current spot prices flat would yield a 33.3% year-over-year hike in input costs during the second quarter of 2021 - up nearly 4% from the first quarter of the year.
In assessing raw material price movements, we note that carbon black has seen its price increase for the fifth month in a row, with double-digit growth in both May and April.
Crude oil prices experienced extreme cost pressures at the beginning of the pandemic, with average prices down 37% year-over-year, on average through the end of 2020.
This year, however, has been a different story as we begin to lap these cost pressures and the number of miles driven increases. Oil prices jumped 128% year-over-year in May.
Meanwhile, natural rubber prices rose 63.3% in May, which marks strong double-digit gains over the last 10 months.
Synthetic rubber costs have increased, as well.
However, price pressures on tire reinforcement items continue to track negatively year-over-year at a low- to mid-single-digit rate.
Despite these and other fluctuations, dealers remain upbeat in their outlook for the second half of the year as miles driven continue to increase, consumers invest more in their cars and economic stimulus bolsters consumer spending.
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.