Summer Cool-Down: What's Stalling Retail Sell-Out?
This MTD exclusive was provided by John Healy, managing director and research analyst with Northcoast Research Holdings LLC and author of MTD's monthly Your Marketplace column.
Is retail tire sell-out starting to cool down? Our recent conversations with dealers leave us with the view that retail sell-out trends have stalled on a year-over-year basis as we have now lapped the beginning stages of the COVID-19 pandemic, while also cooling down in terms of previous-month numbers.
From a volume standpoint, surveyed dealers report that unit sales were flat last month, which follows the largest, year-over-year increase in sell-out trends ever recorded by our index.
We believe that there was a divergence last month from record-setting trends due to fewer drivers taking their vehicles in for preventive maintenance prior to the summer trip season.
In addition, our contacts noted that similar levels in demand compared to last year also were impacted by lower inventory levels and price hikes by tire manufacturers.
Open for business
Given the continued COVID-19 pandemic, we looked at a number of data points to assess the continued health of automobile travel demand, which directly correlates to tire usage and wear.
In looking at state re-openings in recent weeks, we see that all states have fully reopened, which compared to slightly more than half just two months ago.
While state economies are back in full force, the delta variant of the COVID-19 virus may cause government officials to reimpose some lockdown measures in the coming weeks if infection rates continue to increase.
Two for the road
Our latest survey indicates that tier-two brands remain the segment of most significant growth among our contacts.
This could be a sign that prior strength in consumer preference for tier-three products may be starting to subside as customers are more confident in their economic outlook and are more willing to balance both performance and value.
We also note that tier-one brands have ranked second in our survey for two months in a row, which is the first time this has occurred since before the pandemic — in January 2020 and February 2020, specifically.
Dealers indicate that inventory remains low while price increases continue to be pushed through by all tire manufacturers. This appears to not have dampened the relative strength of tier-one products, which had been expected by some dealers due to the price differences between tiers as prices have increased.
Throughout the pandemic, we have seen that consumers seem to change their preferences for certain tiers of products according to the current COVID-19 situation. With high vaccination rates and broad reopenings throughout the country, we believe that tier-two brands will continue to remain at the top of most consumers’ preferences.
As stated in previous columns, we also remain confident that the North American tire pricing environment will remain rational and in-line with raw material costs, while tire manufacturers remain disciplined in their efforts to manage the trade-off between price and volume, with a focus on optimizing profit.
Looking at raw materials costs, the “basket” of raw materials needed to build a standard replacement tire rose on a year-over-year basis and also increased on a sequential basis by 1.1% from previous-month levels.
This continues the overall trend of increasing raw material pricing inputs that began at the start of 2021, although year-over-year increases have moderated since the highs seen this past April.
Holding current spot prices flat would yield a 33.8% year-over-year increase in input costs during the second quarter of 2021, up nearly 5% from the previous quarter.
Examining individual components, we note that carbon black has seen its price grow on a year-over-year basis for six months in a row now.
In last month’s column, I noted that crude oil prices experienced extreme cost pressures at the start of the pandemic, with average prices down 37% year-over-year through the end of 2020, on average.
Things have turned around in 2021.Oil prices jumped 84% on a year-over-year basis this past June, with sequential gains.
Meanwhile, natural rubber prices rose by 42.4% in June, which marks strong, double-digit grains over the last 11 months. Synthetic rubber costs were up at the high-teens level in June, year-over-year.
The category that continues to track negative on a year-over-year basis is reinforcement items, such as fabric and cord, at its usual low- to mid-single-digit rate.