Pricing, Supply Chain Challenges Carry Over Into 2023
Are challenges like the supply chain crisis and price increases finally in the rear-view mirror? Not necessarily, says John Healy, who tracks the domestic tire industry for Northcoast Research Holdings LLC. (He also writes MTD’s monthly Your Marketplace column.)
The lingering hangover of these factors - along with inflation, rising inventory levels and other dynamics - will impact tire dealers well into the new year. He explains why in the first part of this exclusive interview.
MTD: Last year, there was a significant shortage of products and SKUs. Today, tire dealers are telling us there is almost too much supply, which has created sky-high inventory levels. That’s a major swing that took place in a compressed period of time. What do you attribute this shift to? What happened and how did it happen so quickly? How important will inventory management be for tire dealers?
Healy: To say that supply and demand dynamics over the last 24 to 36 months have been unpredictable would be an understatement. That said, figuring out inventory dynamics and proper alignment has been even more challenging than forecasting demand as tariffs, rising costs, shortages of inputs and delayed and expensive freight costs have all complicated this equation. Managing tire inventories is always tough and 2022 was a period that was among the toughest.
Entering 2022, many dealers we spoke with were seeing accelerating demand as more full re-opening levels were ongoing and industry inventories for product lacked visibility. Heading into 2022, we heard from many dealers that industry fill rates were suboptimal by a fair margin. Given this, as well as lack of visibility from a timing and expense standpoint on imports, many dealers were scrambling and at times increasing the size of their orders to hopefully get some portion of their target.
While these dynamics were at play, we believe manufacturers started to catch up from a production standpoint, while simultaneously figuring out ways to get product into markets at an expedited rate. While all of these good things were happening, the demand side of the equation due to inflationary pressures on the consumer started to peak and soften. In a nutshell, demand softened at the margin, while manufacturers were ramping up production and international product was figuring out more economic ways to get on-shore - thus creating the situation of today, where we feel industry inventories have caught up to demand and are starting in some areas to be uneven.
MTD: Inflation and interest rates have had a major impact on consumers. How has this affected retail tire sellout by tier and what are your projections for 2023?
Healy: While tire buying is not always discretionary, we do believe the categories in which consumers select the tire to purchase is often a function of what the dealer has and recommends, but also the total price point. Given rising pressures in affordability of nearly all goods and services, we are seeing a shift in recent months of the consumer looking for value over brand at the point of sale. Simply put, consumers are often surprised by the price to replace four tires on their vehicle as a result of inflation, raw materials and even vehicle size. The result for many consumers is sticker shock at the cost to get back on the road.
Given this, we have seen tier-two manufacturers gain share over the last few quarters as part of our survey work with the dealer community. Confirming these trends were recent conversations at the Specialty Equipment Market Association Show with major retailers, which are increasingly modifying their product screen from premium to mid-tier and value lines, so that they can increase consumer conversion and near-term satisfaction.
With inflation being the driving force of this change, we believe the move to value brands will only intensify in 2023. Currently, unemployment still sits at just under 4% - a healthy level. With rising rates and affordability pressures, the likelihood of economic cooling and a recession seems like a prophecy likely to take place in 2023, under these scenarios. And from the healthy level of employment today, we believe it’s likely that the job situation will deteriorate in the next six months - likely causing the consumer, who is already becoming more value-conscious, to intensify their current path of trading down.
MTD: Nine months to one year ago, shipping was a major problem in our industry. Fewer containers were on the water and freight rates were out of this world. Several tire manufacturers and dealers have told us that freight rates have plummeted in recent months. Why? What’s going on with shipping? Will we see more of the same in 2023?
Healy: If we have learned anything in the last two to three years, it’s to expect the unexpected. When one bottleneck or concern seems to be figured out by our great ingenuity as a country, something else seems to pop up. I fully expect that to be the case in the next 12 months. That said, will it continue to be the shipping area that compounds logistics and economics for manufacturers and retailers? It’s hard for me to come up with a long list of reasons why it would be.
Generally speaking, I am a bit more cautious on economic output in 2023 as the consumer seems to be a bit more cautious and big-ticket purchases have become more aspirational than in years past due to financing costs. Ultimately, we think these things will all shake out in terms of lower prices due to higher rates and inflation becoming tamed, but we think it takes time and will likely be the story of at least the first half of 2023.
Given this, we think shipping pressures and bottlenecks could be alleviated as demand cools. The one off-set we see to this dynamic could be rising energy costs and the uncertainty that this could bring to the shipping/logistics area. Also labor continues to be uncertain and could be a wild card as we head into 2023.
Stay tuned to www.moderntiredealer.com for more interview excerpts!