I made my annual pilgrimage to the SEMA Show in November. With only a few exceptions, almost every tire dealer I spoke with said: a) business remains challenging, and b) they plan to buy very cautiously in the coming months. Dealers believe that tire prices will come down due to soft demand, lower raw material costs and the coming elimination of Chinese tariffs. Some raw materials have indeed declined, but because of FIFO accounting most manufacturers will probably not see any bottom line benefit from today’s lower costs until 2Q12 and, as such, I expect tire prices to remain firm for at least the next several months. Manufacturers are willing to cut production to control inventories as their emphasis is on needed profitability vs. market share.
Monthly survey
A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the October 2011 survey are compared with those of October 2010.
Dealer outlooks remain optimistic
Roughly 43% of passenger tire dealers believe business will improve over the next six months while 57% believe it will stay about the same. As for truck tire dealers surveyed, 62% see business staying level while 38% see business improving. Since July, we have seen outlooks gradually improve despite smaller margins. Manufacturers continue to battle high-cost raw materials still in inventories so pricing is likely to remain elevated, but is unlikely to increase much further.
Passenger and truck tire volumes take a small step back
On average, retail sales of new replacement passenger tires were down 2% when compared with October 2010. Consumer demand remains stagnant as retail prices remain high and consumers are at a breaking point in which they are unwilling to pay much higher prices. Truck tire sales showed signs of slowing as volumes were flat, but retreaded tire sales were strong, growing 4%.
Profit margins improved in October
In comparing the month of October 2011 with September 2011, average costs for size 215/60R16 major brand tires were up 1% while selling prices were up 2%. The average cost for a 215/60R16 private brand tire was down 3% while selling prices were down roughly 1%. This month widened the gap between major and private brand tire costs, which may be an incentive for consumers to trade down as tires remain expensive and money remains tight.
Truck pricing seen as very firm
In October 2011, 47% of passenger tire dealers saw pricing as very firm while 33% saw it as aggressive. The remaining dealers saw pricing as normal. Sixty-four percent of truck tire dealers saw pricing as very firm as high demand for truck tires is causing manufacturers to discount sparingly. Fourteen percent saw pricing as normal, while 22% saw it as aggressive.
Inventories levels are just about right
The survey indicated that 60% of passenger tire dealers believed inventories were in line with current business levels, with the remaining dealers equally split between viewing inventories as too high and too low for current demand. Roughly 57% of truck tire dealers we surveyed indicated inventories were in line with current business levels, while 36% felt inventories were too low. The remaining dealers felt inventories were too high. Dealers are doing a good job of managing inventory levels and adjusting with changes in consumer demand.
Service business strong in otherwise slow environment
Dealers who provide automotive service reported that 28% of revenues, on average, were generated by service during October. Dealers indicated that service business grew by 9% in October 2011 vs. October 2010. Many respondents are claiming service was the key driver of growth this year.
Analyst Saul Ludwig is a managing director with Northcoast Research Holdings LLC based in Cleveland, Ohio. He concentrates on the tire and chemical industries. He has been writing for Modern Tire Dealer since April 1975.
