In 2Q12, Cooper Tire saw its North American volume increase by 15% while Goodyear’s replacement volume in N.A. fell by 10%. The overall market was relatively flat with 2Q11. Yet, Cooper’s operating margin in N.A. that quarter was 8.4% while Goodyear’s was not too different at 7.7%.
I speak with several tire dealers every month. During the last three months, the ratio of dealers reporting weak business to improving business still not good — but a glimmer of evidence that a turn in business may be occurring.
The Chinese tariffs end on Sept. 26, 2012 — what happens then? After shipping and handling expenses, I expect the net unit cost to an importer of Chinese tires to decline by approximately 12% vs. today’s cost, and I would then expect to see an increase in the number of tires that come into the U.S. from China.
The bad news is that raw material costs continue to increase. In December 2011, butadiene was $1.03/lb., in April 2012 it was $1.45/lb. Other representative raw material comparisons (per pound) are: styrene, 56 cents then to 66 cents now; carbon black, 50 cents then to 60 cents now; and natural rubber, $1.55 then to $1.72 now. Yes, tire prices are high, and even as consumers are balking, tire manufacturers cannot absorb those cost increases, so higher tire prices are on the way
Last month I wrote that due to sharply lower raw material costs during 4Q11, I would not expect to see any further tire price hikes any time soon. Unfortunately, that was a wrong call because predictability of future raw material prices is all but impossible.
No snow — that was the problem for dealers in northern climates in December as retail tire sales at those dealerships were very weak. Some reported to me that comp store sales volumes last month declined by more than 15%. Wow.
For sure, the retail consumer tire business was rather lackluster in 2011 as the combination of high gasoline prices (that led to a decline in miles driven), high unemployment and low consumer confidence led to tire buying deferral.
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.
This year has been characterized by soft retail demand, high tire prices forced by surging raw materials, poor fill rates early in the year and new leaders of North American operations at both Goodyear and Cooper Tire.
The challenge of selling big ticket products in today’s economic climate is indeed daunting, and to boot, with most tire companies just having announced a new round of price hikes, your job won’t get any easier.