Serious concerns linger surrounding consumer spending strength

Feb. 13, 2013

Well, we made it through 2012, which almost everyone can agree was not the tire industry’s banner year.  As we were winding down the year, dealers got their Christmas wish answered as winter finally made its presence felt. 

Indeed, the storm that swept across the nation in late December dumped snow and ice all the way from the Mississippi Valley to the Ohio Valley and the Northeast. Interestingly, dealers reported that volume trends were again challenged during December, despite a lot of hope for major release of pent-up demand following the first good snow storm of the year. While the sight of snow improved the outlook of some dealers modestly, they still have serious concerns lingering about the strength of the consumer. 

Perhaps the absence of a meaningful lift during the storm points to the fact that the primary factors pressuring the industry are not likely to vanish on the account of a few snowy days as many had hoped.  As we look out to this year, the strength of the consumer (especially in light of the payroll tax holiday expiration) could be the story of 2013. Specifically, if the weakness in the industry is in fact being driven by a cash-strapped consumer, pricing discipline could evaporate if dealers and manufacturers choose to chase volume.

This leads to other questions, such as whether another year of weak volumes would result in accelerated dealer consolidation. Conversely, if the consumer shows signs of rebounding, it’s possible that we could see dealer restocking. We will have to wait and see, but one thing is for sure — 2013 will continue to be interesting.

Monthly survey

A number of independent tire dealers were surveyed concerning current business trends. Except for tire prices and costs, the results of the December 2012 survey are compared with those of December 2011.

Dealers become more optimistic as we head into 2013

According to our dealer survey, 17% of passenger tire dealers believed business would improve over the next six months while another 67% believed it would stay about the same. The other 16% believed it would worsen. Meanwhile, 19% of the truck tire dealers we spoke with saw business improving and 63% believed that business trends would stay about the same. The remaining 17% believed business would worsen. This represents an improvement in outlook of both passenger and truck tire dealers from November. On the margin, dealers seemed to be slightly more optimistic since we had a taste of winter weather. That said, there were still lingering concerns about the strength (or lack thereof) of the consumer, which is not something that will be helped by the expiration of the payroll tax holiday.

Snow storm didn’t spur tire purchases

Despite the intense snow in some areas, dealers reported that weak trends continued through December. Indeed, passenger replacement tire sales fell 0.9% versus December 2011, which is only slightly better than the 1.2% decline that dealers reported in November.  Truck tire sales were weak as well, with dealers noting that sales in this segment declined 0.7% (vs. a 1.1% decline in November). Finally, retread sales dropped 0.8%, which was in line with November.

Retail tire market remains rational

Seventy-eight percent of passenger tire dealers noted that manufacturer pricing has been more aggressive (vs. 64% in November), while 63% of truck tire dealers believed manufacturer tire prices were aggressive (vs. 55% in November). That said, any uptick in the aggression of manufacturer pricing has not affected the most popular selling tires, as dealers reported that the cost of their best-selling premium and value brand tires was essentially unchanged from November. On the cost side of the equation, premium brand tire prices were basically unchanged during December, while tires in the value arena rose 0.8%. In our view, this data is further confirmation that the market has remained rational, despite the fears many harbored ahead of Tariff 421’s expiration.

Moderating sales declines helped inventory levels

While sales in December were far from robust, the modest pickup appears to have been enough for passenger tire dealers to work down some of the excess inventory they reported in November.  Specifically, 53% of passenger tire dealers believed inventories were too high (vs. 70% in November), with the rest believing inventory levels were just right (vs. 30% in November).

Meanwhile, 38% of the truck tire dealers we surveyed indicated that inventory levels were too high (vs. 27% in November), while 62% thought they were in line with current business levels (vs. 73% in November).

The fact that not a single survey respondent believed that they had more inventory than they needed underscores just how reluctant tire dealers are to buy inventory in this environment.

Indeed, we’ve heard many a wholesaler say that dealers are only willing to buy what they are selling right now.

Service revenues were in less of a tailwind in December

While service revenues have been in a tailwind for dealers in recent months, our survey shows that service work slowed significantly in December. Dealers noted that service work, which generated 30% of their total revenues, rose only 0.6%, which is sharp deceleration from the 5.0% increase reported in November. While this could be partially driven by the fact Christmas was on a Tuesday last year, we were surprised to see the drastic slowdown given the way dealers have been talking about the expected lift they would get when snow arrived.    ■

John Healy and Nick Mitchell are research analysts with Northcoast Research Holdings LLC based in Cleveland, Ohio. Healy and Mitchell cover a variety of subsectors of the automotive industry. 

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