Retail Sellout Shows Weakness

Sept. 26, 2022

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.

Our recent check-ins with tire dealers leave us with the view that retail sellout trends continue to show weakness and are lower on a year-over-year basis versus the same period in 2021.

Looking more closely at volume during the month of August, we note that only the Southwestern region of the United States reported any year-over-year growth, with the average of all geographic regions seeing low single-digit unit declines. The Midwest region saw the weakest performance.

Dealers have indicated once again that overall inflation and pricing actions from tire manufacturers are driving declines in consumer tire demand and retail sellout.

Five months of decline

Thirty-three percent of respondents to our latest survey indicated that they experienced a decline in demand, which compares to similar percentages recorded in June and July 2022. This marks the fifth straight month of negative replacement consumer tire demand following a healthy first quarter.

Consumer demand for tires is dampening and we continue to hold the position that tire dealers are coming to grips with this, just as consumers themselves are adjusting to increased pricing across all areas of spending.

While we maintain the perspective that volumes in the long run will become more closely aligned with the level of GDP growth, we will be closely watching economic conditions as GDP continues to decline on a sequential basis each quarter.

Consumers strike balance

In response to our question about the “best and worst performers” from a product mix perspective, our recent survey of tire dealers shows that tier-two tires were most in-demand during August 2022.

We hold the view that this is not surprising, given that our dealer contacts continue to cite tire manufacturer price increases - especially in the tier-one category - as a challenge.

We note that consumers who are in the market are showing a continued preference for less expensive tires - supporting our long-held belief that buyers seem to change their preferences based on the volatility of the economy.

Over the long term, we believe this trend will stand as consumers continue to strike a balance between value and performance that fits their budgets. T

Tiremakers remain disciplined

Looking at manufacturers and distribution, we continue to believe that the pricing environment in North America will remain rational and in-line with raw materials costs.

We expect tire manufacturers to remain disciplined in their efforts to manage the price/volume trade-off in order to maximize profitability instead of market share.

We remain pleased with the disciplined approach to production schedules that we have seen at the manufacturing level and global inventory levels remain relatively lean.

Moreover, tire dealers and distributors are being tactical with their approach to inventory allocation.

Raws continue to climb

Turning to raw material costs, we see that the “basket” of raw materials needed to build a common consumer replacement tire rose 25.5% on a year-over-year basis this past August, while falling on a sequential basis by 3.8% from prior-month levels. However, we also note that the July-to-August decline was the biggest sequential drop since April 2020.

Holding current spot prices flat would yield a 26.3% year-over-year increase in input costs during the third quarter quarter.

Looking ahead to the rest of the year, we estimate there will be a 13.9% year-over-year hike in the cost to build a tire. We note that carbon black has seen its price increase month after month for 20 months now.

In August alone, carbon black saw a 51.6% price increase.

Crude oil prices remain elevated.

Synthetic rubber pricing continued to rise in August, climbing 9.9% on a year-over-year basis. Price pressures on reinforcement items continued to climb higher in August, posting a 44.3% year-over-year increase.

Natural rubber prices fell 9% on a year-over-year basis in August and dropped 8.7% on a sequential basis from July 2022.

All-in, we see tire raw material inputs continuing to be elevated on a year-over-year basis. But some of the declines we have observed recently are a welcome sign, given extensive inflation across all aspects of the economy this year.

About the Author

John Healy

John Healy is a managing director and research analyst with Northcoast Research Holdings LLC, based in Cleveland, Ohio. Healy covers a variety of subsectors of the automotive industry and writes MTD's monthly Your Marketplace column. If you would like to be included in the monthly dealer discussions, contact him at [email protected].

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