This marks a second straight month of negative retail sellout.
Looking closer at volume for the month of January, on a regional basis we note the Mid-Atlantic region reported the strongest year-over-year growth, up low-single digits. The Northwest region performed the weakest, falling mid-to-high single digits during January.
Dealers indicate that less severe winter weather, as well as manufacturer price increases, were the key catalysts to unit underperformance to begin 2023.
Dealer commentary suggests consumer demand for passenger and light truck replacement tires in January was flat on a net basis compared to January of 2022.
Zero respondents indicated they saw positive demand year-over-year, which compares to December’s reading of minus-25% and November’s reading of plus-43%. While trends in tire retailing are always a bit finicky and can be impacted by weather or a calendar shift, December’s trends seem to continue.
Dealers continue to struggle obtain the right level of inventory, as 33% of respondents indicated inventory was below normal, consistent with trends from the previous month.
Dealers also pointed to less severe winter weather, as well as the rising cost of tires, as factors which drove flat demand in January.
One unexpected bright spot has been the introduction of new tread patterns, which dealers say have had a positive effect on business.
Dealers had previously said they were worried 2023 would be a difficult selling environment, especially without some help from the winter weather. Thus far, this scenario appears to be playing out.
Our contacts are worried about the environment going forward. And with the bulk of winter weather likely behind us, this paints a less-than-ideal picture for the consumer replacement tire industry.
While we continue to believe volumes in the long run will become more closely aligned with the current level of GDP growth, we will be closely watching macroeconomic conditions. Additional Federal Reserve interest rate hikes could spur further GDP declines.
Awaiting a mileage rebound
Given volatile industry conditions, we look at several data points to assess the demand for travel by automobile, which correlates to tire usage and wear. Miles driven in January dropped 5.4% year-over-year, following a 9.7% decline in December and a 7.0% drop in November.
Miles driven has declined each month since March 2022, when U.S. fuel prices increased following the Russian invasion of Ukraine.
Despite the price of gasoline falling for nearly six months, our index has seen no measurable increase in miles driven. Gasoline prices acted similarly in 2010 to 2016 and we saw miles driven bottom out six months after gasoline prices reached $4 per gallon.
If gas prices follow this historical track, we believe when prices reach an average of $3 per gallon, miles driven should return. This will benefit sectors related to passenger tires and aftermarket auto parts. Until then, we suspect the passenger replacement tire market will experience headwinds.
Tier-two holds its lead
From a mix point of view, tier-two and tier-three tires were the most-in demand in January. This continues a long-term trend, as tier-two tires were the most in-demand or tied for the most in-demand in nine of twelve months in 2022.
January marked the second straight month where demand for tier-three tires tied that of tier-two tires.
For the second straight month, tier-one tire brands finished last in our survey. Given rising prices for tires — and all consumer goods — January’s tier rankings are not a surprise to us.
Dealers indicate the pricing spread between tier-one and tier-two brands has grown so large following recent pricing actions that they’ve seen consumers trade down. In our view, this a current reality of the replacement tire market.
Prices have simply become too high for some consumers to justify buying premium tires.
Looking forward, we note consumers seem to change their tier preference in line with the current economic situation.
Volatility has resulted in swings in the rankings over the last three months.
ver the long run, we believe consumers will opt to tier-two tires as they strike the balance between performance and value.
