There Are Hints of Sellout Improvement

April 4, 2023

Retail sellout trends continue to show softness on a year-over-year basis, marking a third straight month of negative retail sellout, according to our latest check-ins with dealers.

Looking closer at volume for the month of February 2023 on a regional basis, the Southwest region reported the strongest year-over-year growth, up less than 1%, while the Midwest region performed the weakest, falling more than 3%.

Previously, dealer contacts indicated less severe winter weather was a drag on retail sellout and we note this trend appears to have continued through February, with another month of suboptimal retail trends.

We look at several data points to access the health of demand for automobile travel. Miles driven has a significant correlation with the need for a new set of tires and trends again slowed in February.

That said, we highlight the slightest year-over-year declines since March of 2022. The month of February showed just a 0.3% year-over-year decline in our miles driven momentum index, compared to a 5.4% year-over-year decline in January and a 9.7% year-over-year drop in December 2022.

The index continues to see volatility during a prolonged period, with miles driven below normal. Miles driven have declined each month since March 2022 following the Russian invasion of Ukraine and fuel price increases that followed in the U.S.

Despite the price of gasoline falling for nearly six months in the U.S., our index has seen no measurable increase in miles driven.

As a reminder, in 2010 through 2016, when gasoline prices acted similarly, we saw miles driven bottom out six months after gasoline prices reached $4 per gallon.

We believe if gas prices follow this historical period and reach an average of $3 per gallon, miles driven should return and benefit sectors related to passenger tires and aftermarket auto parts. We believe this scenario could be in the beginning phases of playing out, as evidenced by the weakest year-over-year decline seen in almost an entire year.

For the second straight month, the cost of the basket of raw materials needed to make a basic replacement vehicle tire fell on a year-over-year basis. This is the first time this has occurred since December 2020.

Our raw material index fell 1% year-over-year in January and 9% year-over-year in February. The February index was also 0.8% lower than January. This would equate to a 3.6% decline in raw material costs from the fourth quarter of 2022 to the first quarter of 2023.

If current spot prices remained flat, it would equate to a 6.7% year-over-year decline in input costs to build a tire in the first quarter and a further 11.7% decline in the second quarter.

This recent shift is expected to be a welcome sign for both tire manufacturers and tire dealers as price increases on top of the impact of inflation have severely hampered retail sellout.

Cloudy picture for retail

Commentary from dealers suggests consumer demand for passenger and light truck replacement tires was flat compared to February of 2022, which is consistent with demand in January. No dealers indicated they saw positive demand year-over-year in February and it was the same story in January. So the picture remains cloudy for retailing trends in 2023.

Some dealers pointed to milder winter weather as a drag on demand in February, but generally, contacts are struggling to put their finger on the cause of the slowdown.

It appears somewhat difficult to make year-ago comparisons, as overall macroeconomic worries, the effect of inflation on consumers’ wallets and a lack of weather-driven buying have resulted in lackluster demand and sales trends so far in 2023.

Looking into March, early trends point to a continuation of softer trends.

While we continue to hold a perspective that volumes in the long run will become more closely aligned with the current level of GDP growth, we will be closely watching macroeconomic conditions as further Federal Reserve interest rate hikes could spur further GDP declines.

A surprise in tier performance

After successive months of mid-tiered tires leading the demand rankings, our survey of dealers shows a bit of a surprise as tier-one tires were the most in-demand from consumers during February. This is the first time tier-one tires were in greatest demand since our October 2022 survey and it bucks the trend of tier-two tires showing the greatest strength.

Tier-two tires have been the most in-demand, or tied for the most in-demand in nine of the twelve months of 2022. Tier-three tires were the least in-demand during our February survey, falling into the bottom spot after being tied for the top spot the previous two months.

Given rising prices for both tires and all consumer goods, February’s tier ranking comes as a bit of a surprise. From our view, this month’s tier rankings may be indicative of some consumer deferment, as those who put off buying tires for the winter season may be trading up a bit to more premium brands. 

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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