Spring Brings Signs of a Turnaround

May 3, 2023

For the fourth straight month, our recent industry checks with dealers leave us with a view that retail sellout trends continue to show softness on a year-over-year basis.  

Regionally, no regions showed positive growth during the month of March. The Southwest region fared the best, with an average unit decline just above 1%, while the Midwest and Northeast regions were the weakest, with volumes falling 6.9% and 6.3%, respectively. 

Looking at the bigger picture, in the first quarter of 2023, average units declined approximately 2%.  

While milder winter weather was called out as a drag on sales early in the quarter, dealer contacts indicate that the impact of the overall inflationary environment for consumers has been the key driver of lackluster sales as a whole. 

Good news in miles driven 

There were good signs in miles driven data from March, as the trends turned positive for the first time since one year prior. The improvement was driven by a robust increase in miles driven during the last week of the month. 

The rebound in miles driven in March came despite gasoline prices, which were the highest of any month thus far in 2023. Still, prices have declined significantly from year-ago levels when the Russian invasion of Ukraine sent gasoline prices soaring. 

While gasoline prices are still slightly elevated from pre-conflict prices, we see this recent decline as a key catalyst to the increase in miles driven. Our miles driven momentum index showed a year-over-year increase of 1.3% in March, compared to declines of 0.3% in February and 5.4% in January. 

We note miles driven through the first week of April grew 6.5%, year-over-year. Should gasoline prices abate further, we expect miles driven to return and benefit sectors related to passenger tires and aftermarket auto parts. 

Raw material costs drop 

There’s more good news in raw materials. For the first quarter of 2023, the basket of raw materials needed to build a basic replacement vehicle tire fell 8.2% year-over-year. For the first three months, the costs have dropped sequentially, with a 0.6% decline in January, an 8.6% drop in February and a 14.6% decrease in March. 

Looking forward, holding current spot prices flat would equate to a 13.2% year-over-year drop in input costs in the second quarter. This recent shift to year-over-year declines - coupled with additional sequential monthly declines - is expected to be a welcome sign for both tire manufacturers and dealers as price increases, on top of overall inflationary impacts, have severely hampered retail sellout. 

Dealer selling trends 

Those good indicators will come as welcome news to our independent dealer contacts, who experienced low demand for replacement passenger and light truck tires in March 2023. A net 71% of our contacts saw negative demand during the month. 

While trends in tire retailing are always a bit finicky and can be impacted by weather, calendar shifts or consumer spending patterns, our recent survey results continue to paint a cloudy picture of retailing trends in 2023. Dealers continue to struggle to pinpoint one specific cause for the slowdown. 

From a historical basis, we need to go back to February of 2021 to see a month in which no independent dealer contact saw a year-over-year increase in demand. We have long been of the view that volumes in the long run will become closely aligned with the current level of GDP growth.  

However, with macroeconomists expecting just slight GDP growth in 2023 and some fearing a mild recession, we look for tire retailing trends to remain soft until general economic conditions turn for the better. 

Given that dealers indicated tire demand was at its weakest point in nearly two years during March 2023, we are not surprised to see consumers who did choose to purchase tires traded down to tier-three brands. Those brands were the best performers in March, just as they were in December 2022 and January 2023. 

Tier-one tires were in second place in March, while tier-two tires were the least in-demand of all. 

Tier-two tires typically take the top spot in our survey rankings, rating the strongest in terms of demand since the inception of our survey in 2013. But with inflation hurting the wallets of the low-end consumer the most and macro worries sparking the most fear in high-end consumers, we see it as logical and rational that tire buyers would turn to the least expensive 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].