Our recent industry checks with tire dealers indicate that retail sellout trends have returned to negative territory. On average, dealers saw retail unit sales fall 1.9% on a year-over-year basis in October 2023, following a small gain in September.
On a year-to-date basis, just two of 10 months in 2023 have seen positive sellout.
Looking more closely at volume, we note that only the Northwest region saw positive sellout, up 1.3% year-over-year. The Northeast region saw the softest trends, down 6.3% on a year-over-year basis. From our view, we see this as consistent with recent commentary from Monro Inc., which has a big presence in the Northeast market. During its recent earnings call, Monro noted that its October same store sales trends on a month-to-date basis were down 5.4%.
While a month ago we noted that green shoots were appearing in the replacement tire market, it appears the market is reverting to the soft retail momentum seen during the majority of 2023.
In analyzing specific catalysts to this soft performance, dealers continue to note that inflation and macroeconomic fears are driving consumers to defer auto maintenance. Separately, dealers noted that milder-than-expected weather in certain areas of the country have served to work against tire sales.
Looking forward, given soft year-ago comparisons and used vehicle affordability pressures forcing consumers to hold onto their current vehicles longer, we would not be surprised to see an uptick in winter weather serve as an accelerator to demand trends as we head into 2024.
A look at miles driven
Given volatile industry conditions due to cost inflation and other macroeconomic factors, we look at several data points to access the health of automobile travel demand, which correlates to tire usage and wear.
Looking to miles driven over the last month, which has a significant correlation with the need for a new set of tires, trends fell slightly, following a seven-month streak of positive miles driven.
In analyzing monthly trends, we note our miles driven momentum index registered a 1% year-over-year decline in October 2023, which followed a streak of positive monthly miles driven trends from March through September 2023.
While one month does not make a trend, we do note the monthly result is a bit surprising given the fact the year-ago compare was quite soft, as October 2022 saw a large 7.2% year-over-year decline in miles driven. While difficult to pinpoint the exact reason for the decline, we believe year-to-date miles driven trends remain largely healthy.
Given the strength seen in our proprietary miles driven index for the majority of the year, we still believe the tire replacement industry and broader auto aftermarket are seeing a healthier backdrop compared to this time a year ago. Based upon this, we still see positive data points supportive of a recovery in sellout trends exiting 2023 and into 2024.
What’s up with raws?
Turning to raw material costs, the basket of raw materials to make a basic replacement tire fell an average of 4.5%, year-over-year, during October, following an average 13% decline during the third quarter. Holding raw material costs constant, this would equate to a 2% year-over-year decline in input costs
during the fourth quarter of 2023 to build a tire and a 4.2% sequential increase from the third quarter of 2023.
We note aggregate costs amongst raw materials have declined on a year-over-year basis each month during 2023 as inflationary pressures cooled. That said, we are nearing the one-year mark of aggregate input cost declines. Thus, we may see the rate of raw material deflation slow.
In analyzing specific input costs, we’ve seen natural rubber prices climb 14.9% on a year-over-year basis, given rising oil prices amid tensions in the Middle East. We note oil prices grew an average of 9.3% in October 2023 compared to the previous month.
Among other price movements, we note synthetic rubber costs fell an average of 14.3% on a year-over-year basis in October, while carbon black costs fell 1.1%, year-over-year, and tire fabric/cordage costs fell 12.6% on a year-over-year basis.
Despite steady year-over-year declines each month during 2023, we note the past four months have seen increases in aggregate raw material costs. While previously we had expected some price concessions to eventually make their way to the marketplace, recent feedback from our tire contacts indicates premium brand prices have remained relatively sticky.
Further, we note updates from Goodyear Tire & Rubber Co.’s recent third-quarter earnings call, in which the company said it expects price/mix versus raw materials to be a net benefit in the fourth quarter. As such, we may see the industry still in a bit of a holding pattern as wholesalers pause on taking on more inventory, while manufacturers attempt to hold onto price.
That said, we do still see the potential for price decreases at some point in 2024 as raw material costs appear to be stabilizing following the volatile inflation and deflation over the past several years.
John Healy is a managing director and research analyst with Northcoast Research Holdings LLC, based in Cleveland. Healy covers a variety of subsectors of the automotive industry.
