Retail Sellout Starts to Soften

June 18, 2024

Our recent check-ins with tire dealers indicate that retail sellout trends were somewhat softer in May 2024 following a robust April. Independent dealers highlighted average sellout declines of 1.3% in May compared to gains of 5.1% in April, with trends flat to slightly down during the first quarter of 2024.

Looking more closely at volume for the month of May on a regional basis, the Midwest and the Northeast saw negative volumes. Other regions saw flat or positive volume trends, with the Southwest seeing the strongest trends, up slightly year-over-year.

From our view, it appears that the changing of the seasons in much of the country in May and April brought consumers into shops for tire replacement following a period of deferment.

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 at miles driven over the last month, which has a significant correlation with the need for a new set of tires, trends were down low single digits during May, following a flat-to-slightly positive first quarter. More specifically, our Miles Driven Momentum Index registered a 1.2% year-over-year decline in May, which followed a 4% decline in April.

While on the surface this may appear troublesome, we note that the month of May was up against a difficult year-ago comparison as May 2023 miles driven grew by a healthy 3.2%. Further, we note the miles driven trend in May remains above the pre-pandemic trend. Thus, the month’s miles driven data is largely a function of difficult comps, rather than the start of a trend of declining miles driven.

Raw material trends

Turning to raw material costs, the basket of raw materials to make a basic replacement tire grew 10.2% year-over-year during May 2024 and up 0.7% from April 2024 levels. We note that this follows a 3.1% year-over-year average increase during the first three months of 2024.

Holding raw material costs constant moving forward, this would equate to a 9.5% year-over-year increase in input costs to “build a tire” in the second quarter and a 3% sequential increase from the first quarter.

In analyzing specific input costs, natural rubber costs grew nearly 51% on a year-over-year basis in May 2024 as supply remains pressured in Southeast Asia. Oil prices grew an average of 10.1% year-over-year amid tensions in the Middle East.

Among other price movements, we note that synthetic rubber costs grew an average of 3.1% on a year-over-year basis in May and carbon black prices grew 2.2% year-over-year. Meanwhile, tire fabric/cord costs fell 5.7% on a year-over-year basis.

We note that our raw material index fell 9.7% in 2023 from 2022 levels, while our index is up 5.2% on a year-to-date basis in 2024. Given the rapid price deceleration in 2023 following two years of price increases, we are not all that surprised to see raw material costs moderate and increase slightly on a year-over-year basis. In fact, we see this level of stability as a positive for the tire industry given the volatility experienced since 2020.

When examining the landscape from a longer-term view, we have heard of multiple dealers experiencing price decreases and promotional updates from several tire manufacturers which we did not expect but were not entirely surprised to hear, given year-over-year raw material price declines in 2023.

We hear that tier-two and upper tier-three manufacturers are aggressively chasing the lower end tier-three and tier-four products in an attempt to remain cost-competitive in a consumer trade-down environment.

We note that as we see price decreases alongside consumer trade-down, there is a risk to some manufacturers’ profitability.

Tier-three in demand

Respondents to our recent survey of tire dealers point to tier-three brands as being the most in-demand from consumers during May 2024. We note this is different from our observed long-term trend, as tier-two brands have historically been the most in-demand segment in the decade-plus history of our monthly survey.

Tier-two brands moved into second place in our tier rankings during May, while tier-one brands remained in last place in May. This is consistent with the trend that closed 2023 as tier-one brands placed last for six consecutive months from September 2023 through January 2024.

We believe the May 2024 result is an indication of the type of tire buyer in the marketplace, as customers are trading down to less-expensive tires for the summer months. To us, this aligns with tier-two and tier-three brands being the most in-demand during May, as consumers who have deferred necessary auto maintenance re-enter the marketplace with fewer tax refund dollars leftover and opt for more value-oriented tires.

While our tire tier rankings can be volatile from month to month, we continue to expect tier-two brands to be the most in-demand segment on a long-term basis as consumers continue to strike a balance between cost and performance. 

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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