Has Replacement Tire Sellout Peaked?

June 17, 2022

This MTD exclusive was provided by John Healy, managing director and research analyst with Northcoast Research Holdings LLC and author of MTD's monthly Your Marketplace column.

Recent tire dealer commentary suggests that demand for passenger and light truck tires fell on a net basis last month versus May 2021. 

The net number of respondents to our latest survey indicating they observed positive demand for replacement consumer tires during May 2022 was minus-33%. By contrast, that number was up by 30% just four months ago.

In recent columns, we indicated that tax refund payments had lagged previous years and mentioned that there may be a near-term tailwind in replacement tire sales given these historically delayed refunds.

It appears that this scenario has not come to fruition. We note that through May 20, 74% of tax refunds had been issued compared to May 2019, when all tax refunds were issued at the start of that month.

The 74% delayed refund payments were not enough to help drive higher unit volume, while tire manufacturer price hikes and inflationary pressures in the broader economy worked to dampen consumer tire spending.

Drilling down further, our recent check-in with tire dealers leave us with the view that retail sellout trends have slowed and turned lower year-over-year compared to levels observed during May 2021.

Looking more closely at volume during May 2022, we note that no surveyed geographic region experienced year-over-year growth. The Southwest achieved the strongest performance, but was flat. The Southeast region performed the worst on a year-over-year basis. 

We believe that the overall impact of inflation on consumers and pricing actions from tire manufacturers have been the main headwinds recently.

Tier equality

In an interesting twist, our recent survey of dealers indicates that tier-one, tier-two and tier-three tires and brands were in equal demand during May 2022 after tier-one tires took the top spot the previous month.

From a high-level view, we believe this month’s tier preference results represent an anomaly and are indicative of the current environment’s volatility, as this scenario is atypical from our historical survey results.

We feel this equal level of demand across all three tiers is telling of the health of the consumer across income classes, as inflation is pushing some consumers to tier-three products, while others in higher income brackets continue to show a preference for more expensive tires.

We have seen throughout the COVID-19 pandemic that  consumers change their tier preferences based on the present economic situation, which is reinforced by this month’s atypical preference distribution. 

Over the long run, we believe that more consumers will shift back to tier-two products as they try to strike a balance between performance and value.

Raws continue to rise

Examining raw material costs, the basket of raw materials needed to produce a common consumer replacement tire rose 33.2% on a year-over-year basis in May 2022 and also slightly increased by 3% on a sequential basis from the prior month. 

This continues the trend of increasing raw material price inputs on a year-over-year basis that started at the beginning of 2021.

Holding current prices flat would yield a 32.9% year-over-year increase in raw material input costs - up 6.1% from the same period last year.

In assessing specific raw material price movements, we note that carbon black has seen its price increase on a year-over-year basis for 17 consecutive months, with May posting a 61.6% increase - slightly less than the 66.3% increase that was observed in April 2022, which was the largest carbon black price hike recorded since 2005.

As noted in previous columns, geopolitical instability continues to drive up the price of oil, with May 2022 registering a 66.2% jump. (By comparison, the price of oil increased 63.1% during April 2022.)

The price of tire reinforcement items like fabric and cord continue their upward trend, with a recent year-over-year increase of 39.2% - slightly less than the increase observed during April 2022.

Meanwhile, the price of synthetic rubber increased 16.8% on a year-over-year basis in May 2022, down just 1% from prices seen during the previous month. And natural rubber prices fell 1.5% on a year-over-year basis, but grew slightly more than 3% on a sequential monthly basis.

Pain at the pump

We also track miles driven and note that May 2022 showed a 2.7% year-over-year decline in our miles driven momentum index. This compares to a 1% year-over-year drop in April 2022.

We feel that sustained pain at the pump - coupled with rising inflation in all areas of consumer spending - is beginning to negatively impact miles driven.

We recently noted that pre-pandemic vehicle miles traveled trends showed only five periods during the previous decade in which miles traveled fell for five or more consecutive weeks. 

This type of decline typically indicates a bottoming-out of our index and that appeared to prove true as May 2022 showed lumpy miles driven trends.

However, trends rebounded in June 2022 as our index showed growth, particularly during the first week of the month.

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].