Slight Reprieve? Sell-Out Trends Are Tracking Positively Again

Aug. 20, 2021

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.

Last month, I reported that retail sell-out trends were starting to cool down. But it appears that this might have been an anomaly, based on more recent data.

Recent dealer commentary suggests that demand for passenger and light truck tires at the retail level has rebounded from prior-month levels. Furthermore, sell-out levels last month were even stronger than the robust demand observed one year ago.

The net number of respondents to our latest survey indicated that they saw a year-over-year demand increase of 59%. 

Contacts noted that the rebound was likely attributable to the unpredictable nature of the repair business, along with continued improvement in miles driven.

We believe that the most recent month’s sales benefited from slower sales during the previous month and is a continuation of the strength seen during April and May.

We continue to hold the perspective that volumes in the long run will become even more closely aligned with the current level of gross domestic product growth, with a degree of uncertainty in the months to come due to the proliferation of the delta variant of COVID-19. However, we also believe that consumers will increase their driving habits as they return to the road.

Tier two shows strength

Our latest survey reveals that tier two remains the segment of most significant growth among our surveyed contacts, which is consistent with what we have seen - even during the early days of the pandemic. We also note that fluctuations away from this trend are likely a function of transitory items.

This could be a sign that prior strength we had been observing in the tier three category is starting to subside as consumers become increasingly confident in their financial outlook and regain a sense of normalcy.

We also note that tier one brands have been ranked second in our listing for three months in a row, which is the first time this has occurred since before the pandemic - specifically December 2019 through February 2020.

When it comes to inventory, dealers note that levels remain low, while price increases continue to be pushed through by more manufacturers. 

The most recent round of price hikes has taken place over the last few months and in some cases, tire manufacturers have raised their prices multiple times within the last 12 months.

We believe that aggregate pricing gains of 20% to 25% have taken place over this time period.

However, this has appeared to not have dampened the relative strength of demand for tier one products, which was expected by some dealers due to the price difference between tiers as pricing has increased.

Throughout the pandemic, we have seen that consumers switch tier and brand preferences based on the current COVID-19 situation. 

With relatively high rates of vaccination and broad reopenings throughout the country, we believe that tier two brands will remain the preferred choice of many consumers.

Oil prices jump 76%

Looking more closely at raw material costs, the “basket” of raw materials needed to make a common replacement tire has risen 29% on a year-over-year basis, while also increasing on a sequential basis by 1.5%. 

This continues the trend of ever-increasing raw material price inputs that began at the start of the year, although year-over-year increases have moderated since April 2021 highs.

Holding current spot prices flat would yield a 25.5% year-over-year increase to input costs during the third quarter of 2021, up 3.1% from second quarter levels.

In assessing raw material price movements, we note that carbon black has seen its price increase on a year-over-year basis for seven months in a row, with double-digit growth levels during the past four months.

Crude oil prices have seen extreme cost pressures, especially at the start of the pandemic. As noted in previous columns, 2021 has been a much different story as miles driven continue to increase.

We note that July 2021 saw an increase of 76%, year-over-year, with sequential gains in oil prices since November 2020, although July experienced the lowest month-over-month increase at 1.6% versus June 2021 levels.

Natural rubber prices rose 29% in July, which marks strong double-digit gains over the last year.

Synthetic rubber prices were up 20% on a year-over-year basis, which marks the first time this has occurred since April 2017.

Unsurprisingly, pricing for tire reinforcement items continues to track in the negative range year-over-year, in a continuation of a longstanding trend.

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.

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].