Modern Tire Dealer

OCT 2018

Magazine for the professional tire industry

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M T D O c t o b e r 2 0 1 8 16 Y o u r M a r k e t p l a c e O ur recent discussions with dealers provide us further confidence that retail sell-out trends continue to move in a favorable direction. We note this trend of improved sell-out conditions at retail marks the fih consecutive month of improvement accord- ing to our dealer contacts. From a volume standpoint, surveyed dealers reported they saw unit sales volumes improve marginally (approximately 1%) compared to the same period last year. Industry data points relating to shipments and anecdotal commentary regarding the digestion of changes in tire distribu- tion behavior over the last few months from various tire players throughout the value chain give us a cautious optimism that sell- out volumes in the second half of the year will revert to healthier levels since the key drivers of intermediate-term replacement demand remain favorable. e dynamism of the tire industry has been on full display lately as over the past month our channel work has shown a number of manufacturers approaching the market with price increases for shipments this fall. Most notably, Goodyear, Bridgestone and Michelin have approached the market with some price increases, which has caused other manufacturers like Cooper to follow suit and begin raising prices alongside the market leaders. is move is not entirely surprising since the cost to build a "generic" tire is up over 10% in the past year. Based on our discussions with dealers, we believe price increases are being initially absorbed with little push back. From our seat, as long as retail remains in growth mode, price increases are likely to stick; this is a stark contrast from the operating environment in 2017 when retail demand was under pressure and manufacturers attempted to implement price increases but were rather unsuccessful in their endeavor. Specifically, nearly half (48%) of respondents saw tire manufacturers implement price increases in July, with that number jumping to nearly 62% in August. Out of our pool of dealers, over 76% of dealers surveyed in August expect price increases to hold. Seeing how these price increases are followed by other manufacturers in combination with the ability of retailers to pass along these increases will have an impact on how the tire business rolls later this year. However, if this upward trajectory in raw material commodity costs continues, manufacturers may be forced to implement further price increases as they will no longer be willing to continue absorbing increased production costs. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the August 2018 survey are compared with those of August 2017. See the report on www. moderntiredealer.com. REPLACEMENT TIRE SALES: AUGUST TRENDS RISE WITH THE TEMPERATURES Dealer commentary suggests consumer demand for passenger and light truck replacement was up in August compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 13.6%. August's results are encouraging and given dealer commen- tary that sales were steady throughout the month, which many expect to continue over the next few months, we are cautiously optimistic that sell-out volumes in 2H18 will closely resemble the improved results in recent months rather than the lackluster volumes through the first few months of the year. A LOOK AT MIX TRENDS IN THE MARKET Remember how some dealers indicated at the beginning of the year that the projected windfall from tax reform in combination with a strong economy should allow for more trade-up activity in 2018? We may finally be witnessing that pull-through occur. Outside of the last few months, Tier 1 brands appeared to be under performing the market, but we feel the mega-trend of the market shiing to HVA shipments remains a long-term opportunity. It seems that manufacturers have been doing a diligent job of managing supply, which likely has been a tailwind to improved sell-out trends lately. Our channel work suggests that channel inventories are much healthier aer much of the excess was cleared from the channel in 4Q17 and positions remained lean through the third quarter. We continue to hear from contacts that manufacturers remain disciplined in their production schedules and are not chasing share with pricing. ■ P.S. If you would like to be included in our monthly discussions with dealers, please do not hesitate to reach out to me directly at john.healy@northcoastresearch.com. 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. Sell-out trends continue to move in a favorable direction John Healy By Tier Jun'17 Jul '17 Aug '17 Jun '18 Jul '18 Aug '18 Tire 1 1 3 3 2 1 1 Tire 2 3 1 1 1 2 2 Tire 3 2 1 2 3 3 3 SOOURCE: NORTHCOAST RESEARCH HOLDINGS LLC Average tire tier rankings

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