Modern Tire Dealer

DEC 2018

Magazine for the professional tire industry

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36 M T D D e c e m b e r 2 0 1 8 Y o u r M a r k e t p l a c e O ur recent discussions with dealers leave us with a view that retail sell-out trends remain healthy and volumes improved over the prior year's pe- riod. From a volume standpoint, surveyed dealers reported they saw unit sales volumes improve marginally (approximately 0.3%) compared to the same period last year. When discussing the outlook for the remainder of the year among contacts, conversations continue to leave us encouraged that the final period of 2018 will be a good time to be in the tire business. We note optimism on the "top line" of things as higher than in past years and note that the pressure/concerns facing contacts are more related to cost items (raw materials/tariffs/ freight) and normal cyclical tendencies in the tire business as opposed to concerns of a fundamental shi in the tire industry landscape as some may have feared in 2017/early 2018. Almost all manufacturers we monitor have put implemented some level of price hikes since the third quarter to offset elevated raw material costs. Given this, our discussions with dealers indicate that price increases still seem to be getting initially absorbed with little push back and, in-line with our view last month, as long as retail remains in growth mode, price increases are likely to stick. However, despite the relative stabilization in raw materials prices, the trajectory remains upward, and contacts have speculated that further price increases could be on the horizon at year end (already started to filter through). Despite this, sell-out trends have the potential to experience a nascent seasonal tailwind through the rest of the year. e normalized winter weather seen over the past two years has impacted consumers' thought-processes and seems to be impact- ing buying behavior. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the October 2018 survey are compared with those of October 2017. See the report on www. moderntiredealer.com. REPLACEMENT TIRE SALES SAW INCREASE Dealer commentary suggests consumer demand for passenger and light truck replacement tires was up in October compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 7.3% of contacts. Our discussions revealed many dealers experienced an acceleration in unit volumes throughout the third quarter, which we note immediately preceded many proposed price hikes that were about to be enacted throughout the industry. Despite this, contacts relayed that price actions have not detrimentally impacted demand and volumes were holding steady into the fourth quarter. A LOOK AT MIX TRENDS IN THE MARKET I n response to best and worst performers, our recent survey suggests that Tier 1 brands gave up some momentum following several months of strength, allowing Tier 3 brands to escape the basement of our rankings for the first time since May 2018. e continual theme we notice in our research is the fortitude of Tier 2 brands. Even though consumers may desire a recognizable brand, the combination of price and performance that Tier 2 tires provide continues to be a winning formula among shoppers as value- conscious consumers continue to gravitate toward this segment. is is further illustrated by the fact that Tier 2 brands have only been at the bottom of our rankings one time since September 2016 and have been the best performer in our index over one-, two- and three-year time frames. Furthermore, we note that Tier 2 brands have been the segment of most significant growth according to surveyed dealers for eight out of the last 11 months while, on a longer-term basis, Tier 3 brands have been ranked or tied for last place by our respondents in 23 of the past 50 months. Despite this recent speed bump of Tier 1 under-performance, we feel the mega-trend of the market shiing to HVA shipments remains a long-term opportunity. We would attribute the tem- porary weakness in Tier 1 sell-out results as more of a function of recent pricing actions. Tier 1 nameplates began working their price increases through the channel beginning in September and October and consumers may have noticed the price tag uptick and rebuffed initial attempts for them to pay more as vehicle owners have not been conditioned to price increases on tires in recent memory, which could explain the out-performance of Tier 2 brands in October. ■ J ohn 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. As long as retail remains in growth mode, price increases are likely to stick John Healy By Tier Aug '17 Sep '17 Jul '18 Aug '18 Sep '18 Oct '18 Tire 1 1 3 1 1 2 3 Tire 2 2 2 2 2 1 1 Tire 3 3 1 3 3 3 2 SOOURCE: NORTHCOAST RESEARCH HOLDINGS LLC Average tire tier rankings

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