Modern Tire Dealer

FEB 2019

Magazine for the professional tire industry

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M T D F e b r u a r y 2 0 1 9 16 Y o u r M a r k e t p l a c e John Healy By O ur recent discussions with dealers leave us confident that sell-out continues to trend in a promising direction, with retail conditions remaining healthy and volumes improving over the prior year's period (sixth straight month). From a volume standpoint, surveyed dealers reported they saw unit sales volumes improve modestly (approximately 1.1%) compared to the same period last year. Although December sell-out volumes were solid, we note commentary from our contact base that trends gradually slowed as we progressed through the month, especially among dealers in colder climates. Even though dealers in our contact base experienced a firm December overall, there have been a few recent developments in the external atmosphere that could pose risks to an acceleration in retail sell-out trends moving forward. is is not to say it is time to sound the alarm, but since things continually remain fluid within the tire industry we felt it was prudent, as we turned the page on the calendar year, to point out risk factors that could pose a threat if they were to come to fruition. On top of unfriendly climate conditions (for tire sell-out), we want to point out that raw material spot prices remain volatile and, in spite of some subsidence in raw material cost pressures, we expect these costs to be up year-over-year, at least through Q1. at said, it is not entirely out of the question manufacturers could again flex pricing actions within the next few months to recapture lost margins during this cycle of rising input costs. Another peripheral issue that has come to the forefront and had ripple effects in a multitude of industries is the longest government shutdown in U.S. history. It not only directly affected nearly a million of government workers, but also started to have wide-ranging implications for government contractors, airlines/ transportation companies and other businesses that deliver services to the federal government. In addition to businesses that derive revenue from the govern- ment and are now under pressure as they lost millions in sales, federal government workers had a month without pay and some even reported dipping into retirement savings to fund their regular monthly expenses. Economists estimate that every week the shutdown lasted it reduced quarterly GDP by 0.13%, and more importantly, business and consumer confidence. Government workers who were not getting paid were likely to drastically cut back on discretionary purchases (re: tires). However, if old-man winter comes knocking again and political pressures subside, we expect that pent-up demand will quickly return to the marketplace and volumes will continue to march higher, returning to normal seasonal demand patterns. Despite these near-term challenges, we believe that demand trends are continuing to firm for much of the industry. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the December 2018 survey are compared with those of December 2017. See the report on www.moderntiredealer.com. CONTACTS STILL EXPECT HEALTHY REPLACEMENT TRENDS DESPITE HIGHER PRICES Dealer commentary suggests consumer demand for passenger and light truck replacement rose in December compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 12.1% of contacts. Contacts conveyed that price actions have not adversely affected demand and volumes were stable through December despite the vast majority of price increases having worked their way through the supply chain all the way to the retail level. We note a 4-6 month lag time for many input costs to truly impact tire producers, which is why price increases have been introduced to the industry more recently. Given that, the research we conduct monitoring the pricing trends of over 10,000 consumer replacement tire SKUs has revealed that the average tire price increased 1.2% in October, 1.6% in November and 4.2% in December (all y/y). A LOOK AT MIX TRENDS IN THE MARKET In response to best and worst performers, our recent survey sur- prisingly revealed that Tier 3 brands showed the best performance among our surveyed contacts last month for the first time in eight months. We surmise that consumers have keenly noticed how tires have become more expensive within the last couple months and opted to shop for replacement units based on price. Despite the rebound in value tires, however, we note that Tier 2 brands have been the segment of most significant growth. ■ 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. Government shutdown reduced quarterly GDP as well as consumer confidence Tier Oct '17 Nov '17 Dec '17 Oct '18 Nov '18 Dec '18 Tier 1 1 1 3 3 2 3 Tier 2 2 3 1 1 1 2 Tier 3 3 2 2 2 3 1 SOURCE: NORTHCOAST RESEARCH HOLDINGS LLC Average tire tier rankings

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