Modern Tire Dealer

MAY 2019

Magazine for the professional tire industry

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M T D M a y 2 0 1 9 18 Y o u r M a r k e t p l a c e R ecent conversations with dealers leave us with a view that retail sell-out remains healthy and trends continue to remain on the positive side of the ledger. From a volume standpoint, surveyed dealers relayed they saw unit sales volumes improve in the low-single-digit range compared to the same period last year and were up roughly 1% for the first quarter as a whole. It seems that the only speed bump that dealers have encountered is slight push-back from consumers who initially experienced sticker shock on premium priced products resulting from recent price increases. is has been reinforced through our survey work over the last few months as consumers have traded down in favor of less expensive products and made Tier I and II tires the worst performers among our contact base of dealers from November to February. What is encouraging for dealers and manufacturers, however, is that despite initial friction at retail, price increases appear to be sticking. Our survey of more than 10,000 consumer replacement tire SKUs suggests a nice acceleration as retail prices were up 3.5% in 1Q19 compared to 4Q18, and nearly every major brand we tracked displayed price appreciation during this period. More specifically, prices across the most popular passenger tires showed notable strength in 1Q19, increasing 3.6% sequentially while the most popular light truck tires were mostly flat quarter-over-quarter. We view the recent growth in the SKUs we track as evidence that the price increases implemented across the manufacturers have stuck and are flowing through to wholesalers and retailers. As the end of the tax season quickly approaches, we thought it would be worthwhile to again gauge the status of individual tax returns compared to last year in light of the disrupted tax return season among American consumers. As of the end of March, the total individual income tax returns received by the IRS was down by 1.4% compared to the same time period in 2018. Furthermore, the total number of refunds issued was down 2.2% year-over-year while the average refund was down 2.9% comparatively. Although these percentage comparisons may not seem significant at first glance, we note that there has been 1.28 million fewer refunds filed and $6.17 billion less in refunds issued (roughly $4,800 per return filed) at the end of March 2019 versus the end of March 2018. Despite a notable improvement in tax return activity since the middle of February, when we pointed out that individual returns and refunds were down 4.8% and 26.5%, respectively, we still believe these reduced levels of cash flow that consumers are normally accustomed to receiving in the first few months of the year could be having an effect on tire sell-out trends. MONTHLY SURVEY A number of independent tire dealers were surveyed concerning current business trends. e results of the March 2019 survey are compared with those of March 2018. See the report on www. moderntiredealer.com. DEMAND ENVIRONMENT SUGGESTS FAVORABLE SELL-OUT TRENDS IN 1Q Dealer commentary suggests consumer demand for PLT replace- ment rose in March compared to the same period last year. e net number of respondents indicating they saw an increase in demand year-over-year was 20.7% of contacts. We note that our tire demand index increased nearly 28% year-over-year and we believe volumes are becoming more closely aligned with the current level of GDP growth as our dealer contacts have seen nine straight months of positive volume growth. Further, our research suggests a construc- tive backdrop occurring within the North American tire market as dealers seem pleased with Q1 sell-out activity. Dealers west of the Mississippi highlight a strong start to the year with trends cooling as the first quarter progressed, while dealers east of the Mississippi tell us the opposite with a slow start to the year and strong end to the quarter. A LOOK AT MIX TRENDS IN THE MARKET In response to best and worst performers, our recent survey revealed that Tier 1 brands were the segment of most significant strength among our surveyed contacts for the first time since August 2018. Conversely, aer spending three months atop our rankings, Tier 3 again fell to the bottom spot for the first time since November 2018 (see chart). Aer a delayed tax refund season, many consumers have finally received their refunds and the additional influx of cash in consumers' pockets may have impacted buying behavior causing them to trade up to higher-quality, legacy nameplates. When examining the landscape from a longer-term view, we continue to hold a view that the pricing environment in North America will remain rational and in-line with raw material costs. ■ 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. Consumers may be experiencing sticker shock following price increases John Healy By Tier Jan '18 Feb '18 Mar '18 Jan '19 Feb '19 Mar '19 Tier 1 3 3 3 3 2 1 Tier 2 1 1 1 2 3 2 Tier 3 2 2 2 1 1 3 SOOURCE: NORTHCOAST RESEARCH ESTIMATES Average tire tier rankings

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