What will have the biggest impact on your business in 2024? Analyst John Healy discusses dynamics that will have an effect on your dealership in part one of this MTD exclusive.
MTD: How would you describe the overall state of the U.S. tire market versus where it was approximately 12 months ago?
Healy: We would describe the current state of the U.S. tire market as “clearer skies ahead” compared to a “cloudier” environment at this point a year ago. Twelve months ago, the end consumer was beginning to feel the effects of both rising inflation and tire prices, which subsequently impacted sellout levels, while manufacturers were beginning to experience the effects of channel destocking at wholesalers. Now we see channel inventory in a much healthier place, with consumers becoming more aware of needed auto maintenance, like new tires, particularly after the winter a year ago, which was lackluster in terms of weather-driven tire purchases. As we look ahead, we feel that a winter season full of precipitation can be the igniter to a strong winter and spring selling season.
MTD: Retail tire sellout appeared to take a positive turn during the first half of 2023. What do you attribute this to?
Healy: Retail sellout trends are always a bit fickle, but the consistent commentary we have heard from dealers is that what little positive momentum we saw (last) year — particularly in the back half of the year — was driven by consumers pursuing needed automotive maintenance after deferring it throughout the end of 2022 and first half of 2023. Additionally, record high levels of new and used car auto loans — double digits, in many cases — is simply creating a bottleneck to vehicle affordability. This bottleneck should be a positive in the near-term for repair outlets, as consumers reinvest in their current vehicle as monthly payments on a new ride are simply out of reach for many. Separately, we have seen the most strength in tier-two and tier-three brand sellout. Thus we believe the comparative pricing environment for lower-tier tires versus premium brands is positively impacting sellout
MTD: One year ago, high inventory levels were a major problem for tire manufacturers, distributors and retailers. As these companies continue to work down their inventory levels, what impact is this having on sell-in?
Healy: We would describe sell-in trends as marginally positive. At this point in the year, channel destocking appears to be largely complete. That said, we do not get the feeling distributors are willing to take on big orders at this time. With raw material inflation continuing to abate, we get the feeling that distributors are taking on more inventory than earlier this year, though they are likely looking for some price concessions before committing to increased orders. From our sense, dealers know that tire prices are likely to come down and they don’t want to bulk up their stock rooms ahead of these potential declines in unit prices.
MTD: We’ve heard that some tire manufacturers are rolling back price increases. Can you comment on what you’re seeing as it pertains to tire pricing?
Healy: In terms of tiring pricing, it appears that distributors are cautiously approaching forward ordering in hopes of price concessions from falling raw material costs. That said, we ourselves have not yet heard of major price reductions from tier-one and tier-two brands. However, dealers tell us that pricing for opening price point and lower-cost imports is gradually coming down, which is welcome. At this point, most promotions/ deals in the market appear more one-off to us rather than widespread. That said, we would not be surprised to see more premium brands give up some price at some point in 2024.
MTD: What tire tier saw the most growth in 2023 — both consumer and commercial — and why? What do you expect to see in 2024?
Healy: Throughout 2023, tier-two tires were, on average, the most in-demand segment in our surveys, followed by tier-three brands. Said simply, we view this as confirmation of the consumer trade-down dynamic, not only in the tire industry, but also in other areas of consumer spending. Given the inflationary pressures stretching consumers’ wallets this year, we see it as logical and rational that auto owners are shifting toward less expensive brands and away from more expensive brands. Looking to 2024, we have long felt consumers will trend towards tier-two brands as they strike a balance between price and performance. Given a continuation of uncertainty in the broader macro environment, we see no catalyst which would move us away from our view that tier-two tires will continue to be the most sought-after brands in both 2024 and the long-term.
MTD: Tire dealership mergers and acquisitions slowed down in 2023. Why? What factors influenced this? Do you expect to see any changes in the amount of M&A activity in the wholesale, retail and commercial tire segments in 2024?
Healy: Frankly, M&A activity slowed in 2023 not only in the tire space, but across all industries we cover compared to the past several years. The catalysts are simply elevated valuations given over-earning in the post-COVID-19 era, elevated interest rates and capital market dynamics. As we look to next year, we expect M&A activity to be driven by the interest rate environment. While capital markets are never expert predictors, current expectations are for interest rate cuts in 2024. If interest rate cuts materialize next year, we would expect an incremental boost to M&A activity in the tire space, as borrowing costs become less expensive. All considered, we view the pause in tire dealership M&A activity as not a byproduct of the auto sector or unit economics, but merely a function of macro items and financing costs.
MTD: There were major acquisitions in the distribution channel in 2023. How does this change the landscape of the market going forward?
Healy: This was not a surprise to us. Covering more geographies, having all the brands and being able to provide quick service — perhaps with multiple stops per day — are the new table stakes for distributors. Wholesale and distribution acquisitions across all areas of automotive have been a hot area over the last few years. While the number of sizeable entities is getting somewhat smaller, we do think there is likely runway for more to come in some regions of the country. From our perspective, we’re not sure competition is changing from a price and availability standpoint, but I think the expectations from outlets regarding service/deliveries are rising and that is where competition will be fiercest in years to come.
MTD: What’s your take on the changes that have taken place at TBC Corp., including TBC’s decision to exit company-owned retail? Will this prove to be a good decision and why?
Healy: TBC’s sale of its stores to Mavis Tire Express Services Corp. was one of the bigger stories of 2023, as it relates to retail. From our perspective, tire retailing and distribution are tough and complicated businesses. Many constituents have tried to dabble in some and all these areas at one point in time. Doing everything for everyone is a great long-term goal, but few have been able to do so in any industry. Given this, I think it makes sense for TBC to regroup and focus on other aspects of its model. I think TBC found a good partner in Mavis. I am optimistic this transaction will be a win for both sides.
MTD: Some of the private equity firms that have acquired tire dealerships are approaching the normal point where they want to sell and move on. What are you expecting them to do?
Healy: We expect private equity shops to review the state and the progress of their investments prior to looking for an exit. With the tire industry currently in uneven times, we could see them extending their time as they wait for higher exit returns. Additionally, we think activity will be tied to the financing market, as well. Financing a transaction at 6% is very different than 10%, in terms of capital costs. So from our standpoint, we would expect private equity to probably wait it out rather than sell during a less than favorable window of time.
MTD: What advice can you give small and mid-sized independent tire dealers as they try to compete with private equity-owned competitors?
Healy: For small and mid-sized independent dealers, we would advise them to focus on good customer service and relations, along with high levels of transparency, to get customers to continue to return for future services. Best practices and local connections with customers will attract and retain business to help those smaller private dealers remain competitive. At the end of the day, consumers are people and people do business with people. Long-term success is driven by reputation and service.
Stay tuned to www.moderntiredealer.com for part two of this interview.
