Retail sellout trends continue to show softness on a year-over-year basis, marking a fifth straight month of negative retail sellout. During April, tire dealers saw average unit declines of 4.0% year-over-year, the largest decline since April of 2020 when COVID-19 lockdowns were still in place.
So what’s driving the lackluster performance? We believe the overall inflationary environment continues to weigh on the consumer, with added tailwinds during April including declining year-over-year income tax returns.
Given the volatility, we want to access the health of automobile travel demand, which correlates to tire usage and wear. In April, for the second month in a row, miles driven trends remained positive. It’s the first time since February and March of 2022 that we recorded back-to-back months of positive trends. Our miles driven momentum index showed a 1.3% year-over-year increase in March followed by a 3% year-over-year increase in April. And miles driven through the first week of May grew 2.7% year-over-year. Given the recent improvements, we see the potential for sectors related to passenger tires and aftermarket auto parts to improve as well.
Raw material costs continue to fall in year-over-year comparisons. Combined, the materials needed to build a basic replacement vehicle tire fell 11.2% year-over-year in April, which follows a 8.2% year-over-year decline in the first quarter. And with year-over-year drops in the prices of carbon black, crude oil, natural rubber and reinforcement items needed to build a tire, it is becoming abundantly clear that rising raw material costs may be behind us. There is growing viewpoint in the industry that with this decline in raw material costs, manufacturers may be inclined to reduce price to jumpstart sellout trends.
The slowdown persists
Eight out of 10 of our independent dealer contacts reported negative demand for replacement tires in April, which is slightly worse than the 71% of dealers who saw declining demand. And for the second straight month, no independent operators saw a year-over-year increase in demand — a phenomenon we have not seen in the 10-plus year history of our surveys.
While there are always a number of factors which can unexpectedly push and pull tire demand during a month (weather, calendar shifts, etc.), it appears the broader theme of the shaky macro environment has taken hold and created a trend in the tire retailing category. Outside of these larger macro factors, we note declining year-over-year tax refunds, prior price increases from manufacturers and consumer deferment in automotive service all worked against tire sellout trends in April.
While inflation is cooling in some sectors of the economy and consumer spending is still elevated in certain premium segments, it appears tire retailing has not seen any signs of positive momentum. Simply put, our April survey indicates there are a number of headwinds facing the industry, with few tailwinds in sight.
We are of the view that volumes in the long run will become closely aligned with the current level of GDP growth. Given fears of a recession in the back half of 2023, we feel it is likely trends will continue to show softness.
Demand drops for top tier
For the second straight month, tier-three tires topped the demand charts among dealers in our survey. Tier-two tires moved into second place in April, flipping spots with tier-one tires from the previous month’s survey.
Given that dealers indicated tire demand was at its weakest point in years during April, we are not surprised to see those consumers who did choose to purchase tires trade down to tier-three brands. With inflation hurting the wallets of the low-end consumer the most, while macro worries spark the most fear in high-end consumers, we see it as logical and rational that tire buyers would prefer the most inexpensive brands.
Looking forward, we note consumers seem to change their preference for certain tires given the current economic situation, and that has played out in the swings in our rankings over the last few months. Over the long run, we continue to believe consumers will opt for tier-two tires, since they strike a balance between performance and value. Until then, we think it is likely that consumers will choose the most inexpensive brands given they are experiencing rising prices in every facet of their lives.
