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Analyst and MTD columnist Nick Mitchell chose those fve words as his forecast for 2016. He also looked back on all that shook the industry in 2015
By Joy Kopcha
Raw material prices dropped so signifcantly in 2015 that the one thing everyone expected to happen during the year never materialized. Tire prices didn’t go up.
In June when the U.S. Department of Commerce fnalized tarifs on consumer tires manufactured in China, tire dealers and industry watchers considered it “a mater of time” until all passenger and light truck tire prices increased. But the price hikes never materialized, and industry analyst Nick Mitchell doesn’t expect raw material prices to rebound in 2016. Look for them to drop even lower, Mitchell says.
Modern Tire Dealer asked Mitchell, senior vice president and research analyst at Northcoast Research Holdings LLC, to talk about the highs and lows of 2015, as well as what’s ahead in the new year. He names the tire manufacturer to watch, addresses whether the 2016 presidential election will have any efect on the tire industry, and covers which segment is the most likely subject of the next tarif investigation.
MTD also asked Mitchell to pick fve words to describe 2015: “perpetually falling raw material prices.”
MTD: What are tire dealers saying about the state of their businesses? What are they expecting in 2016?
Mitchell: Dealers are saying business is solid, but not exceptional. Volume growth moderated in November and December due to unseasonably warm temperatures in the Great Lakes, Mid-Atlantic, and Northeast. Sentiment among the dealers is defnitely upbeat, albeit not quite as optimistic as the tone at this time last year, as the participants are more divided over the likely strength in 2016. Specifcally, one cohort is expressing optimism that an expanding car parc, including an uptick in the number of cars entering the frst replacement cycle, low gasoline prices, and an improving economy will buoy volumes next year. Tis group expects to see a 2% to 3% increase in sell-out volumes, with some beneft accruing from the release of pent-up demand. Meanwhile, the rest of the dealers we speak with anticipate that sell-out trends will track in the range of fat to up 2%, as they expect less of a windfall from deferred tire purchases arriving in 2016, as well as a more modest tailwind from lower gas prices, especially amidst growing signs that the consumers in markets dependent on the oil and gas industry are starting to retrench in the wake of ongoing weakness in the price of oil.
Tying these views together, we think it is prudent to project that domestic volumes will increase in the low-single digit range next year, which is consistent with the assumptions in our models.
The 2016 presidential election might lead the evening news, but Mitchell doesn’t expect it to alter consumer purchasing or affect the tire industry.
MTD: How would you sum up the tire industry in 2015? Where is the industry headed in 2016?
Mitchell: Tis year can be summarized as a fairly solid year for the industry, with replacement passenger and light truck sell-out volumes running up 1% to 2% through the middle of November. Te higher prices that many expected to see in the wake of the new tarifs on light vehicle tires imported from China never showed up; however, a precipitous drop in raw material prices relative to the prior year more than made up for the lack of pricing power, and helped improve proft trends.
MTD: What’s the biggest inventory-related story of the year? Who’s got it and who doesn’t? And what opportunity, or problem, does that present for 2016?
Mitchell: Overall inventory seems fairly well controlled. Dealers were able to work down the pre-buy product from
2014 without any problem despite the “pricing power story” never really geting of the ground. Tat said, given the warm temperatures and the lack of snowfall across the Great Lakes, Northeast, and Mid-Atlantic regions in the fourth quarter of 2015, we expect channel inventory of snow tires will be higher than ideal coming out of the frst quarter of the year, which could present a minor obstacle to sell-in volumes in the frst half of 2016.
MTD: Afer the tarifs on passenger tires made in China were approved, most expectations were for prices to increase like they did in 2009 afer the previous tarifs were imposed. What happened?
Mitchell: Despite the fact the U.S. Department of Commerce fnalized its anti-dumping and countervailing duties covering passenger and light truck tires produced in China in the middle of 2015, most players in the North American tire industry we spoke with noted they never saw a lasting beneft from the trade measures. In our opinion, the weakness in raw material prices was the primary culprit for the fact the initial increases to base prices on Tier 2 and Tier 3 products were rolled back or ofset with promotions, including more aggressive volume incentives.
Tat said, we are surprised the pricing terms for product coming from Thailand, Indonesia and Vietnam are very aggressive. It sounds as if this phenomenon is being driven by Chinese suppliers still quoting prices that are on par with those seen prior to the implementation of the tarif.
MTD: How much are tire dealers depending on tire sales for their botom line? Has there been a shif during 2015? Do you expect this to change in 2016?
Mitchell: Tire sales are as relevant today to the botom line as they ever were. Te category remains a key trafc and proft driver and is still the best category to forge relationships with customers. Service has become more important over the years, but the proft diference between a well-run dealer and an average dealer lies in how well the tire portion of the sales mix and inventory portfolio are managed.
MTD: What’s happening with tire production in China?
Mitchell: Tire production continues to expand in China despite the new protective trade measures in the U.S. However, we have heard some chater about banks foreclosing on small manufacturers as credit tightened. We expect overall tire production in the country will expand by 5% plus in 2016.
MTD: Raw material prices have been low in 2015. When should dealers expect those prices to rise again?
Mitchell: Predicating raw material prices is tough, to say the least. Tat said, we think the basket of key raw material prices will be fat to down low-single digits in 2016, driven by the weakness in oil and natural rubber prices.
MTD: Oil prices have decreased throughout the year, and that afects raw material costs as well as consumer habits. Who’s benefting more, tire manufacturers or consumers?
Mitchell: Te lower oil prices are a win-win for all parties; however, consumers are reaping the bulk of the benefts at the pumps as tire prices have been fairly sticky.
MTD: What’s the forecast for tire wholesalers?
Mitchell: Tire wholesalers expect the market to grow 1% to 3% in 2016, and that we will see more consolidation in this segment of the industry.
MTD: Do you foresee any shifs among the Tier 2 and Tier 3 manufacturers?
Mitchell: We expect the mix to shif up to Tier 1 and Tier 2 brands at the expense of the Tier 3 players. We anticipate there will be some consolidation in the Tier 3 bucket, especially in China and other parts of southeast Asia. We expect the mix at retail to shif up to Tier 1 and Tier 2 brands at the expense of the Tier 3 players, as the combination of the improving labor market, low gas prices, and product innovation should cause some consumers to trade up. We anticipate there will be some consolidation in the Tier 3 bucket, especially in China and other parts of southeast Asia as margins in these regions are pressured from supply outpacing demand in the wake of new tarifs on passenger and light truck tires in the U.S.
MTD: Who would you label a “manufacturer to watch” in 2016?
Mitchell: Falken Tire Corp. is defnitely the manufacturer to watch in 2016 and 2017. With the Goodyear/Sumitomo Rubber global business alliance dissolved, we anticipate Falken will be much more aggressive in the market, especially as it relates to product innovation and dealer relationships.
MTD: Goodyear started off 2015 with a bang with its announcement it would start selling tires on goodyear.com. Other manufacturers are following their lead. How much of a game changer is this, and what can independent tire dealers do?
Mitchell: Honestly, more noise has been made on this topic than it deserves. At the end of the day, less than 5% of all tire transactions are completely made online without the consumer calling or visiting a store while researching the available options. More importantly, the manufacturers will always need channel partners to mount and balance the tires, and those are very important elements of the value proposition that dealers should be able to monetize.
The billion-dollar battle for Pep Boys
The 2015 award for best drama in the tire industry goes to Icahn Enterprises LP, the victor in a month-long, back-andforth bidding war for Pep Boys – Manny, Moe & Jack against Bridgestone Retail Operations LLC. Tire industry analyst and Modern Tire Dealer columnist Nick Mitchell liked the initial terms from the vantage point of Pep Boys shareholders, “as this has been an undervalued asset and poorly managed business for quite some time.”
Mitchell says Bridgestone’s loss likely is a win for the tire industry.
“Personally, I do not think manufacturers should own and operate retail assets unless captive distribution points are the only venues that their product is carried in. Historically, manufacturers have not been good at running stores for a variety of different reasons, and their desire to do so only creates channel conficts,” Mitchell says.
“I expect Bridgestone will step back from the deal scene for a period of time due to a dearth of other acquisition opportunities.”
As for billionaire investor Carl Icahn, chairman of Icahn Enterprises, acquiring Pep Boys and merging it with Auto Plus, the sixth-largest parts distributor in the U.S., still won’t make him one of the power players, Mitchell says.
“The combined chain would only move up one slot, and still rank behind the four major powerhouses, AutoZone, Advance Auto Parts, O’Reilly Auto Parts and NAPA,” Mitchell says.
He expects Icahn Enterprises will divest Pep Boys’ service bays and tire wholesale operations.
MTD: What’s the biggest story of the year in the commercial tire side?
Mitchell: Te biggest story on this front has to be the fact that Pirelli & Cie SpA was acquired by China National Chemical Corp. (ChemChina). Te deal creates the fourth largest commercial tire business in the world with roughly 12 million units of capacity. Integration is the hardest part of any merger, and this seems like it will be a tricky one to pull of without a hiccup in light of the fact it requires bringing together two very diferent cultures.
MTD: How much are tire dealers depending on feet work to maintain, or grow their businesses?
Mitchell: Fleet work is a very important segment of the market. It is typically a lower margin business but the size and predictability of the volume trends make it atractive. It should continue to be an area of focus going forward.
MTD: With so many tire plants under construction in the U.S., in addition to extra production and faster fll rates, what are the other benefts?
Mitchell: Te greatest benefts besides the ones listed are: supply chain optimization via greater use of a near-sourcing production strategy (i.e. shorter lead times), and improved product mix (new plants only support high-value-added machinery).
MTD: Which segment of the tire industry will see the most growth in 2016?
Mitchell: We expect to see the best volumes in the OE light truck category, as the relentless drop in retail gasoline prices should boost demand for pickups. Meanwhile, we expect the worst trends to be seen in the OTR and agricultural categories.
MTD: How’s the auto service repair business? How will the economy afect those profts?
Mitchell: Te service business is good, and we expect this to remain the case in 2016, assuming a slowdown in China and falling oil prices do not pull the U.S. into a recession.
MTD: What are your predictions for the do-it-for-me (DIFM) and do-it-yourself channels for 2016? How have those channels performed in 2015?
Mitchell: The DIFM market was red hot through the first three quarters of 2015 on the heels of a very strong performance in 2014. We expect the data will ultimately show trends moderated in the fourth quarter in light of the unseasonably warm weather across the Great Lakes, Northeast and Mid-Atlantic regions. I think this segment of the market will grow 3% to 5% in 2016, assuming the U.S. economy does not slip into a recession.
MTD: Are consumers more confdent in the economy? How is that relating to their tire purchases and auto repairs?
Mitchell: Notwithstanding the recent weakness in the stock market and retail sales, consumers seem to be fairly upbeat and healthy from an economic standpoint, and this is helping fundamentals across the tire and auto service in the form of stronger volumes, less deferral activity, more proactive maintenance, and a richer sales mix (i.e. consumers are trading up).
MTD: With the tarifs on passenger tires now in place until at least 2020, what are the chances tarifs will be leveraged against truck tires?
Mitchell: It is tough to say, and speculating on such maters is never fun. Tat said, the International Trade Commission voted unanimously in early 2014 to retain the antidumping and countervailing duties that were levied against Chinese of-the-road tires in response to a 2008 judgment; and similar measures were fnalized against passenger and light truck tires imported from China. As such, I would not be surprised if the next area of focus is on the TBR market. China has the ability to produce over 120 million radial truck tires, so it is clearly a force that needs to be monitored.
MTD: Tanks for your insights, Nick.
Demand trends are holding strong despite lack of harsh winter weather
According to the results of our dealer Dealers noted volume trends were strong for survey, demand for replacement tires replacement tire sales increased in November. Indeed, from a According to our dealer survey, consumer volume standpoint the dealers reported they sold demand for replacement tires increased in Novem0.6% more tires in November on a year-over-year ber. As stated, the dealers in our survey reported basis, following a 0.1% increase in October and a they sold 0.6% more tires on a year-over-year 0.6% increase in September. We are encouraged basis, following a 0.1% increase in October and by the fact that demand trends are holding strong, a 0.6% increase in September. Trends continued although they are down slightly from what we positive in the truck category as the dealers who saw at the peak of summer’s heat, which is likely By Nick Mitchell responded to the survey reported volumes increased due to a lack of harsh winter weather and a tough 3.9% afer a 0.8% increase in October and a 1.6% comparison from 2014. decrease in September. Lastly, the survey respondents
In light of the recent strength in demand trends, we indicated volumes were up 6.3% in the retread business continue to believe the abundance of pent-up demand afer decreasing 1.8% in October. should lead to decent volume growth in 2016, despite the fact that 2014 and 2015 provide some tough comparisons. Dealer reported tire costs were mixed
In fact, demand has increased on a year-over-year basis for Te tire dealers who responded to our survey noted 20 of the past 21 months, according to the dealers surveyed. manufacturer pricing on branded tires increased, while
Furthermore, most dealers stated they anticipate these prices on value tires decreased in November. In fact, the sales trends to improve throughout the frst three months respondents noted manufacturer pricing on value tires of this year. decreased 0.1% during November, while the price of branded
Until next time, keep the tires rolling out the door. tires increased 0.2%. While we were initially surprised at hearing about any prices declining during our recent trip Monthly survey to the Specialty Equipment Market Association (SEMA)
A number of independent tire dealers were surveyed Show in November, this trend is consistent with commentary concerning current business trends. Except for tire prices from around the country that pricing has remained fat or and costs, the results of the November 2015 survey are declined despite the implementation of tarifs on Chinese compared with those of November 2014. import tires. Tis phenomenon is being partially aided by lower raw material prices as well. Inventory levels were OK to high they had the appropriate amount of inventory in stock for levels among truck tire dealers, 60% reported they had the appropriate amount of inventory, 20% indicated inventory was too high, and 20% indicated inventory was too low.
How dealers view near-term business
Dealers JUL AUG SEP OCT(R) NOV(P) NOV(14)
Passenger tire
Will improve 20% 50% 83% 0% 33% 66%
Will worsen 0% 0% 0% 0% 0%
0% Will stay level 80% 50% 17% 100% 67% 44%
Truck tire
Will improve 60% 50% 100% 17% 50% 57%
Dealers indicated automotive repair sales trends improved once again in November. Specifcally, the dealers who responded to our survey indicated service sales, which
Will worsen 0% 17% 0% 0% 0%
0% Will stay level 40% 33% 0% 83% 50% 43%
R-Revised P-Preliminary
Dealers believe sales trends may level of
According to our survey results, 67% of passenger tire dealers believe business will stay about level, which is a marked decline from what we have seen in the past; however, much of this decline in optimism may be related to mild tire demand was slightly higher, as 50% of the truck tire dealers see business staying about the same and 50% saw business improving.
Of the dealers who responded to our survey, 67% indicated demand (the same percentage as in October), and 33% indicated that inventory levels were too high. As for inventory
Automotive repair sales rose in November
weather conditions relative to 2014. Te outlook for truck accounted for 28% of the study participants’ total revenues, were up 4.5% on a year-over-year basis in November (compared to an increase of 8.7% in October) as a higher average ticket and strong trafc trends again benefted repair departments. ■
Nick Mitchell is senior vice president of research for Northcoast Research Holdings LLC based in Cleveland, Ohio. Mitchell covers a variety of subsectors of the automotive industry.
