WASHINGTON—The steady stream of tire price increases over the past couple of years to offset ballooning raw materials costs may be backfiring at the retail level, with consumers putting off tire purchases because of higher prices, according to prominent tire industry analysts.
However, higher prices for gasoline and other consumer goods are also factors in the tire market, clouding tire shipment projections over the next several months, they said.
Meanwhile, a spokesman for the Rubber Manufacturers Association said the tire shipment figures used by a BB&T Capital Markets analyst in a recent report on industry trends were preliminary and never intended for distribution except to RMA members.
Anthony Cristello, senior equity research analyst with Richmond, Va.-based BB&T Capital, quoted June 2011 tire shipment figures in a July 13 stock estimate change report on Cooper Tire & Rubber Co., crediting both the RMA and BB&T as the sources.
Those figures showed total light vehicle tire shipments down 2.7 percent for RMA members for June 2011 compared with June 2010. For the entire industry, including non-RMA members, light vehicle tire shipments were down 5.3 percent for the month, the report said.
By the numbers, the June figures showed passenger tire shipments down 3.6 percent for RMA members and 6.8 percent for the total industry. Light truck tires shipments, however, were up 4 percent for RMA members and 6.2 percent for the total industry.
The June shipment numbers were roughly in line with market expectations, according to Cristello.
“We have been concerned for some time that the magnitude of price increases implemented by the tire manufacturers over the past 12 to 18 months, while necessary to offset the margin impacts of escalating raw material prices, would lead to declining unit sales as end users would not be able to absorb the full brunt of higher tire prices,” Cristello wrote.
Recent evidence shows those concerns to be correct, according to Cristello. “With supplier fill rates now much improved, we believe that manufacturer tire shipments are likely to remain soft barring a rebound in end user demand,” he said in his report.
Dennis Leipold, owner of Leipold Tire Co. in Cuyahoga Falls, Ohio, said he feels his business hasn't slowed down so much as it's been sporadic. End of the month unit sales have been on par with or better than last year, but the flow of customers has been far from steady.
Some weeks sales are dead, he said, and other weeks will generate “micro-storms” of customers with sales that are “off-the-charts strong.” He speculated that he believes some manufacturer price decreases might be on the way.
“It just takes one company to do it,” he said.
Darold Schaefer, owner of R&R Tire Shop in Mankato, Minn., agreed price decreases are possible, saying it's becoming tougher for the average American to pay the rates for tires that manufacturers are asking.
“I think a lot of people are starting to get annoyed because you see these tire manufacturers announcing record profits over the last few years, but the (prices) keep going up,” he said. “Keeping up with inflation is one thing, but how many price increases do you think the average American is going to want to pay for? I think the average American is getting fed up with seeing CEOs making $20 million a year and announcing they need price hikes on everything.”
Schaefer has noticed a dip in new-tire sales at his shop but said used tire sales have been on the rise. He believes the rapidly increasing prices are leading many consumers to change their tire-buying habits.
Many R&R Tire customers have been purchasing more high-mileage tires and tires with better warranties, while others are simply shopping on price. Some customers are buying full sets of tires, but others are replacing two tires or even just one tire at a time in order to save money, Schaefer said.
“I think we're getting to the point where they're going to need to start lowering the prices or you're going to see people dying here, there and everywhere because nobody will be able to afford to replace their (bald) tires,” he said. “At which point, I'm sure Congress will step in and say, 'We got all these people dying that used to vote for us. We need to do something.'”
Andy Chalofsky, co-owner of Chalfont, Pa.-based distributor Network Tire Inc., said many of the dealerships his company sells tires to also have complained of a slow-down in business. “Although it's July, it feels like February.”
Chalofsky said he believes that in addition to higher prices, lower unit sales can be attributed to inventory levels at the dealer, distributor and manufacturer end, as tire supply has improved.
“What we're also finding is the dealers are not stocking up,” he said. “We ran a special where we took our bottom-line pricing and then gave gift cards on top of it to try to excite some business, and we couldn't get the dealers to stock up. They're not buying unless they need it; even if it's a good deal, they'll wait.
“We've seen a couple manufacturers like Cooper (Tire & Rubber Co.) put some deals in the marketplace because they have some extra stock,” he continued. “Prices at this level are difficult for the manufacturers as well as the customers because the customers are not buying heavy and the distributors—what's tough for us is when all these price increases were happening, we were just buying and buying and buying, and now we're just selling out our stock.”
Chalofsky said with supply turning around, manufacturers “can't lay off product to us as much as possible because we're still selling what we stocked up.” Because of this, he said, manufacturers' inventory levels on “A and B mover” products are high and supply will soon improve on less popular “C mover” lines. He also anticipates that dealers may start to see some price decreases—both at the manufacturer and distributor end.
“The distributors need to let go of stuff, so you might see some price decreases from the manufacturers, but you're also going to see some artificial price decreases from the distributors because at some point they need to lay off some inventory,” he said. “It's money tied up; they just want to get rid of it. I know I do. There are items in my stock where I'm just looking at it and saying, 'I don't care if I get full value, I'd rather just get something out of it and sell it.'”
Cristello said it was difficult to predict how tire shipments would fare in the next six months, because there are so many variables at play.
“Part of the issue is a weak consumer,” he said. “Gas prices have had an incremental impact on consumers. Higher food prices and the general cost of living also have been incremental factors.”
Consumers are driving less, which means tire life is extended and tire demand lower, according to Cristello.
The most recently available statistics from the U.S. Deptartment of Transportation back up that contention. The Federal Highway Administration reported that, for May, travel on all roads and streets was down 1.9 percent—5 billion fewer vehicle miles—compared with May 2010. Motorists rolled up 254 billion vehicle miles in May 2011, the agency said, adding that thus far, cumulative travel this year was down 1.0 percent. That's a reduction of 11.7 billion vehicle miles.