NPD Group: High-income consumers driving tire sales

PORT WASHINGTON, N.Y.—The current inflationary economy has created a bifurcation of the consumer base, so it is important that tire dealers market to both high- and low-income groups, NPD Group L.P.'s Nathan Shipley said.

While retail dollar sales increased this year, tire unit sales edged up only slightly, buoyed by households with $100,000-plus income, according to Shipley, an automotive industry analyst with NPD.

NPD's point-of-sale retail tracking of tires recently expanded, now measuring over 50 retail banners, comprised of both brick-and-mortar and e-commerce retailers and tire dealerships. NPD has been tracking tires since 2018, and the automotive aftermarket for more than 20 years, and has the ability to analyze the retail sales results on a weekly basis.

During the 52 weeks ending July 2, unit sales of tires in the U.S. increased less than 1 percent, yet dollar sales jumped double digits as a result of the average unit price increasing over 15 percent during the period, according to NPD.

However retail tire unit volume this year is below what was happening in 2019 before the pandemic.

Shipley said the research firm compares current retail sales data with pre-pandemic data, ignoring "a lot of the noise" and anomalies, such as temporary business shutdowns, federal stimulus and other pandemic-related economic assistance programs during 2020 and 2021.

"In spite of all of that, dollar volume is trending in line with 2021 levels, which sounds at the height, that sounds somewhat positive, I suppose. 2021 being such a good year for retail because of vaccine rollouts and then consumers are getting out of the home again, and they were traveling again and they're spending their stimulus (distributions). …

"But when you look at the other side of the story, which is the unit volume story. Unit volume is trending generally below the last two years and, depending on which week you look at in 2019, levels are slightly under," he said.

"When dollar sales are trending at last year's level, but unit sales are way below it, that means the price that consumers are paying for general goods has shot up dramatically. ... There's no doubt inflation is very much part of this story."

This also means the higher-income consumers are the ones generally willing, and able, to pay the higher prices.

"Growth at retail was driven by higher-income households. That's the takeaway," Shipley said, referring to the retail market in general over the past two and a half years.

"A component that we're seeing, and this is not just automotive-specific, but this is across retail, is what we're calling a bifurcation of the consumer, where higher-income consumers are acting differently. very differently right now, than lower-income households. ...

"But when you break it down by household income, the higher-income households—and I'm talking about households that make over $100,000 a year or more—their unit demand or purchases is still trending, continue to trend up. Households under $100,000, their unit demand is trending down, dramatically down," he said.

Higher-income consumers may not be driving to the office every day or traveling, so they may be spending discretionary money elsewhere.

"But for the lower-income families, their income didn't change, their day-to-day life didn't really change. They're not changing their behavior in terms of spending," he noted.

"… And then on the flip side, you've got higher-income households that they're obviously very aware of higher prices, and they're aware of the higher gasoline prices and all these things, but it's not actually changing their behavior."

Consumers are feeling squeezed, not only with price increases on major household purchases, such as food and gas, but also the expiration of federal stimulus programs and the pending end to the suspension of student loan repayments.

Lower-income consumers may see a need to delay vehicle maintenance or tire replacement.

"So our message to the industry and retailers is, you can't take your performance, that is at a very high level, as OK. ... The reality is you're doing pretty good with one consumer segment. And there's another segment out there that you need to make sure you're supporting, whether that's with a very low opening price-point offering or maybe certain promotions on lower price-point products to help get that consumer base," Shipley advised.

"It becomes very much you can't just do one approach and that's it. Now more than ever, it seems like having a multi-phased approach to how you market and promote is important because of how things are going between these two dissimilar groups," he said, adding, "You can't rest on your laurels and just assume our business is continuing to grow and we're doing just fine. ... What's the opportunity that you're missing?

"Recognize there's a (lower income) consumer group out there that has decided to not shop you or is going elsewhere, and that there's an opportunity there. Are you catering your offering and your messaging and your products to that consumer group, kind of meeting them where they are if you can do it?"

Shipley said he observed fewer retail promotions, or promotions that offered lower discounts, than in the past.

Inventory of tires has been a struggle this year and consumers are aware of the supply-chain challenges.

"There was almost this 'get it while you can' mentality. Like, if you want it, go ahead and get it and not wait for a deal because you might not be able to get it when that deal happens," he said.

Another trend was that consumers, until recently, were less price sensitive. Consumers were trading up to more premium products, whether by choice or because their preferred brand was out of stock and they were forced to trade up.

"All that, coupled with the fact that many, many households and families were eligible for various stimulus programs that took place the last couple of years, which made consumers more cash flush than normal. Coupled again with consumers who didn't have to pay their rent or pay student loans back etc. (under government moratoriums). So it just kind of put the cash position or the buying power position of the consumer in a much stronger place," Shipley said.

Vehicle miles traveled, a barometer for tire sales and maintenance services, were up slightly compared with a year ago.

This summer, consumers are dealing with two things they weren't dealing with last summer, Shipley said: higher gasoline prices and more discretionary spending on experiences.

Airline tickets are more expensive and the industry developed a bad reputation among travelers for delayed and canceled flights and lost luggage.

"Gas prices might hurt (road trips). But on the flip side, folks who would have planned to fly, over 30% that told us, 'I'm concerned about flight delays or cancellations,' are instead choosing to drive. I think that's helping the miles traveled," he said.

"The other component is a tremendous amount of households invested in recreational vehicles, whether that be an RV or a boat or an ATV or a dirt bike, and there is the desire to continue to utilize that investment. So a lot of those were road-trip-based activities to go somewhere with that equipment."

He expects vehicle miles traveled to hold steady.

"But if we break this down, one consumer segment is really keeping it afloat and another consumer segment is really, really suffering."

NPD merged its operations on Aug. 1 with Information Resources Inc. (IRI), a Chicago-based big data analytics firm. A unified name and brand for the combined company will be announced at a later date.