When is a Price Cut Not a Price Cut?

Aeolus Tyres, for example, apparently became the first tyre maker to openly cut its rates, saying it was aiming to send a clear signal that as a “runner-up among major tyre brands,” it is taking the lead in terms of pricing. Clearly the idea here was for the economy tyre producer to steal a march on the premium tyre manufacturers that are fighting hard not to cut product prices, despite market analysts’ predictions that the days of price increases are over and the opposite is likely, and take advantage of raw material price stabilisation. Industry sources have also linked the Triangle and Infinity brands with factory gate price cuts and (if the “email us for best prices” messages Tyres & Accessories has received are anything to go by) they are unlikely to be alone. The problem is the pound has plummeted in value against the US dollar. And as most Far Eastern transactions are dollar-based, sterling prices are – and in fact have to be – higher than they were 12 months ago.

While the euro appears to be faring better against the dollar, a similar effect is understood to be place taking place on the continent. The pound peaked against the dollar in March when it averaged more than two dollars, staying at $1.95+ until August when the credit crunch bit in. For the next six months the pound lost around $0.10 a month of its value before crashing at a low of $1.37/£1 on 23 January 2009. It averaged $1.44 during January and February, but at the time of going to press it appears to be going further south during the early stages of March. The point of all these figures is that a year ago a tyre sold at $40 dollars at the factory gate cost a British importer around £20. The same tyre today would cost the best part of £30 – a massive 50 per cent increase. With this in mind factory gate discounts are welcome, but unless the factories are willing to halve their prices, increases at this end are inevitable just to bring things back to even keel. And even if such decreases were available, discounts of 50 per cent are simply unsustainable, even in the low production cost countries of the Far East. So what happens next? All the data T&A has seen shows that retail passenger car tyre sales are experiencing a period of de-segmentation.

Initially it looked as though premium tyres alone were affected due to their higher price, and that consumers were choosing mid-range products instead. Now that budget tyre prices are going up, will this mean consumers will be pushed towards the mid-range from beneath as well? Or will wholesalers and retailers ensure that the economy offering remains sufficiently economic at the point of sale? (As far as truck retreads are concerned, the same trend potentially offers retreaders a real growth opportunity. See this month’s Retreading Special Supplement for more on this) It all hangs on the exchange rate. Reuter’s latest poll of the leading banks’ dollar:pound forecasts found that in a year’s time a pound sterling will be equal to somewhere between $1.29 (Bank of America) and $1.80 (Barclays). Or in other words they don’t have a clue. And therefore no-one can predict what effect the F/X effects are going to have on tyre prices.