Growth in Mid-range Market Size and Influence: Leading wholesalers

One of the most distinctive trends observed by leading tyre wholesalers during the course of the last year is the increasing size of the mid-range and budget segments. The predictions that a recessionary economy would support a so-called “de-segmentisation” process appear to have been right, with some of the largest distributors reporting that their retail customers are increasingly opting for budget and mid-range tyre purchases having decided to trade-down from the more expensive premium and OE products they may have had before.

While the growth of the mid-market can be clearly seen, the status quo is anything but secure. The significant market share now held by budget and mid-range brands is unlikely to change, but a greater degree of differentiation and even consolidation is predicted. Those brands with well established marketing, distribution and brand development strategies will rise above those with comparable products that don’t have that kind of support. Higher quality products will aim to push the upper limits of the segment they are in, in a bid to promote themselves and their brand; those with inferior products will struggle to maintain share – something that will be particularly relevant post 2012, when the much ballyhooed labelling legislation kicks in. And all this means there is likely to be a consolidation of the number of players in the segment, but not necessary in the overall size of the segments, leaving plenty of scope for the most successful mid-range and budget manufacturers and distributors to expand their sales.

In a recent interview with Tyres & Accessories, Grouptyre managing director Karl Naylor observed that the mid-range segment is “really beginning to grow and shows every sign of going beyond where it is now.” And with wholesale being very reflective of retail, there are said to be clear signs of a price shift towards the lower end in the last couple of years: “There is a gap developing between those that can offer range and legislatively compliant products and those that can’t.” Those competing at this level have to have a multi-brand approach, he explained, adding that this is a challenge to “old school” second line brands. The mentality of producing a smaller range of tyres in old moulds just can’t compete with the size range and quality of what the Korean (and other Far Eastern manufacturers) are now offering.
 
40:20:40 is now 30:20:50

It is easy to pull words like de-segmentisation out of the air, so let’s look at some more concrete examples of what has happened in the UK passenger car replacement market recently, according to some of the market’s most influential wholesalers. In order to get the most objective picture of what has changed T&A sourced data from both Stapleton’s and Grouptyre. And while their answers have their differences, their conclusions are strikingly similar, lending support to the theory that the balance of power in the UK market has switched from the premium to the mid-range and budget sectors. Before we go any further, it must be pointed out that the sheer size, value and continuing significance of the premium sector remains unmatched in any other single segment. The point is that the data now appears to be showing that the mid-range and budget segments combined now overbalance the premiums in terms of both volume and value.

While the benchmark segmentation of the UK tyre parc has long been thought to be a 40:20:40 (premium:mid-range:budget) split, it now looks much more like it is closer to 30:20:50. Grouptyre’s numbers (which are based on a 35 million unit a year market) suggest a slightly larger premium and mid-range/second line sectors, but otherwise the numbers support this thesis.

Stapleton’s data, which is based on benchmarks of the company’s wholesale and distribution volumes from 2006 show that, while both the budget sector and the mid-range have grown in the face of losses in the premium sector, substantial gains have been made in the mid-range. Stapleton’s CEO Kenji Murai qualified the figures with the warning that mid-range sales in 2007 were measured from a relatively low base. However, four years down the line the company was still measuring sevenfold year-on-year growth in the retail of these products, and two-thirds growth in the significantly larger based wholesale of mid-range tyres. What Stapleton’s numbers also reveal is that wholesale volumes generally run in parallel with retail sales, although it is clear that the inflated appearance of rapid retail growth can be explained by the fact that wholesale tyre distribution remains the overwhelmingly dominant part of the company’s £300 million/year business.

3PL versus added value distribution

So what does the swing towards mid-range and budget products mean for the market? According to Karl Naylor the trend means wholesalers and premium brands have “a new opportunity to work together in order to enhance the competitive position of their brands relative with others, resulting in mutual benefits.” Bearing in mind the fact that mid-range products now occupy a larger market share than the premium manufacturers’ own second line tyres, his view is that this trend reflects the need for the two sides to work together. One reason why the brands in the mid- and budget segments have grown to occupy such a significant part of the market is said to be the attention they have paid to developing their fitment portfolios through setting up things like key dealer networks, most of which has been done in partnership with large wholesalers. The suggestion seems to be that premium manufacturers can experience the same benefits from this kind of “added value distribution” through partnership with wholesalers.