Premium tyre sales on the up?

Years after the credit crunch bit and the recession took hold in the North America and Europe, financial analysts are asking if the de-segmentation phenomena that saw cheaper tyre sales increase could be coming to an end. So does this mean premium tyre sales are on the up?

So far this year there have been signs that the wider European market has witnessed some degree of increase in sales volumes. According to Michelin data, demand increased by approximately 2 per cent in July. Overall demand was said to have been stronger in Original Equipment (OE) than in the replacement sector.

European demand reportedly grew 5 per cent across the continent, while growth fell back in the NAFTA region (-2%). Growth was markedly stronger in the truck segment (+5%), than the flat progress with passenger car tyres (0%). These figures have to be put into context with the fact that July (like August) is traditionally a relatively low volume month and September, October and November are seen as key months for influencing the overall second half result.

Interestingly, earlier in September Bridgestone announced is facing a capacity shortage of 500,000 passenger car tyres and could not fulfil additional demand in Japan since its plants are all running at full capacity. Two months before Renault announced that it was short 500,000 tyres too. Reflecting on these developments, financial analysts at Deutsche Bank described the two points as “interesting examples which give us comfort on the pricing discipline in the industry.”

Whether linked or not, what is happening in the wide context could also lead to a small decline in market volumes, which as we have seen, are around currently growing at 2 – 3 per cent, according to Morgan Stanley. Writing in an investor’s note dated 13 September the bank points out that “these come more from concerns on GDP growth than actual data points from tyre markets,” but there is growing evidence that the outlook is by no means clear. While, as the Michelin tyre market demand data show’s, Europe as a continent is growing, the situation within the different constituent markets is less clear. Leading figures in the UK tyre business (including representatives from influential manufacturers and wholesalers) for example report that they expect a drop in tyre sales of around 10 – 15 per cent by the end of 2011. While 15 per cent might be at the alarmist end of the spectrum, even more conservative estimates see firms bracing themselves for around a double digit drop.

Across the pond however, Morgan Stanley reports that the North American market looks most at risk. “While consumer tyres will be at risk of declines, truck tyres should perform better…but trucks are indeed more cyclical hence more at risk.”

In the emerging markets growth is expected from the Latin American region and China, thanks to continued increases in the size of the car parc and miles driven.

The premium element ‘set to outperform’

Interesting as these figures and perspectives are, so far they all refer to “tyre demand” and the market as a whole. And this is an area that is scrutinised in depth and at length every month. What is arguably more interesting is Morgan Stanley’s suggestion that the premium tyre segment is “set to outperform.” According to the analysts, the significant outperformance posted by premium tyre sales in the last few years (see chart) is “a direct consequence of the increase in premium car population.”

Citing Pirelli’s view, the analysts go on to explain that the leading Italian tyre manufacturer is convinced premium tyres will continue to outperform in 2012. The analysts agree and believe “Pirelli is the best positioned to exploit this structural global trend.”

Looking ahead to 2012 the analysts expect Pirelli to aim for “Conti-like margins in the consumer business” of around 15 per cent and maintain 9 – 10 per cent profitability in “industrial tyres”, which probably refers to commercial vehicle products. And much of this off the back of what they call the “premiumisation” of the car parc that is expected to naturally lead to increased to tyre demand. While this is true in terms of tyre size and performance characteristics necessary, this analysis doesn’t offer an argument as to why – in the context of rising macro-inflation and rising prices in the tyre field – consumers will continue or increasingly buy premium branded tyres. What happens in this respect remains to be seen.