The re-volving retail market

Roughly half of the 30 million-odd tyres sold to UK motorists each year are delivered through tyre specialists, a figure that is broadly comparable with figures across Europe. And while there are some noteworthy differences between the structure of the UK tyre market and mainland Europe in general, perhaps the most interesting details are to be found within this 50 per cent. That’s why in this month’s retail chains/buying groups feature Tyres & Accessories considers the state and make-up of the sell-out market and releases the details of latest top 20 tyre retail chains survey. As well as our own research we consider data compiled and analysed by four well-known third-party research firms, however for commercial and confidentiality reasons we aren’t citing the sources individually each time they are mentioned. Instead this year’s retail report analyses their input and presents our view of the consensus.

Recent years have seen the British tyre market put under considerable pressure. The combination of reduced disposable incomes (due to the wider economic situation), lower miles driven (down to the combination of the credit crunch) and sky-high fuel costs have pushed consumers to run their tyres for as long as ever (often past the legal limit) and in 10 per cent or more of cases to purchase part-worn tyres (some figures put annual UK part-worn sales as high as circa 5 million units, while others hold 4 million). Either way, all this has had a significant impact on new tyre demand, which has inevitably been felt by retailers themselves. However, while Europool figures report that European sell-in was down double digits last year, and was similarly poor in the first quarter of 2013 (a trend that is broadly similar in the UK), other market researchers report that UK new tyre sell-out was roughly half as bad. On the one hand you could view this as reason for optimism, as a sign that the market is stabilising prior to recovery and the sell-in discrepancy was due to de-stocking. On the other hand you could say it is a testament to the entrepreneurship of the retail business, which has kept the tyre business afloat in what have been undoubtedly challenging times.

A stuttering diesel-engine tyre retail environment

What we are left with is a diverse core of specialised businesses that represent a variety of different businesses approaches and the complete range of sizes. Around them the market context has been stalling and stuttering like an old diesel engine. This, according to some figures, means that the 30-odd million unit average annual car tyre sales figure could be considerably less now. Different sources offer massively different opinions on this, but the consensus appears to be that 2011 was something of a low water mark with demand falling up to 11.5 per cent, the worst performance of all the major markets in Europe. However, one report suggests the previous year (2010) was the strongest growth witnessed in the region, increasing 12.5 per cent. Therefore we have to read the drop in light of the fact that it came off a high base.

Nevertheless, market research agencies put the retail market’s four-year (2007-2011) compound annual growth rate (CAGR) at between -2.4 per cent and -5.3 per cent, meaning the market has significantly contracted during the period, whichever way you look at it. Having said all that, again like a diesel engine, once it gets going the UK market has one of the best outlooks in Europe. Between 2011 and 2016 UK tyre sales are expected to record CAGR of between one per cent and 4.5 per cent, depending on which report you are reading. To put this into perspective, the same reports suggest other leading mature markets such as Germany and France are going be flat or decline during the period.

De-segmentation and selling power

But how have retailers managed to keep sales going in spite of the adverse conditions? There are likely to be many disparate reasons for this, but for the purposes of this article let’s just look at two linked points – the selling power of retailers and de-segmentation.

It is well-known within the industry that the most important influencer when it comes to consumer tyre buying is the retailer themselves. But why is this? As one market research firm said, in a recent report on the UK passenger car tyre market in general, the presence of large numbers of small customers in this market can often imply low buyer power, since the effect of any individual decision to buy or not to buy has negligible impact on revenues for market players. Switching costs in this market are low with little cost to the individual consumer when swapping their loyalty to another garage. Or in other words, there is lots of competition and it costs nothing to go to another depot. And it has to be said that with a large chunk of consumers now pre-researching their tyre purchases online this is only likely to increase. However, dealers can and do play on the cost sensitivity of consumers and differentiate themselves on price. And before labelling there was no way for consumers to objectively compare products apart from magazine tests. Owing to the fact that magazine tests are by definition limited in their scope, the retailer is also the tyre expert and therefore the voice of the reason in the consumer conversation. As a result, buyer power isn’t overwhelming – when people need tyres they need tyres, even in a recession. But – as we have seen – it is certainly a moderate and some would say increasing influence in the market place. The second means of maintaining sales in the midst of turmoil linked to this.

As the saying goes, a bird in the hand is worth two in the bush – even more so in a recession. So when a consumer enters a depot, selling tyres – any tyres – is better than not selling tyres, even if the product sold isn’t a direct match for the premium OE tyre fitted to the customer’s car. As a result, there appears to have been a real tendency towards selling more competitively priced (and many would argue increasingly competitively performing) non-premium tyres. This is the so-called de-segmentation phenomenon that we have become so familiar with. The latest research suggests that the age-old 40:20:40 Premium:Mid-range:Budget segmentation of the market has now gone (see chart “UK tyre replacement market segmentation”). While this model has been roughly in place for some time, others (who presumably had different definitions of budget) have suggested the trend toward budget is more marked than this, and therefore the latest data T&A has come across offers confirmation of its reality.

What is perhaps surprising is where the swing is coming from. Broadly speaking, the swing is from Premium to Budget rather than from Mid-range to Budget as you might expect, with some sixth sevenths of the roughly seven percentage point swing headed in this direction.

Looking forward

If you seek a prediction as to what is up ahead, there are some indications that the worst is over and therefore we may see some improvement in the status quo by the end of the year. One such indicator is the fact that the general UK retail outlook is improving, along with increases in tax allowances and falling fuel prices.

For the first time in two and a half years the general UK retail performance has improved. However, unless something changes the second quarter of 2013 is set to “flat line”, according to the Retail Think Tank. Following its quarterly meeting in April, the KPMG/Ipsos Retail Think Tank (RTT) reported that the downward trajectory that has plagued UK retail since the start of 2011 finally turned around in quarter one of 2013, although a significant increase in the health of UK retailing is unlikely to arrive any time soon. The RTT’s Retail Health Index improved one point to 77 points, thanks to a marginal lift in demand, which would have been better still had it not been for the prolonged extension of wintry weather throughout the whole quarter.

The RTT agreed that overall Christmas trading figures had been relatively good, and that there were very few new casualties coming through now – the consequence of better run businesses and an uplift in demand.  Details about the different sectors are perhaps irrelevant to those of us interested in the tyre business and automotive parts in general. However, what they do offer is an insight into consumer confidence. For example, while the food sector was something of a star performer, food margins remained broadly flat. And extra discounting was necessary to stimulate clothing sales in particular, and some major players remained heavily promotional led in the quarter (notably Debenhams and M&S). The logic is that if people are scrimping on clothes they won’t necessarily have disposable income to spend on tyres. But once again, because of the unique type of product context tyres are sold in, what it may mean in practice is that rather than fewer tyres being sold it will mean the fight will really be over which tyres are sold. And again the fact that retail outlook is improving in general may suggest that people will spend a bit more on tyres.

However, the broad retail situation remains “very mixed” and the RTT report suggests confidence is likely to remain weak because “the recent employment growth is expected to tail off, inflation is on the increase again, and with fuel and energy prices set to rise.” However, looking more optimistically, there is some support for increased spending based namely recent changes in income tax thresholds and better flowing lending.  Commenting, David McCorquodale, head of retail, KPMG UK, said: “Overall the quarter was quite an even one for UK retailers as demand, margins and costs all remained relatively static and it looks like we’re at the bottom of the decline.”

Vicky Redwood, chief UK economist at Capital Economics, added: “It’s a mixed picture. We have seen more employment growth during the quarter, mainly part-time jobs and individuals setting up their own companies. Also, more people are looking for work as they come off benefits or come out of education. Consumers are more inclined to spend because it has become easier to borrow and at the moment there is less incentive to save. However, employment growth is tailing off a bit, incomes will again be squeezed in the coming months so nothing is certain. Everything is stacked against the consumer, but they keep on spending.”

Then there is the effect falling fuel prices are likely to have on miles driven and therefore tyre consumption. According to the AA, pump prices have dropped substantially following a fall in the price of oil and the wholesale price of petrol and diesel. As a result there is now said to be potential for the UK’s average pump price of petrol to fall to 134pence per litre (ppl) in two to three weeks. This means unleaded prices have fallen by 3.0ppl from 139.9ppl to 136.9ppl and diesel prices even more so, down 4.6ppl from 146.4ppl to 141.8ppl. All this means a) more pennies to spend on tyres when motorists need to, which will b) be more often because as prices lower miles driven and thus tyre usage tends to increase, speeding up market throughput. So while quarter one delivered some very welcome results, whether we see any increase in demand the next quarter is open to discussion. Or in other words there are some positive signs, but especially in the tyre industry it is too early to say. What is even less clear is what effect this will have on the segmentation of the UK market as and when such effects kick in.