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Published on October 9, 2006

The UHP market's changing: Dealers need to plan ahead to get their piece of the pie



ST. LOUIS (Oct. 9, 2006) — For many years, and maybe still today, the ultra-high performance (UHP) market has been the shining star in the tire business.

The UHP market is the fastest growing and one of the most profitable segments of the industry. This has caused tire makers to rush to get their piece of the UHP pie. Four years ago, who made a 265/35R22 or a 305/35R24? No manufacturer offered many sizes in 17- to 20-inch low-profile fitments. Now, who doesn't?

A 205/40R17 has become the 175/70R13 of yesterday. It is a commodity, like a bushel of wheat. Let's take a look at what is happening and how a dealer can plan for the market ahead.

Starting mid-2005, the industry saw rapid price decreases—a first in the UHP marketplace. Those who had market share fought to keep it from the new kids on the block, while new guys did everything possible to get a piece of the action. While raw material and shipping prices have skyrocketed, UHP prices are still dropping.

In 2006, this hyper price deflation has started to slow. Even at today's lower price for a 205/40R17 or 225/40R18, these tires are still much more profitable than a 175/70R13.

Every month, only so many UHP tires are actually mounted on wheels and installed onto cars. This is the real UHP market—how many hit the ground.

Depending on which size—205/40R17, 265/35R22, 305/35R24, or now in the U.S., even 305/30R26 and 30 inches—there are still only a finite number of tires installed every month. But the supply continues to grow.

It is estimated that manufacturers seek orders, or actually manufacture, nearly double the true consumer demand for aftermarket UHP tires. In some sizes, it could be three to five times the true market. So, guess what continues to happen to prices? Down they go again.

For every Chinese manufacturer that has entered the market, there are twice as many planning to enter the market in the near future.

If prices continue to drop, is there any shelter in name brands? Arguably, no.

The wheel design is driving the sale, not the tire. People are buying low-profile tires to fit the wheels onto the car, not for performance upgrades as in past years. Hence, they first decide what wheel they like, and then choose tires based on what is left in their budget. In the U.S., it is very common for buyers to not even ask what tires they are getting.

Many buyers—some retail dealers estimate as many as 80-90 percent—do not care what brand tire they purchase. They simply want the lowest price tire so they can get the wheel they desire. The wheel sale creates the tire purchase. This means that if you are a tire maker and want to sell units, you have no choice but to jump into the price war.

In early 2005, one U.S. tire maker made one of the smartest market moves I have seen. It introduced a program for dealers to buy four very popular UHP sizes in a standing order for a three- to five-month period. After fulfilling the order the dealer then got a rebate.

Since the tire maker started with exceptional prices to make it attractive, the end result was huge orders, taking all those buyers off the market for months for those sizes.

Where does the market go now?

The real profit for a dealer is in new sizes—hot sizes that no one else has. There will be small 24-inch and 22-inch, like 255/30R24, 275/25R24 and 235/30R22. They will get smaller.

How low can the price go? Six years ago there were one or two manufacturers offering 20-inch sport-utility vehicle tires, with the 275/45R20 size being the most popular. Now, there are more than 10. And the price of a popular 275/45R20 is 30-40 percent lower than it was six years ago.

What is a dealer to do? Seek exclusivity.

If you have to fight a price war, do it with a brand you can control in your market. Look to the long-term. Dealers must be very aware that the prices will continue to decline. This doesn't mean that you should be afraid of good buys. Just be aware that there is now a glut of tires on the world UHP market. The 225/40R18 is saturated, everywhere, worldwide.

Dealers having un-price-protected stocks can suffer huge losses. When your warehouse is full with six months of inventory, and the current deal is 10-percent lower, you just have to sell what you have first. Sometimes you have to do that fast, for little or no profit.

So, when you get an opportunity to buy the new hard-to-get size that you can earn a significant profit on, there has to be somewhere on the shelf to put the tires. That is just the way the industry is.

Just recently, I have seen two sizes in 22-inch tires drop $20 each, and a 26-inch for a Hummer drop by more than $150. And depending on the brand and how many you would buy, it could be as much as $250.

UHP has changed—now it stands for “Ultra-Hard Planning.”

Mr. Mathis is sales/marketing manager for Zisser Tire Wholesale based in St. Louis. The company handles the Wanli brand from South China Tire Rubber Co. Ltd., China, and is worldwide distributor of the Lexani performance tire line.


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