Tire makers' continuing price increases over the past year have left tire dealers across the U.S. with little choice but to pass on as much of the price hikes as they can, absorb the rest, then tighten their belts to help profit margins.
We used to get a 3- to 5-percent increase every 18 months or so, said Mark Buenger, co-owner of O'Brien Tire & Service in Granite City, Ill. Now it seems as if there's one of 5 percent or more every quarter.
Along with price issues have come supply issues, with shortages particularly widespread in medium truck tires. Some dealers, however, are reporting major increases in sales.
I'm up 25 to 30 percent this year, said Klyde Thompson, owner of Del's OK Tire Factory in Astoria, Ore. All in all, I'm on track for a record year.
Several strong circumstances are pushing tire prices higher. Spiraling raw materials costs are the reason industry experts cite most often. But increased demand brought on by low inventories also are a factor, as are the Obama administration's stiff tariffs on Chinese-made consumer tire imports, which are now entering the second year of their three-year duration.
Since July alone, virtually most tire manufacturersand many distributorshave announced price increases (see sidebar at right), some of which are still pending.
The problem with supply shortages has been around for some time, said Curtis Schneekloth, director of investor relations with Findlay, Ohio-based Cooper Tire & Rubber Co.
It goes back to when demand started to increase, around the middle of 2009, he said. We have more supply coming online right now, but the shortages are likely to stick around until the middle of next year.
We're ramping up capacity, and we've even been running on some days that are expensive for us to run, Mr. Schneekloth said.
Earlier, commenting on third quarter results, Cooper Chairman/CEO Roy V. Armes said the firm was facing historically low levels of inventory, whereas high inventory levels the same time last year were available to support demand. We are taking action to increase our production levels and intend to produce 10 percent more units in 2011 than in 2010, he said. (see related story on page 4.)
Back orders for the tire industry in general began increasing in the fourth quarter of 2009, according to John Baratta, president, consumer replacement for the U.S. and Canada Consumer Tire Sales Division of Bridgestone Americas.
The reasons are due to a number of variables, he told Tire Business. In response to weakened demand in the North American market, tire manufacturers reduced production to align with the industry demand. Cash for Clunkers raised OE demand more than expected, and the tariffs on Chinese products also raised demand on domestic and other products.
In addition, the pent-up demand in the replacement market began to increase in the second half of 2009 and the first half of 2010, he said. Demand for Bridgestone and Firestone tires exceeded the industrywide growth in demand, he added.
Bridgestone has increased production to full capacity over the past few months and expects the level of back orders to improve through the year, with inventories becoming more stable by mid-2011, Mr. Baratta said.
Jim Melvin Jr., president of Tire Pros of Rhode Island, Johnston, R.I., said the prices he is paying for tires have jumped 7 to 10 percent since January.
We do not ever absorb price increases, we always adjust retail pricing, Mr. Melvin told Tire Business. That being said, our retail gross profit percentages are at an all-time low. My tire business year-to-date is up over last year in unit count, but my overall gross is 2 percent lower than last year.
Ed Chrisman, president of Silver Creek Tire, a franchisee of Big O Tires Inc. in Reno, Nev., said price increases have averaged 5 to 7 percent for the tires he buys, including Big O private brand products.
Gross profit has declined throughout the year, he said. There has been very little room to pass on these increases to the consumer, because of the economy and new competition in the market. As a result, we have looked and will look at alternate suppliers where possible, to allow us to be more competitive in the marketplace.
O'Brien Tire's Mr. Buenger said the price hikes are an industry-wide problem that's eating into profit margins. Every time we get a price increase, we absorb 1 or 2 percent and pass on 3 or 4 percent.
Brian Gollub, director of purchasing and distribution at Norwell, Mass.-based Sullivan Tire Co. Inc., said the dealership tries to buy a substantial amount of tires ahead of any price increases. But they're a fact of life.
I've been with Sullivan Tire 20 years, and I've seen a number of price hikes, he said. You just have to roll with the punches.
We know manufacturers are under pressure because of high raw material costs, Mr. Gollub said. If they're not financially viable, that doesn't help their customers.
As much as possible, Sullivan Tire has been holding the line on the prices it charges its customers, according to Mr. Gollub.
Our customers are trying to pay their bills, and we're very aware of that, he said. We're trying to become more efficient and mitigate some of the prices by working hard on our expenses. We're trying to stay profitable by tightening our belts.
Mr. Thompson of Del's OK Tire Factory said the price hikes are creating tension between customers and dealers. I don't know where it's going to end, he said. You used to buy a set of pickup tires for $500. Now, you can't buy them for $1,000. And when customers see that a replacement tire is $350, they get mad at the dealers.
Along with price increases have come supply issues that are becoming ever more severe, the dealers said.
Supply is going to be an enormous problem this winter, Mr. Melvin said. We are off approximately 70 percent on our fill rates. We buy from several manufacturers, but light truck tires are as bad as I've ever seen in 29 years in this business. I believe we are going to hit a point in December, predicated on weather, where there will be certain sizes of light truck tires that just aren't available.
Mr. Buenger reported similar fill rate problems. Supply is not the greatest, he said. Shortages are popping up on a regular basis, and medium truck tires are nonexistent. An order for passenger tires, he said, regularly takes 30 to 45 days to fill.
In Oregon, where logging is king, it's tough to keep logging tires in stock, according to Mr. Thompson. We're scrambling for tires, he said.
But if supply is bad, the silver lining is that demand is high, he said. A lot of people are keeping their old cars. The tire industry hasn't suffered very badly in this recession, because people are replacing tires instead of cars.
* Yokohama Tire Corp., increases of up to 8 percent on all consumer tires, effective Dec. 1.
* Falken Tire Corp., increases of up to 8 percent on all passenger, light truck and Ohtsu truck and bus tires, effective Nov. 1.
* Continental Tire the Americas L.L.C., hikes of up to 6.5 percent in the U.S. on all Continental, General and proprietary brand passenger and light truck tires, effective Jan. 1.
* Kumho Tire USA Inc., increases of up to 6.5 percent on all U.S. products, with in-line adjustments, effective Nov. 1.
* Bridgestone Americas Tire Operations, increases of up to 8 percent in the U.S. Nov. 1 on its Bridgestone, Firestone and associate brand passenger, light truck, medium truck, bus, agricultural and off-road tires, including consumer replacement and OE tires.
* Hankook Tire America Corp., increases of up to 6.5 percent on its full line of passenger, light truck and medium truck tires, effective Dec. 1.
* Cooper Tire & Rubber Co., increases of up to 6.5 percent on all passenger and light truck tires shipped in North America on or after Nov. 1.
* Titan Tire Corp., increases of 3 to 10 percent on Titan-brand OTR tires, effective Oct. 1.
* Goodyear, increases of up to 6 percent on all North American consumer tires, effective Oct. 1.
* Trelleborg Wheel Systems, increases averaging 5 percent on tires and wheels for agricultural, forestry and light industrial applications, effective Sept. 1.
* Michelin North America Inc., increases averaging 3.5 percent on U.S. and Canadian replacement farm tires and 3 percent on earthmover tires sold in the U.S. and Mexico, effective Aug. 1.
* Pirelli Tire North America Inc., increases of 4 percent on all U.S. replacement light truck and passenger tires, effective July 1.