Sumitomo's sales slump; back-order status improves

RANCHO CUCAMONGA, Calif. — Sumitomo Rubber North America Inc.'s (SRNA) sales in early April reflect the downturn in business many of its North American tire dealers are experiencing during the pandemic.

"For our business specifically, ours began to tail off significantly the last week (first week of April) when it became very apparent that the COVID-19 impact was going to be really significant and could last awhile," Matt Leeper, director of sales-consumer, said during SRNA's COVID-19 Dealer Resource Forum held online April 14.

Ironically, there was an upside: "The silver lining for SRNA is that our back orders are declining from historically high levels," he said.

Mr. Leeper and other SRNA executives gave dealers an update on business conditions for the tire industry in general and the company in particular during the online forum, which will be held bimonthly for its direct and associate dealers. SRNA's Falken brand will be central to the discussion, the tire company said.

"Our goal is to provide a resource to collect and distribute information we've developed internally, as well as gathered from our external sources, to help our tire dealers cope in this challenging and dynamic business environment," said Darren Thomas, Falken Tire's senior vice president of sales and marketing.

During the first forum, SRNA discussed the effects of stay-at-home orders around the U.S.

The stay-at-home orders have impacted everything from service work to manufacturing, Rick Brennan, vice president of strategic planning, said, noting the full impact is expected to be seen in the first two weeks of May through July.

Passenger vehicle miles driven in early April was down 47% from earlier in the year, according to research firm INRIX Inc. Commercial truck mileage was down about 15% to 20% in early April, due in part to the shutdown of manufacturing plants.

With tire manufacturers implementing minimum advertised pricing policies, Mr. Brennan said advertised prices increased in the first quarter "mainly because there were a lot of manufacturers that took price increases at the end of December and through the first quarter."

"We see those coming into effect in minimum advertised price and actual prices that all of you are showing on the internet. So we don't see a lot of price fluctuation because of this activity as of yet.

"So far we haven't seen a big change on retail pricing in the marketplace at this point in time. ... We don't see any major downturns happening in the prices that are being put out in the marketplace, at least as far as facing the consumer."

"We survived through the first quarter with pretty good numbers," Mr. Leeper said. "As we look at the daily numbers and shipments for April, we're looking at about a 50% reduction in what we sell to our direct dealer base, which obviously is pretty significant but in line with what most of our dealers are telling us is happening with their business.

"So dealers are only buying what they're selling, and they are also reducing their inventories," he continued. "So if those two things are happening at the same time, obviously fresh orders are going to be limited. So that is what we are looking at right now. However, it looks like we will pull through April at 50% of our 13-month average.

"Some regional dealers have canceled all orders and are not taking any shipments; others are maintaining their business but at a much reduced rate. They're still placing orders every week and still receiving tires, it's just consistent with the percentage down that we're seeing across the board."

Mr. Leeper noted that some dealers have been reluctant to place container orders, including for winter tires for next season.

"A lot of indecision about winter tire container orders. That may actually create a shortage of winter or tier 4 or product that's typically ordered in containers in the future," he said.

The downturn in orders has enabled SRNA to catch up on back orders. He noted Sumitomo has been dealing with back orders for the Wildpeak A/T3W all-terrain light truck tire for two years.

"It does look as though at the end of May, we'll probably be out of the back-order situation on the A/T3W. Ziex CT60 and Wildpeak H/T02 will also go down in back orders. That is a positive for us. We've been (having) serious back orders on our light truck products for over two years now, so we'll get through this with very good fill."

Mr. Brennan noted that all of Sumitomo's factories outside the U.S. are up and running and focusing on keeping up with demand for its Wildpeak A/T3W, Ziex CT60 and Wildpeak H/T02. SRNA's Buffalo, N.Y., factory is to be idled for two weeks beginning April 20.

"We're up and running in all our warehouses and focusing on shipping back orders. We're unloading about 45,000 units a day into our warehouses," he said.

"As dealers are willing to accept those back orders, we're really focusing our needs on getting those back orders filled because our order rate, of course, has dropped so we're getting less new orders. But part of our realignment is to focus on unloading those tires that come in and shipping them right back out to the people who need them. …

"We will expand our capability to build more light truck tires over the next 12 to 18 months."

There are about 6,000 tire dealers registered with the Falken Fanatic associate dealer program. As of early April, purchases from their distributors were down about 40%, consistent with what the company said it has been hearing from retailers and distributors.

"Retailers are cutting hours, they are cycling employees and, unfortunately, they are laying off staff. From the wholesaler standpoint, we are seeing severe reductions in the number of deliveries they're doing and routes are being cut," Mr. Leeper said.

He said some distributors have curtailed the frequency of daily deliveries.

"We're seeing those drop down to one to two deliveries a day. And that's just a cost-saving method that may or may not last into the future. We're seeing dealers cutting back and modifying advertising and promotions. The mantra seems to be more 'serve versus sell,'" he said, noting that dealers are focusing resources on servicing vehicles rather than on advertising.

SRNA said it will make some accommodations for Fanatic program rewards based on orders for the first quarter that fell short of hitting a certain level. For the second quarter, the program will offer a 40% program enhancement to accommodate the downturn in business created by the COVID-19 situation.

Falken Tire enjoyed sizable increases in commercial tire sales in the first three months, up 21% over 2019, Bob Klimm, director of sales – TBR, said.

However, for April "we're seeing a pretty drastic slowdown in orders. Our orders right now are tracking approximately 30% below our average. And again, that's pretty much right on target with what we're hearing from our commercial dealers as well. Some are doing better than that, some a little bit worse. Overall, the consensus is 30% to 35% reduction in volume."

Areas of the commercial market doing fairly well include: long-haul delivery, household goods delivery, local delivery, agriculture, mail and waste hauling.

Not doing well are the oil- and gas-related freight, automotive-related freight, restaurant-related freight and school buses, he said.

The construction market is mixed, he said, due to varying definitions of "essential services" among the states.

Likewise, for commercial dealers, Falken is making modifications for volume-based programs to reflect what is going on in the marketplace, Mr. Klimm said.

SRNA expects what many economists are describing as a V-shaped recession, where the economy will drop quickly and then recover fairly quickly.

OE tire sales have been hit as vehicle production has been curtailed during the pandemic.

"Clearly in 2020 we're going to have a decline in production and in sales," said David Colletti, vice president, OE/technology and QA.

"The latest estimate is probably about 15% decline in vehicle sales, a little more than the 11% production that we've already seen," he said. "It's probably going to take a while to rebound, to get back to where we had been previously.

"The expectation is that by the end of this year or early 2021, we should be getting back to more of a normal steady state. It's difficult to predict how big of an impact this is going to be and how long it's going to take. But we should be getting back to normal sales probably next year," he said.

The impact of the pandemic may lead to an increase in miles traveled, a turnaround that would be good news for the tire and vehicle service aftermarket.

"It's very possible that the lingering effects of the virus, and how it impacts people emotionally, may increase the amount of road trips they take because they can all sit in a car with people they know instead of getting on a plane and the social distancing may be more difficult as things get more back to normal as we go forward," Mr. Brennan said.

He said he expects low gas prices through 2020, "which should have a favorable aspect on people driving. It's just going to depend on how fast things open up and how many of the 16 million that are out of work right now get back to work and really feel like taking a trip."

Mr. Thomas said he believes the business climate in mid-April may impact how distributors operate going forward, describing a "take a pause" moment in terms of what it means to be a regional or national distributor, how often tires are procured and/or sent to local dealers and how small independents or regional dealers maintain tire inventories.

"We definitely believe that we're starting to see the intersection of a couple of economics. One is the cost of secondary supply; two is the cost of multiple runs by the regional distributor and national distributor," Mr. Thomas said.

"As a manufacturer, clearly we do not participate in the distribution at that level, but we do believe we're seeing signs in the wholesale market where the delivery patterns will more than likely change as we exit this COVID situation. Primarily because we'll be forced to change because the demand will not be at the level it would have been originally.

"So we will find a new normal. Obviously that is a decision distributors will have to make on their own. But we do believe, if we were to see a shift because of the cost of redistribution and secondary supply, this is probably going to be a sign or the type of impact on the market something this significant would potentially change that."