Premium Sales Up? And Why Would Consumers Even Buy Them?

Years after the credit crunch bit and the recession took hold in the North America and Europe, financial analysts are now asking if the de-segmentation phenomena that saw cheaper tire

sales increase could be coming to an end.

So, does this mean premium tyre sales are on the up?

Thus 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% in July. Overall demand was said to have been stronger in OE than in the replacement sector. European demand reportedly grew 5% 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 tires and could not fulfill additional demand in Japan since its plants are all running at full capacity. Two months before Renault announced that it was short 500,000 tires 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%, according to Morgan Stanley. Writing in an investor’s note dated Sept. 13, the bank points out that “these come more from concerns on GDP growth than actual data points from tire markets,” but there is growing evidence that the outlook is by no means clear.

While, as the Michelin tire 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 U.K. tire business (including representatives from influential manufacturers and wholesalers) for example report that they expect a drop in tire sales of around 10%-15% by the end of 2011.
While 15% 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 tires will be at risk of declines, truck tires 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 “tire demand” and the market as a whole. And this is an area that is scrutinized in depth and at length every month. What is arguably more interesting is Morgan Stanley’s suggestion that the premium tire segment is “set to outperform.” According to the analysts, the significant out-performance posted by premium tire 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 tire manufacturer is convinced premium tires 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% and maintain 9%-10% profitability in “industrial tires,” which probably refers to commercial vehicle products. And much of this off the back of what they call the “premiumization” of the car parc that is expected to naturally lead to increased to tire demand.
While this is true in terms of tire 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 tire field – consumers will continue or increasingly buy premium branded tires.