Southern California feeling the pain

Posted on 30 August 2010
Written by Reagan Haynes

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The state's high unemployment rate and housing market collapse are cutting deeply into boat sales

Throughout the recession, South Florida has been the poster child for boating industry hardship, but lately, it seems, that role might rightfully belong to Southern California.

Like their counterparts in other regions, dealers in the Los Angeles area were hoping the surge in consumer confidence in early spring would signal an industry turnaround. But a steady stream of bad economic news - debt problems in Europe, a fluctuating stock market, the Gulf oil spill - appear once again to have left consumers reluctant to part with their dollars.

In May, small-boat sales (the under-17-foot segment) were down 50 percent from May 2009 totals in Los Angeles, compared with only 8.3 percent for Miami, according to Statistical Surveys Inc., the Grand Rapids, Mich.-based firm that tracks new-boat sales. In the 18- to 29-foot segment, Los Angeles was down 43 percent year to year, compared with 28.4 percent for Miami.

There were no sales of large yachts (43 to 60 feet) in Los Angeles in May, compared with four in May 2009, according to Statistical Surveys. Four boats in this size range were sold in the Miami-Fort Lauderdale area this year, compared with six in May 2009. The only segment in which Los Angeles outperformed Miami was cruisers between 30 and 42 feet. That segment was down only 20 percent in LA and nearly 30 percent in Miami.

Southern California dealers wonder how long they can get by with those kinds of numbers. "I sure put more back in this business than I ever expected," says Barry Lieberman, owner of Hardin Marine Arrowhead, with locations in San Bernardino, Lake Arrowhead and Corona. "We put some money away for a rainy day, but we didn't expect a flood."

Lieberman continues: "I've been around 40 years, so you say it was a bad year. But it's been three bad years and you wonder ... Well, it's never going to be like the old days, but you would have thought it would be better than it is."

Spring boat-sales data shows California's new-boat volume in key segments was exponentially lower than the rest of the country. Sales were up 1.5 percent nationwide on boats smaller than 17 feet in April from the same month in 2009. But in California, that segment saw a 13.8 percent decline, according to Statistical Surveys. In the 18- to 29-foot segment, April sales were down 7.8 percent from April 2009; in California, they were down 35.7 percent - more than quadruple the national decline.

The Los Angeles area saw a 43 percent year-to-date decline in the under-17-foot market and a 42 percent decline in the 18- to 29-foot segment.

Towboat sales are "just gone," with the wakeboard segment particularly hard-hit, says Bart Hall, organizer of Fred Hall Shows in Los Angeles and San Diego. Fishing boats were still selling at the Hall shows, which include travel, fishing gear, hunting equipment and automobiles.

Some say that despite the disappointing spring numbers, sales then were better than in early summer.

"Every time I see these consumer confidence reports, I'm like, 'Dude, I could've told you that three weeks ago,' " says Mike Basso Jr. of Sun Country Marine, a family-owned dealership with locations in Ontario and Dana Point. "Our sales in May were good; our sales in June were horrible, so obviously something wasn't right. I can't tell you what it is, but the numbers don't lie."

Jobs and housing

California's unemployment rate was 12.4 percent in May - well above the national figure of 9.7 percent. That rate is the third-highest in the country, trailing only Nevada and Michigan, according to federal statistics. Unemployment in the Riverside, San Bernardino and Ontario areas just east of Los Angeles and Long Beach hit almost 14 percent in May, according to the U.S. Department of Labor.

Real estate values have dropped between 50 and 60 percent in some parts of California, says Don Parkhurst, senior vice president of marine lending at SunTrust Bank.

"Southern California was the hardest hit because it had the most rapid rise in values," says Bob Brown, a spokesman for the Southern California Marine Association. "It's still expensive here, but compared to five years ago, home prices are probably half."

The housing market will have to bounce back before the boat business can stabilize, says boat show promoter Hall, and he predicts that won't happen for another four or five years.

The dealers who make it that far will be smarter and the new climate probably will not allow novices to break into the industry, Basso says. "Anybody could've run a business for the last five years," he says. "It's the ones who make it out who will know the business - every in and out - with no gray areas. That's for sure. We got in, in 1989, and our philosophy was if we can do it now, we can do it anytime. And it's much harder now."

Duncan McIntosh, who edits and publishes several boating publications in California, including Sea Magazine, says some dealers have stopped selling new because they're unable to get floorplan financing.

"The builders, in some cases, haven't missed a beat and had other dealers to sell their brands," says McIntosh. But with fewer dealers left overall, that's not always the case. The small-boat market, in particular, McIntosh says, has been hard-hit in California - and those are the boats that sell inland.

"I think we're looking at a fairly long haul moving out of this," says McIntosh, who also produces boat shows. "I don't know if 2011 is going to be the turnaround or not. I can't speak for the rest of the country, but I know it's been particularly tough for the last year."

Repo glut

The marine industry on the West Coast took an additional hit when Olympic Boat Centers and Cope & McPhetres went out of business in 2008 and 2009. Both were large franchise operations and their failures flooded the market with repossessed vessels.

Cope & McPhetres' reach didn't stretch into the market area of San Diego-based M2O Marine Outfitters, but sales manager Ian Morton says the repossessed inventory affected the dealership, which sells Sanger, Correct Craft/Nautique, Yamaha and Hyperlite boats. For example, people were picking up MasterCraft's 24-foot X45 - a $100,000 unit - for $60,000, Morton says.

"I'm not going to sell a boat at cost," Morton says. "I'll buy it and sit on it for three years if I need to, but my policy is, I will not sell a boat at or below cost. If you start that way, you're going to end up that way."

Not all dealers have had the luxury of making that choice. The Southern California Marine Association is reluctant to estimate how many dealers have gone out of business, but Lieberman, who was president of the association for eight years, guesses that membership has halved.

"Probably 15 have gone under in Southern California and, if you count the performance guys, it's probably more than that," Lieberman says, counting dealers from San Diego to Bakersfield.

As is the case everywhere, some dealers have stopped ordering and selling new boats, but continue to store and service boats and, in some cases, sell used boats. Those dealers might have lost floorplan financing or didn't get the support they needed from struggling manufacturers.

Selling used and brokerage is now vital for dealers looking to stay in business, many say. "We don't have margins, but we have the volume and have less general expense in inventory," says Ray Jones, owner of Long Beach Yacht Sales. "We have about the same bottom line as if we sold new boats. The problem is we can't dial up the manufacturer and ask for red and green used boats."

A number of dealers have gone out of business, but that's to be expected with the sales declines, Basso says. "That piece of the pie shrunk five-fold. That's tough to deal with," he says.