A bigger slice of the pie

Posted on Written by Reagan Haynes

pieDealers who survived the recession have learned its lessons and diversified

The marine industry has been hearing a lot about a “new normal,” but only in recent months has there been some idea of what that looks like to dealers.

There are fewer dealers than in 2007 — the numbers floating around indicate about 35 or 40 percent fewer — and although people aren’t turning out in droves to buy boats, dealers appear to be realizing the fruits of the discipline imposed on them by what many have called the industry’s most brutal recession ever. “Dealers have been very positive about what’s going on out there,” says Matt Gruhn, president of the Marine Retailers Association of the Americas.

There has been an uptick in sales, although data show that the increase is modest — about 10 percent in a market that remains drastically reduced from prerecession levels. “But I think what we don’t understand always is that’s 10 percent up over a market that’s got fewer dealers, so the dealers themselves are seeing greater growth individually because there’s fewer dealers to do that business,” Gruhn says.

gruhnThe good news this year is that the strong spring start held its momentum, he says. Although the industry saw a small lull after an unseasonably warm spring that led to an early launch to the boating season, the market rebounded despite disappointing jobs and economic growth reports, he says. “In the past few years we’ve seen buildup to Memorial Day, and then everything levels off, and I don’t think we saw that this year,” Gruhn says. “Dealers continued pushing hard through the Fourth of July. Now it will just be a matter of seeing if that momentum continues. I’ve heard from some dealers that they’re having their best year ever, and that’s just incredible.”

A genuinely strong industry rebound will come only with the return of a thriving housing market, says Joe Lewis, owner of the Mount Dora Boating Center and Marina in Florida. “But having said that, we had our strongest second quarter … in six years in terms of dropping dollars to the bottom line,” he says.

The new normal

After the most painful period of the recession had passed, one dealer remarked that he wished he’d known how to operate as efficiently when times were good. “What we’re seeing with this uptick is they’re still running lean and efficient businesses that allow them to maximize profitability,” Gruhn says.

Prior to the recession, dealers relied heavily on new-boat sales, he explains. “What the recession taught them was they have to profit from service — figure out a way to profit from parts or F&I or rentals. Basically, they needed to diversify,” he says. “Those who were able to do that came out of this much stronger, and the opportunities they have today are much greater than they would be if they hadn’t. I think that plays into the upside that dealers are feeling today.”

The recession also brought with it another “new normal.” Just a few years ago manufacturers dictated how much inventory dealers would take. Now dealers call more of the shots. “The former model was a push strategy,” says Larry Russo, owner of Russo Marine, which has three Boston-area locations. “Manufacturers would push product on dealers, and because there was enough demand, they could push it. If you didn’t take X number of boats they’d go to another dealer.”

pie2Now things are different because the recession left a glut of inventory that choked the pipeline for a couple of years, Russo says. “The dealer becomes king,” he says. “Manufacturers can no longer push product on the dealer. If it’s not good enough for you, where else are you going to go? Now dealers can say, I can take X, not double X or triple X. It went 180 degrees the other way.”  The only thing that will shift that power balance is when consumer demand increases and manufacturers think they can be more demanding, Russo says.

Gruhn believes one positive that emerged from the recession is that dealers and manufacturers now recognize they have to work as partners. “We have a more collaborative approach to how the industry is operating, and it was a very valuable lesson that has proven to be very effective,” he says.

And perhaps a smaller number of boat dealers is not a bad thing, says Thom Dammrich, president of the National Marine Manufacturers Association. “To tell you the truth, I don’t know how many more dealerships we need,” he says. “We had too many and lost 30 to 40 percent of them. Do we have the right amount, too many, not enough? I don’t know, but it’s probably healthier from the dealer perspective.”

That dynamic will be around for a while, Dammrich says — at least until sales pick up more significantly and new dealers are attracted to the field.

Being ‘growth-oriented’

Because luxury industries were the hardest hit, Gruhn believes it will be a while before entrepreneurs decide to jump back into industries such as boating. “I don’t think people are rushing to get in, which bodes well for our business as it is today,” Gruhn says.

When they do try to break in, startup dealers will have a harder time gaining a foothold than in the past, Russo says. “I don’t see new money coming in and opening up new businesses,” he says. “I see dealers like mine and others that are clearly and firmly established in their markets making sure that doesn’t happen.”

Surviving dealers have had time to position themselves for the brands they cover, and they will continue to add brands or add locations where it’s appropriate, Russo says. “I think the ones who have survived are going to be bold. They are going to get bigger. They’ll have more brands, more territory, more clout.”

Manufacturers want dealers that are growth-oriented because the builders are growth-oriented, Russo says. “As manufacturers come out with growth strategies, they want to find dealers who mirror those growth strategies. If not, they find other dealers, and that creates more competition for me, and I’m not going to let that happen,” he says.

Those growth opportunities, however, require a sensible approach. “I’m not going to buy a dealership in Cleveland because it’s cheap,” Russo says. “I’m going to expand in our market as opportunities present themselves.”

Market access

If there are 40 percent fewer dealers, roughly the same number of manufacturers and no new entrants in the boat-selling business, the question arises: How are builders finding access to their target markets?

Dammrich doubts that there will be any significant increase in factory-direct sales. “There are certain markets where the number of dealers left is really small, and they can’t possibly carry all the lines that want to be in that market,” he says. “There are some markets where manufacturers are having trouble and can’t find a dealer, but I think as demand in those markets improves, new business will be drawn in.

“I would say there are a number of manufacturers that don’t have distribution in markets they want to be in, but there just aren’t dealers available,” Dammrich says.

pie3Many wonder whether that dynamic will lead to more manufacturers leaving the industry; so far, the number bandied about is that about 10 percent have disappeared since the recession began.

The need for market access could create new partnerships between builders, Russo says. “It’s incumbent on them to figure out how to go to market or cease to do business in that market,” he says. “And overall, it’s a smaller marketplace, so they have to adjust or die.” However, many of the builders carry little debt burden and are able to stop or slow production until orders roll in, he says.

“I think most — certainly not all, but I think most — [builders] who are still in business today have found a way to make money at these levels of industry sales and are probably going to be around,” Dammrich agrees. “Just because you don’t have a dealer in one or two markets you’d like to be in doesn’t mean you’re not doing well in other markets.”

It would behoove builders to pitch a dealership model to private investors, Lewis says. “If there’s a well-established market with five or six dealers with lines that are all doing well, what’s the incentive to get them to take on a new product line?” he asks. “The builder’s got to figure out a way into that market or lose that market.”

Those builders will have to move or risk losing those markets for good, Lewis says. “I think some are frozen out of some markets, and I think they’re waiting on the sidelines but not by choice,” he says. “Short of consigning product, what can they really do to get their product on the floor?”

More dealerships will emerge when sales grow, but existing dealers will have the jump on them, Lewis says.

There are few businesses that go hand in hand with boat dealerships. At one time mom-and-pop gas stations serviced and sold boats, but the big franchise operations have taken them over, Lewis says. Car dealerships have split from boat sales, so any new boat dealers essentially would be starting fresh.

“When we get stronger the manufacturers get stronger, and then they’re dealing with one entity rather than two or three to cover a region,” Russo says. “Manufacturers are going to want to do business with dealers they know and trust. Why would they want to … gamble on new money coming in?”

With a presidential election on the horizon and continuing weak economic reports, the industry has not given a lot of thought to new dealers entering the arena. In December there will be a vote to increase the national debt ceiling, Dammrich points out. Bush-era tax cuts are ending, and a sequestration of government spending (massive spending cuts that will automatically kick in as a result of last year’s budget agreement) looms. “If all those things happen, we’ll head back into recession,” Dammrich warns. “People are paralyzed by the inability of Washington to get the right policies in place. I don’t think it will happen, but the fact that everything gets solved at the 11th hour makes people nervous.

“But the amazing thing is that in spite of all that, boats are selling,” he says. “Sales are up this year. Most dealers are doing pretty good business because a lot of competition has gone out of the marketplace, so they’re selling more of what’s being sold.”

This article originally appeared in the September 2012 issue.

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