Inventory control: Lenders lend a hand

Posted on Written by Reagan Haynes

They’re helping with floorplans and cash flow, hoping to avoid 1990s-type dealership failures

In light of an economic downturn, manufacturers and dealers are working in tandem with lenders to control and move inventory.

Lenders are helping dealers manage their floorplan lines. In some cases, lenders have been extending curtailment periods and, in others, they have been tightening internal operations, adding value to dealerships to increase profits and offering programs designed to lure new consumers.

Lenders are feverishly trying to avoid a crisis similar to what occurred in the early 1990s when about a quarter of all dealerships went out of business because they were carrying so many extra boats on their floorplans that they could not stay afloat.

Today, everyone involved seems to be managing inventory more effectively, said Jim Coburn, president of the National Marine Bankers Association and vice president of Flagstar Bank.

“You have to manage your business differently during a changed economic time like we’re having now, so I think some of them are doing an outstanding job managing their floorplan,” Coburn said. “From a big-picture standpoint, if you read Soundings [Trade Only] and the press releases, manufacturers are shutting factories, laying off workers and easing production to ease the number of boats going out on the market and hence, the number of boats in dealerships.

“Dealers are also doing a better job because they’re not ordering as many boats,” Coburn added.

Extending curtailment periods
GE Distribution Finance is one of the major floorplan financers for the marine industry.

To date, many GE dealers say this year’s business is off between 30 and 40 percent, according to Bruce Van Wagoner, president of GE Capital Solutions’ Marine group.

“Defaults [and] out of trusts are certainly at higher levels than they have been for the last several years,” Van Wagoner said in an e-mail. “However, we view this [as] a business cycle. Severity and frequency of defaults are what we are focused on managing.”

GE stays in close contact with customers, helping them work through cash flow projections and helping them understand inventory turns and aging in each region, Van Wagoner said. And the sooner dealers approach lenders about financial issues, the better. That’s because early on, there are more options for the dealership than later.

“We are focused on negotiating non-standard curtailment schedules when our customers are unable to stay current on their existing programs and have taken the steps to develop and share with us a modified business plan that makes sense for all parties involved,” Van Wagoner said.

“An ideal program meets the needs of our customer’s cash flow cycle and still aligns with depreciating collateral values,” he added.

But lenders can only extend curtailment so long because they have to protect their own interests, said Grant Skeens, president and chief executive officer at Key Recreation Lending.

“Certainly any lender has to balance the need to be flexible and realize sales are down,” Skeens said. “Key Bank has been in the business for 50 years and has been through ups and downs. We try to work with dealers, but of course there are dealers who aren’t going to make it.”

Key Bank also tries to be flexible with curtailment periods, Skeens said. “But we’ve got to make sure our interests are protected.”

Curtailment ensures the collateral the bank is dealing with is aligned with the value of the boat, Skeens explained.

“So if you’re lending for a specific boat that’s been on the line for a long time, it’s worth less,” Skeens said. “Typically you require a pay-down, a curtailment, to align the loan value with the asset value.”

That payment, or curtailment, is in addition to the interest a dealer already pays on the boat. For a dealer in trouble, that can be an added financial burden. That’s why the banks will sometimes allow an extension on the period required to make a curtailment pay-down, Skeens said.

“That unit now, maybe it’s a year older, and it     hasn’t sold, so it is worth less in the marketplace,” Skeens said. “That’s what lenders are trying to do — align what the lender has out to a dealer with the underlying collateral.”

When a lender is making the decision to extend    curtailment, it looks at profitability and quality of management first, Skeens said. Next, the lender assesses how much equity the dealer has in the dealership and how much net worth he has outside the dealership.

In situations “where it makes sense,” GE has also restructured loans for dealerships.

“It’s tough to give you an exact formula, but those are some of the factors we would take into account,” Skeens said.

Even from the outset, the underwriting process considers factors including economic, past sales, forecasted sales, geographic location and financial conditions, GE’s Van Wagoner said.

“The proper credit facility provides the dealer enough flexibility to meet stocking needs with some cushion for unexpected events, [like] pre-sold items, new lines, new opportunities,” Van Wagoner said. “Credit lines are adjusted based on need, conditions, collateral and dealers’ business forecast.”

Tightening operations
Another way lenders help dealerships is by tightening up on management as well as to better serve customers.

At GE, teams have been realigned internally around customer segments and have become more efficient to cut costs, Van Wagoner said.

“We have internally aligned deal teams, including sales, risk and operations, so that all functions are intimately familiar with their respective customers’ needs,” Van Wagoner said. “By working as a team, our customers’ needs are met on a more timely basis.”

In addition, GE is focusing on cost controls where the company can and has learned to how to run the business at a lower activity level, he said.

“We have taken a lean approach to all of our business processes and this has enabled us to properly align resources,” Van Wagoner said. “Proper resource alignment has made us more productive at a lower business level. We truly believe this belt-tightening focus on the customer and focus on internal efficiencies will pay dividends when the market returns to a more normal state.”

GE has also intensified its relationship with manufacturing partners, including Brunswick, Tracker, Yamaha, BRP and Suzuki, Van Wagoner said.

“When all channel partners work together to better understand the needs of the industry and take the time to understand the perspective of each partner, the industry becomes stronger and better suited to properly forecast channel inventory levels and product needs,” Van Wagoner said.

Adding value
Key Bank and GE are also offering products to better manage the business.

“Banks are always looking for ways to add value to what dealers are doing, to help make them more profitable,” Skeens said.

Key Bank dealers can use something called derivative products, which is a way for them to manage interest rates, Skeens said. Because rates have been historically low and it is the common belief that rates will rise, dealers can fix a certain portion of floorplan interest.

“We’ve had numerous clients in the recreation side of our business take advantage of that this year and last year,” Skeens said.

Dealers, in an automated way, can also pay down the floorplan line with excess cash they might have on hand, Skeens said. So instead of having cash sitting in an account earning a low rate of return, dealers can take that cash and pay down their floorplan line and reduce interest, which makes the dealer more profitable.

“As a progressive bank, we’ve got products like that to really help dealers,” Skeens said.

For “creditworthy dealers,” they can get a Key Capture Machine inside the operation. With that, any checks obtained from customers can be entered through these machines, which simultaneously scan the check and deposit the funds in the dealer’s Key account.

That allows for faster availability of funds to dealers, Skeens said.

GE is also offering its dealers new programs designed to help GE dealers generate cash flow and reduce debt service, Van Wagoner said.

One tool, called “cockpits,” is designed to help dealers benchmark their business to peer groups. They can help compare individual business performance and metrics of their choice to a specific market, geography or brand, Van Wagoner said.

“This tool is invaluable in the planning process and allows dealers to focus on the critical metrics they need to run their business,” Van Wagoner said. “We find that by comparing to peer groups, dealers are more inclined to reach out and share best practices.”

GE officials recently introduced a fractional program designed to help larger dealers bring more people into boating.

A fractional program is similar to a timeshare model, Van Wagoner said. In it, multiple users pay a dealer an upfront deposit and a monthly fee to utilize boats.

That not only helps dealers generate cash flow on units that may otherwise sit on their floorplan lines, Van Wagoner said, but it is also designed to hook new consumers into boating by conquering some of the hesitations they might have about the cost, time and convenience of boating.

“We are driving more people towards the boating lifestyle,” Van Wagoner said. “This product offering, as well as our new rental and pre-owned programs are all examples of how we are trying to help our customers with cash flow and helping to build a larger boating base.”

The marketplace today
At GE, dealers have been conservative with ordering, Van Wagoner said, but they remain cautiously optimistic that the worst is behind them.

“The next 60 days will certainly tell the story of 2008,” Van Wagoner said.

Dealers who have not paid close attention to inventory turn and associated inventory aging seem to be getting hit hardest by the down cycle, Van Wagoner said.

“We have always encouraged our customers to continuously evaluate and understand the selling cycle in their respective markets and to make certain they focus on inventory management,” he said.

“Inventory levels vary by geography and by dealer; however for the most part they are relatively high, considering current sales activity and adjusting downward to match the expected buying cycle,” Van Wagoner added. “As expected, order patterns are light in response to uncertain market conditions as dealers prepare for the offseason and consider inventory levels and associated debt service should the market recovery take an extended time.”

That’s unlike the crisis in the 1990s, which left many dealers in trouble, overloaded with inventory and mired in debt.

“The marine business today is much different than the market of the early ’90s,” Van Wagoner said. “It would appear our dealer and manufacturer partners have done a good job in focusing on channel pull and on managing the pipeline and we feel this action has helped the industry in total.”

Thom Dammrich, president of the National Marine Manufacturers Association, agreed.

“I think the industry has gotten much better at managing field inventory; manufacturers slowed production much sooner,” Dammrich said. “There are probably a few dealers out there who have more inventory than they’d like, but I’d say most dealers aren’t carrying more inventory than they can handle right now.”

In the early 1990s, the prevailing practice for manufacturers was to continue pumping out product, putting it out in the field and stuffing the pipeline, regardless of economic factors, Dammrich said.

“When it didn’t sell, dealers would go under, and sometimes manufacturers would go under,” Dammrich said. “Everybody is managing this inventory much better than they did 20 years ago, or even 10 years ago.”

Today, manufacturers talk closely with dealers, and they stopped requiring them to take inventory they cannot handle, Dammrich said. Some are even offering assistance on interest for dealers who have more inventory than they can move.

“It’s in their best interests to keep dealers in business and handling this downturn,” he said.

Other manufacturers are providing incentives to help dealers sell the boats they have, Dammrich said.
“I’ve talked to several manufacturers who say, ‘There has never been a better time to buy my brand of boat because of the deals we’re offering to consumers,’” he said.

But this cycle is also different than the early ’90s because of the added issues of high fuel prices and declining home values, Skeens said.

“It seems to sort of be the one-two punch that really keeps buyers on the sidelines,” Skeens said. “The good news of late is we’ve seen fuel prices start to come back.”

GE sees this time as an adjustment period and, in most cases, an opportunity to align resources and to increase market share.

“Like all industries — marine being no exception — these cycles are a part of the normal industry life cycle and typically those businesses that retrench and focus on operating efficiencies, customer service, inventory management and cash flow, will come out much stronger and much better positioned to take advantage of the market upswing,” Van Wagoner said.

“I suspect we’ll see a fallout from the dealer perspective as well as from a manufacturer perspective,” Skeens said.

Already it’s come from manufacturers, who are laying off employees, closing factories, and giving extra time off production in the summer because there are already enough boats out there.

“If you take a step back, one of the questions the industry has to ask itself is, ‘What is right number of dealers? How many should there be in a given space? What is the right number of manufacturers?’” Skeens said.

“I think the outcome of this downturn will be, in the end, fewer manufacturers, and fewer brands of boats … and as far as dealers go, I think there will be fewer dealers.”

This article originally appeared in the September 2008 issue.

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