Leaving troubled times behindPosted on Written by Reagan Haynes
Dealers start to see improved sales as customers decide to hit the water despite uncertain economy
Boaters have had enough bad news, and that’s a perfect reason to get out on the water. That seems to be the conclusion of some of the big names in the industry, who say that despite lingering economic uncertainty — or maybe because of it — boaters are turning back to their getaway of choice.
For the third year in a row, the economy started strong in January, then began to show signs of weakening just as boating season got under way. But reports indicate the rebound in boat sales remains steady despite disappointing job numbers this spring.
Although pundits continue to fret about the possibility of a double-dip recession and threats of insolvency in the eurozone, articles have been springing up in local newspapers around the country with headlines similar to this late-May article in the Toledo (Ohio) Blade: “Recreational boat dealers buoyed by rise in area sales.”
The condensed version of the marine industry that has come to be known as “the new normal” continues to shape the way both manufacturers and dealers do business, but for the first time in years, an unfeigned sense of measured optimism for the industry seems to run through discussions of all things economic.
Sales are still down significantly from where they were in 2007 at Grand Banks Yachts, but there is still “an upward trend,” says spokesman David Hensel.
“In the past few years, there’s been a stronger start to the year and then a major dropoff,” says Hensel. “This year, it’s more like a strong start, and then our typical seasonal dropoff, not like things falling off the edge of a cliff.”
“We’re starting from smaller baseline, but at the same time, I think we’re all a little more optimistic than we’ve been in the past,” Hensel says. “We’ve got some new models, a lot of phones ringing and people saying the right things, and people buying boats that haven’t even been built yet. That’s always a good sign.”
From the tsunami in Japan to a succession of European debt crises, spring — prime boat-buying season — has been dominated in recent years by the type of news that undermines consumer confidence. This year the eurozone’s struggles accompanied disappointing U.S. employment numbers and concern that JPMorgan Chase had lost more than $2 billion in derivatives trading, the practice that many believe launched the Great Recession.
Consumer spending edged up modestly in April, but personal income growth was the slowest in five months, raising concerns about the ability and/or willingness of Americans to keep spending in the future. Spending rose 0.3 percent in April, according to the Commerce Department, but the 0.2 percent income growth in that month was the worst showing since November’s 0.1 percent rise.
“When you go through a couple of years where it starts off strong and just as you get into the summer season, things completely extraneous to the boating industry happen that cause the whole consumer body to become more cautious, it leads you to be cautious in your business,” says Thom Dammrich, president of the National Marine Manufacturers Association.
“This year we’ve got a recession in Europe, and Greece is in the headlines, and Congress is incapable of doing anything, which may actually be good news,” Dammrich says. “But I think that this is not going to repeat itself every year for next 10 years.”
“We as businesses simply need to be aware of what’s going on with the greater economy,” says Matt Gruhn, president of the Marine Retailers Association of America.
If there is a cyclical trend for recovery and confidence to slump in the spring, then the industry should adjust business cycles accordingly, Gruhn says.
In spite of the bad news, boat show leads continue to translate into sales for dealers, Gruhn says.
“With the slow recovery here in the U.S., and the conditions of markets in the last five years and owners waiting on the sidelines, I think there are some real opportunities, and we are continuing to invest in new models,” Hensel says.
Boston-area Russo Marine is also cashing in on opportunities, says owner Larry Russo.
“Greece has not come up in conversation with anybody I know,” says Russo. “They don’t come here to talk about that stuff, they come here to get away from that stuff. That’s what we’re in the business of doing — talking about something fun. We’re not here to talk about Greece, or Obama or super PACs, we’re here to sell fun.”
An encouraging study
The economy isn’t coming back as quickly as it deteriorated, but it is getting better, says Russo.
“It took three months to collapse and now it’s been three years. And it’s not coming back quickly,” Russo says. “But there’s no room for agonizing and moaning about circumstances. You’ve got to plan your business around the existing circumstances.”
To that end, the marine industry is trumpeting its economic clout. The NMMA and the Western Governors’ Association, along with other outdoor industry groups, released a study in June showing that outdoor recreation is an overlooked economic giant, with $646 billion in national sales and services in 2011 — nearly twice the size of the pharmaceutical industry.
The NMMA plans to continue the analysis and release state-by-state data on the overall impact of outdoor recreation to create more leverage with policymakers.
A partnership between the NMMA and the Department of Commerce was formed to increase boat exports. The boat business is one of the few industries that posts positive trade balance numbers.
Some say the lingering downturn could have lasting effects on consumer spending.
“I think people bounce back from a normal downturn pretty quickly, [but] this was not a normal downturn,” says Dammrich. “This was the Great Recession, the biggest downturn since the Great Depression. My parents were Depression-era babies and they were affected the rest of their lives. It’s possible this recession is going to shape people’s psyches for decades.
“But I do think as the economy continues to improve and unemployment continues to drop and confidence continues to build that the consumer will spend more on boating,” Dammrich adds. “People will gradually become more confident and less cautious, but I don’t think we’ll ever return back to how it was in the mid-2000s. It wasn’t as bad as the Depression, so the aftereffect isn’t going to be as bad, but people will not forget this downturn for the rest of their lives.”
Bill Yeargin, president and CEO of Correct Craft, agrees.
“When consumer confidence returns, so will many boat buyers,” says Yeargin. “However, I do think many people have changed their mindset for the long-term.”
If you study the segment of the boating population that has been hurt the most by the recession, “It’s not about boating to them, it’s about a lifestyle,” Russo says. “It’s about how they became over-consumers. They were on a roll in the ’90s and 2000s. They had upwardly mobile income, they moved up in their dwelling or built a big addition, and bought a boat.”
When the housing bubble burst, many of those people were upside down on the houses they’d leveraged to buy a boat or pay for college or a summer home, Russo says.
“They were just living on a financial bubble,” he says, “and as long as our economy would keep chugging along, they would’ve been just fine. But when we had the meltdown, they didn’t have any equity.”
The good news is that the recovery starts at the top and those people are buying again, says Russo.
“The people with the most money feel better and that’s indicative of what is selling and what has been selling over the last six or seven months now,” Russo says. “The large-boat activity comes from the high-dollar, high-net-worth people who’ve been sitting on the sidelines. They’re not financially dependent on credit.”
The other segment doing well is boats under $75,000, Russo says. It’s the segment between $100,000 and $250,000 that’s still paralyzed because that is the credit-challenged sector of the customer base, he says.
“It’s the person in his 40s, with a family and debts and mortgages — he’s not equipped credit-wise,” Russo says. “They’re in what they owned in the summer of 2008. That was the sweet spot in the powerboat business — cruisers and powerboats between 24 and 40 feet — it was the aspirational segment. We’re not seeing the movement in the middle of that segment like in the rest of the industry.”
News and elections
If cable television created an environment of non-stop news, the Internet has put it on steroids.
News outlets compete with one another via Twitter, feeding 140-character updates sometimes faster than news is breaking, leading to several infamous errors.
The coverage of each event as it happens — from economic turmoil in Greece to every jab members of Congress take at one another over raising the debt ceiling — has instituted a new level of drama to just about anything that makes news in the moment, says Hunter Marine Corp. president John Peterson.
“One moment things are crumbling, and then three hours later, they’re fine, but then three hours later, they’re crumbling again,” Peterson says. “All of that [affects] the confidence level of the public. It used to be that we weren’t privy to the blow-by-blow, and by the time the 5 o’clock news came on, a lot of it had sorted itself out.”
“It all gets magnified,” Hensel agrees. “We talk about jobs numbers and now there’s new import to it because of not only what it means for the economy, but what it means politically. It raises the volume of discourse about these numbers beyond employment.”
Election years have always been a challenge for the boating industry. The uncertainty over who will move into the presidency is always a psychological issue for consumers.
This election season, super PACs — political action committees — have introduced a new scale of money to the process, which effectively has given both parties much bigger pulpits from which to shout.
Some say the extreme polarization feeds bias and consumer fears.
“I think as Americans, we have an obligation to listen and participate,” says Russo. “But you have to be very careful about which media outlet you make your favorite, because it’s all slanted one way or another. There’s no middle ground.”
Does it matter who occupies the White House? Some say the impact of presidential policy on personal finances is more psychological than real. But exaggerated or not, they say, perceptions do color consumer attitudes.
On the dealer side, those who have survived the bad times have diversified and become more profitable all the way around, says Gruhn.
“Historically dealers were able to rely on new-boat sales alone and use that to basically make up all their profitability and use that to boost all their other departments, but today I think dealers are a lot stronger and more well-rounded, and more profitable in other areas,” he says. “They’re stronger, smarter and more efficient than ever. With that in mind, they’re well-positioned for what the economy has in store for them.”
As for the people who are choosing to go boating again, “They’re allowing us to make money,” Russo says. “Margins have returned to prerecession levels and we’ve all learned how to take unnecessary expense out of our businesses.”
The lessons learned from the pain of the last three years were so difficult they won’t be forgotten, says Gruhn.
“We can’t overstock ourselves on inventory, we have to be diversified, we have to run profitable businesses all the way around, and we can’t get ourselves into debt all the way around,” he says.
“People got burned pretty badly in this last recession and that memory will not fade quickly,” Dammrich says. “But the other side of that coin is, I think right now new-boat inventories at dealerships are probably lower than they should be because of excessive caution. Dealers and manufacturers are going to miss sales because dealers won’t have product available and [consumers] will go somewhere else where product is available. But frankly I think people are in the mindset where they’d rather lose a sale because they don’t have enough product rather than get stuck with excess.”
Builders also have to get creative, Peterson says. As president of a company undergoing a Chapter 11 restructuring, Peterson says he’s learned that manufacturing must be consolidated in order to be profitable in a time of vastly decreased market demand.
He points to the beer industry as being a good example of out-of-the-box thinking in terms of production. Pabst Blue Ribbon owns 26 brands, from Schlitz to Lone Star, and brews it all in only two plants, Peterson says. At one time, those 26 brands had been produced in 42 factories.
“Maybe the marine industry’s got to learn something from that,” says Peterson. “We can have different brands and maintain unique features of each brand, all being made under one roof. It may lead to some unique situations with shared facilities.”
For example, Hunter Marine’s Florida plant is growing its business of manufacturing fiberglass and non-fiberglass enclosures for golf carts, which are increasingly used as a mode of transportation in retirement communities, Peterson says. “It’s not a big volume,” he concedes, “but it’s 300 percent what it was a year ago, and we’d like to continue growing that.”
Fuel and weather
The biggest clichés about boat-buying season hold true today, and the good news is they’ve been favorable.
“Boating is very weather-dependent, not only in use but in purchase consideration,” says Russo. “We had a very mild winter, and summer-like weather in early spring. On top of that, we have not only a stabilization but a reduction in the price of gasoline, and that’s always one of top things people talk about when deciding whether to buy a boat.”
Russo doesn’t think those things have an overwhelming influence on people’s boat-buying decisions, but they do help put consumers in the right frame of mind, which in part explains why business is “dramatically better” than last year.
The early summer has helped give Correct Craft a boost, too, says Yeargin. “It is too early to know if we have incremental sales this year, or if the sales have just been moved up because of the weather,” he says. “At Nautique we are very pleased with our retail sales the first few months of 2012.”
There are growing numbers of boaters hitting the water and an aging fleet of boats — two factors that should prove positive for the industry, says Dammrich.
Boating participation had grown until about 1987 and then went into a decade or so of decline, Dammrich points out. During the last four or five years, it has begun growing again, he says.
“A hypothesis I have — and I have no data to support this — is that there’s a lag between participation and boat sales,” Dammrich says. “As participation is declining, boat sales are still growing initially, but we’re introducing fewer and fewer people to boating the lifestyle so sales eventually begin to follow. As we look into the future, increasing boat participation should lead us to growing sales.”
In 1998, the average age of a boat was 16 years, says Dammrich. Today, it’s 21 years.
As boats approach 25 years of age, their market value is minimal, Dammrich says. The retirement of more boats should lead to a surge in new-boat sales, he adds.
One of the biggest problems the industry needs to address — and Dammrich admits he’s not sure how — is support for the inexperienced boat owner.
“Most people who get into boating as first-time boat buyers buy a pre-owned boat driveway-to-driveway, so they don’t have dealer support, and may not have a lot of knowledge, and aren’t yet part of a boating community,” Dammrich says. “The turnover is very high.”
The industry also needs to reach out to minorities and youth, Dammrich says.
“We really need to get the whole industry on board with the whole ‘Welcome to the Water’ movement,” he says. “We need to demonstrate to the industry the significant business opportunity that they will miss if they don’t reach out to minorities and youth.”
This article originally appeared in the July 2012 issue.