Remarkably unsinkablePosted on Written by Reagan Haynes
After the banking collapse in 2008, the number of boat dealerships shrank dramatically. Within months, roughly 35 percent had left the business, as floorplan loans dwindled and in some cases vanished. The bottom also dropped out quickly on boat sales, which fell to roughly half of prerecession levels before bottoming out in 2010.
There are no data on dealerships, but some observers estimate that as many as 40 percent left the industry. Similarly, sales of new powerboats 15 feet and larger plunged from 243,200 in 2007 to 118,400 at the market’s bottom in 2010, according to Info-Link, the Miami-based market research and analytics firm. By contrast, total new boats sold in the four years prior to the downturn fluctuated only by about 45,000 units.
It’s a different story with boatbuilders; there are about 10 percent fewer. The number went from 1,136 in 2007 to 1,005 in 2011, according to the National Marine Manufacturers Association. The numbers suggest that the manufacturing side of the industry has not suffered as much as others, but that could be misleading. Builders continue to enter restructuring and bankruptcy, or sell companies on what seems like a regular basis five years after the financial crisis.
Although the attrition in sales and dealers happened swiftly, the trading and buying and restructuring of brands seems more akin to a slow bleed. And every time it seems that a brand has finally been left to die, it is resurrected by another builder or investor.
With a pie half the size it used to be, fewer dealers to sell the boats and 1,000-plus builders competing for slivers of market share, it would seem that more manufacturers will find themselves forced out. The longer the post-recession trudge dragged on, the more confident people became that there would be a gradual shift to more consolidation or that more builders would file for restructuring and finally disappear.
There are several reasons so many remain in business, but most observers agree that the staying power is attributable to one key factor: boats are a labor of love. James Henderson, CEO of the Ferretti Group for the Americas, says small builders may linger, but he thinks larger companies will continue to grab the bulk of the market. “If you look at pure volume of sales and look at boats under production and value production, I think you would see that the large manufacturers have a large proportion of the industry,” he says.
Bryant Boats chairman John Dorton says low-production, family-owned niche builders will ultimately prevail as long as they continue to deliver innovative product that appeals to their base. “I’m a Six Sigma Lean Manufacturing Black Belt, but I’m at the point where I want to slow down and design smarter, prettier boats,” he says. “That’s how you’re going to win the game. You can’t find as many efficiencies at a lower volume that have any significant impact, yet a lot of companies are spending a lot of money trying to find that solution. There are a lot of efficiency exercises being used today that are cheapening the product.”
“There has to be a day of reckoning. It’s just been a slow death rather than a quick death,” says John Buettner, who co-owns California-based Stan Miller Yachts with his brother, Brad. “I would have predicted half the industry would be gone by now.”
“It’s mind-boggling,” agrees Jack Ellis, managing director of Info-Link. “We hear that close to half the dealers went out of business, and there are still so many companies struggling, but you could count on one hand the number of builders that left.”
Larry Russo, owner of Boston-based Russo Marine, says he’s surprised the “lumbering” recovery hasn’t prompted more to close up shop. “Where’s the breaking point for manufacturers to say, ‘I can no longer secure enough orders to cover my overhead. I don’t see the economy turning around.’ When’s it going to happen? It should’ve happened by now.”
Compounding the issue, European builders are increasing their push in America as their own economies face even deeper challenges. “We think we’re bumping along at the bottom, but then the Europeans look this way out of desperation. They went into their downturn later than us, but they went into it deeper,” says Scot West of Ronstan, the sailboat hardware manufacturer.
Boatbuilders will turn their companies back on to build one boat, a phenomenon that brings the powerboating business closer to the dynamic that has existed for some time in sailing, West says. “I think a lot of guys whose buildings are paid for, they know they’ve done reasonably well in the marine industry, even though it was a long time ago,” he says. “They feel like they made a ton of money 20 years ago, paid for the building, and as long as they can ramp staff up and down, there’s very little overhead.”
That dynamic is exactly what makes builders able to endure this slump longer than in past recessions despite the much longer aftermath, says Bentley Collins, who is in charge of marketing and branding for Maine-based Sabre Yachts and Back Cove Yachts. “The majority of builders that were lucky enough to be in business in the ’90s, they have paid off their buildings. In previous recessions everyone had too much debt. In this recession, builders have no debt.”
They’ve also gotten more efficient, Henderson says. “We have the ability to capitalize on economies of scale,” he says. “But it amazes me how smaller yachting companies really survive.”
With a storage shed and some basic equipment, anyone can build a boat, Ellis says. “I’ve got a neighbor who builds sportfish boats,” he says. “He’s got plenty of money but just decided to build himself and some family members a boat, and then people started asking where they came from. So suddenly he’s a boatbuilder.”
All the technology a builder needs is available “off the shelves,” says Constantinos Constantinou, president of Greenline Yachts, which are produced in Slovenia and Italy by The Seaway Group. “To set up a marine manufacturing facility, there is no capital requirement because the fixed investment is very low. Probably 90 percent of the tools you use are hand tools. Some will invest in some routers or robotic cutters, but it’s not necessary, especially in a low-volume environment. This is also what enables a brand to suspend production in the market. The impact they have from capital exposure is very small.”
The scalable model makes it fairly easy for manufacturers to make money, Constantinou says. “Because it’s such a scalable model, there are no huge forces that are going to drive financial consolidation,” he says. “It’s always been a challenge to have an exit strategy in our business, whether you’re a builder or a dealer. If you’re part of a larger group, exit becomes much easier, especially if you’re publicly traded.”
That seems true for the Brunswick Boat Group. In late 2007, Brunswick had 23 brands; it now has 15, including four that are exclusively marketed outside the United States.
One of the brands Brunswick shed after discontinuing it domestically was U.K.-based Sealine. The brand was bought by an investment firm that relaunched it in the American market before its parent company went through receivership (the British version of bankruptcy). Creditors of Sealine America forced the company into involuntary liquidation, a process that is still playing out in court. Rights to the European parent company and some of the models were bought by Hanse Group.
Brunswick also has discontinued several brands, including Maxum and its Bluewater Marine brands, which consisted of Sea Pro, Sea Boss, Palmetto and Laguna. In 2010, Brunswick president Andy Graves told Trade Only he thought more brands could fall, but he also said the stress they were enduring might not translate into closings.
“I think the industry does need fewer brands,” he said. “We’re in a market half the size, but we have a lot of small builders who are still out there because they’re passionate about the industry, and they’re staying in it.”
A Brunswick study showed then that of the top 300 boat brands — those that produced 95 percent of the industry’s boats in 2005 — only 10 had gone completely under by 2009. The remainder still existed, although some were under new owners. “The question is whether investors are willing to enter” to save the struggling companies, Graves said.
That was after Platinum Equity had acquired several brands from the Genmar bankruptcy and also wound up buying Triton Boats from Brunswick. Early last August, Brunswick sold its Hatteras and Cabo brands to an affiliate of Philadelphia-based Versa Capital.
Pennies on the dollar
Given the pressure on investors to sell quickly and turn big profits, some wonder, why boats? “I think equity guys that do have an interest in the segment like the sex appeal of boating,” Dorton says. “When they’re evaluating different deals, such as a concrete vendor or a knife manufacturing facility, when they see a nice offering on a boat company, it’s a lot more exciting, especially if they’re boaters.”
Dorton got firsthand experience with seven equity groups as MasterCraft’s CEO. “My early equity experience was during a time of great growth, so returns were much better for investors,” he says. “It was much easier for us to navigate through their expectations during those financial times. I think the unfortunate downturn in the industry during 2008 and 2009 reset the value of marine companies. Today, to get returns they’re seeing in other industries requires growth that the industry’s just not experiencing.”
However, the drop in market value might make those investments attractive to investors looking to buy companies low and turn a profit. “The rate of growth is not what investors are used to, so they might be trying to get more of a return from efficiency gains and operational gains, or operational synergies,” he says. “That can be hard to do in a highly customized, low-production environment like most manufacturers produce in. You have increased costs from your vendors because they are experiencing less volume, so they’re not able to pass any efficiency gains on to you. And you have a consumer trained to shop for the best price and get extreme bargains, so that just makes things much more difficult.”
Dorton believes there is merit in investing in a lower-production company where low debt loads and lower overhead make it easier to be profitable. “You can run a lot of these companies with a very low break-even point,” he says. “I believe it’s easier to significantly increase the enterprise value of a smaller company in this market cycle than a large one.”
The low price on the brands probably also appeals to investors, Constantinou says. “At the end of the day, a brand is an incredibly valuable component of a boat business,” he says. “That’s essentially the value of what somebody’s selling.”
Back from the ashes
It’s not just investors snapping up defunct or discounted boat businesses. OEMs that are building below capacity want to add revenue streams and also have been buying brands. From an OEM perspective, the factory doesn’t care “what sticker’s on the brand,” Dorton says. By adding another line, a builder just wants to fill vacant capacity. “Volume has a tremendous impact on our business and to labor,” he says. “There are a lot of happy advantages to that. At low volume, there’s very little that all the lean manufacturers and efficiency gains can yield.”
Collins agrees. “The reality is there is a lot of capacity,” he says. “Too much capacity can be a bad thing for builders because the more hours we all put through our shops, the better off we all are. The burden of shop costs and all the associated expenses spread over more units helps keep builders healthy. Healthy builders will be there for clients’ warranty issues, and they will build new models and carry the brand forward. So the question is how much cash do you need to have to build and sell new models? You could buy all the names in the world. You could do all the buying you want. It’s just not going to go anywhere unless you build some boats. That’s where the rubber meets the road.”
The marine industry has always been this way, Russo says. “People have a romance with a brand, and they can’t let it die,” he says. “Maybe some of it’s ego, and some of it is opportunity. If a builder or private equity group makes an investment that costs basically nothing, they have little to lose. If it upturns, great. If not, basically they didn’t lose anything. But even after a merger or acquisition the brand stays because of the brand equity. But it has brand equity with an aging audience. What’s going to be the magic with the new owners? What happened to the old stigma that a bankrupt company wasn’t worth anything?”
Collins says that perspective is naive. “It is a mistake, in my opinion, to assume that a builder can get back into business after a meltdown,” he says. “Let’s face it, old models are old models, and they don’t sell. New models with new technologies do sell. So if someone picks up a set of old tooling and tries to restart a brand, they will invariably fail again.
“Every time I read an article about a comeback I think to myself that this is another failure waiting to happen,” he says. “It costs at least $1 million to introduce a truly new model that will compete in the marketplace. People who buy old tooling are throwing their money away unless they buy a good brand and are willing to make considerable investments to add to the range.”
Technology will play a role in how things continue to play out, Constantinou says. “We’re witnessing a lot of changes and shifts in our industry, and there does come a point where a product becomes obsolete if it does not reinvent itself and it does not stay in step with the times and stay forward-thinking,” he says. “Those companies that become stale will be sidelined and marginalized, and the brand will lose worth.”
There is no direct correlation between dealer attrition and manufacturer attrition in the number of survivors, Russo says. But there is a closer correlation when accounting for that unused capacity. “You might have a brand that doesn’t disappear, but it’s been downsized by 90 percent,” he says. “Some formerly high-production boat businesses are going to turn into boutique builders.”
There is a top manufacturing tier that has most of the industry’s volume, Hen derson agrees. “Then you have a tier of smaller niche manufacturers that have followings of some people who are very passionate about the brand,” he says. “You don’t need to build that many products to survive. I think that’s why there are so many manufacturers out there.”
Says Dorton: “This is an industry where it’s decided at the showroom. The person buys a boat not based on how many are sold. He buys the best boat — the most innovative, most comfortable, best-styled boat — that fits his needs. That’s where every brand stands on equal ground, in the showroom. The smart boat wins the customers.”
Slowing the process to compete in what he calls a “small cottage industry” helps distinguish a brand. “That’s completely the Bryant story,” he says. “That’s really attractive for the hardcore boater. Many of them would rather not buy a boat from a multi-conglomerate corporation, and that’s another reason why some of the smaller brands just don’t go away.”
Market access and factory-direct
Building the boat is one thing, and selling it is another. Builders are competing for dealers in a way they did not previously have to, and dealers who are looking to increase their revenue are taking on additional lines, Russo says. “Pre-recession, I was selling two brands. Now I’m selling five. Why? I had the opportunity, and I also had the resources to add more brands to create more traffic to increase my volume,” he says. “Most dealers have added a brand or two. We all needed to with the overall shrinking of sales.”
Evinrude product manager Jason Eckman says he sees the same trend occurring. “There’s definitely a lot of pressure on brands that often end up in the same dealership,” he says. “You have multiple brands sometimes competing in the same dealership. It’s the same thing for outboards as boat brands. Within a region, the competition between brands is very competitive.”
As a result, some brands have moved to a factory-direct model. “Some don’t have dealer distribution because they don’t build boats for inventory,” Russo says. “As a dealer, I can diversify at the drop of a hat. I can ramp up service, storage, parts and accessories, brokerage, financing, consignment, restorations. I can take on other lines. Manufacturers can’t do that.” And eliminating dealer margins is a way for them to reduce prices.
“We’ve seen guys that have gone customer-direct like Hinckley, Intrepid or Hunt Yachts,” Constantinou says. “They have a very small network but have always sold customer-direct. I don’t think we’ve seen the end of where this is heading.”
A labor of love
Dorton and Russo wonder whether more builders will exit once some of them reach retirement age. “There are a lot of owners in their 60s and 70s. When they stop showing up, where will those companies go?” Russo says. “If history repeats itself, someone will come and pay 10 cents on the dollar and open the doors.”
“I think we’ll see further contraction,” Dorton says. “It won’t be dramatic, and I think a lot of it will be driven by the aging out of manufacturers. They’ll retire, and no one will want to or be capable of taking over.”
Slim profit margins might dissuade subsequent generations from wanting to take the helm. “My instinct would be that people will quit buying them, but like everyone, I’ve been surprised so far,” he says.
The small manufacturers remain because they’re proud of what they do, and they’re good at what they do, Henderson says. “Some businesses are owned by people who are willing to build products in a niche market just because they love it,” he says. “It’s their life, and it’s what they’re used to. We are privileged to sell products that people are very passionate about. Whether you’re manufacturing an 80-foot mega-yacht or a 20-foot center console, that passion is the same. That’s why some manufacturers may stay in the industry even though they may not make much money at it. That’s the only reason I can think of because if you look at it from the standpoint of profitability and success, it’s hard to understand how there are so many.”
Evinrude’s Eckman thinks the core reason might be because most of the boat companies in North America were founded as family businesses. “This is the business they’ve had,” he says. “It’s not like any other business that I know of. The owners are very passionate about it, and even if they could make more money doing something else I’m not sure that they would.”
“This is going to sound corny,” Constantinou says, “but there is something magical about starting with raw materials and all these random components and using your hands to shape molds. Something so beautiful comes out the other end, which is a life-changer in terms of how many great moments it gives to you and the people who will own it. That is something valid for those privately held, hands-on companies. You cannot underestimate that.”
This article originally appeared in the March 2014 issue.