A business model with Wall Street rootsPosted on Written by Reagan Haynes
Commodities trader-turned-dealer says inventory risk sharing would give builders more skin in the game
These days, managing millions of dollars of boat inventory carries as much risk as a Wall Street options portfolio. Getting it right can make you money; getting it wrong can cost you everything.
Thats how Tim Keane, sales manager at Stone Harbor Yacht Sales on the southern New Jersey shore, views marine retailing in the wake of the Great Recession. Keane should know. He traded commodities on Wall Street for 14 years before deciding to abandon the concrete jungle and launch a new career that would get him outdoors and immersed in recreation. For him, that was in boats.
After the lashing the industry took from the recession, Keane began looking at its risk from an unusual perspective that of a Wall Street trader. Its easier to manage a sophisticated derivatives folder on Wall Street than it is to manage an inventory in this boat market, he says. Its brutal out there.
Keane seems uncomfortable putting himself in the public eye for fear of seeming pompous or an attention seeker. But his desire to stimulate a dialogue in the boating industry overwhelmed him to the point that one day, in a fit of frustration, he sent Soundings Trade Only a 32-page paper in an effort to help define a new normal.
Keane measured the risk of what he calls price decay depreciation of the boat against the dealers investment and his ability to profit on the investment over time.
After identifying some of the factors contributing to the rapid price decay of high-end boats, Keane also tried to come up with solutions.
The No. 1 problem you have is, boats are a wasting asset, Keane says. Its like harvesting a tomato the minute you pull it off the vine, it starts deteriorating. The No. 1 thing about a wasting asset is the notion of price decay.
Just like a farmer has to get a tomato to market before it decays, a boat dealer has to sell his boat before his profit margin erodes before he has to pay curtailments to the bank and before the boat has depreciated in the marketplace. Decay is not linear, Keane says. It has its own curve, and that curve is about 60 days prior to the model year [introduction] and 60 days to curtailment period.
A call for change
In his document Keane outlines the challenges boat dealers face. He says those challenges have been exacerbated by the recession, as well as by factors that have changed as a result of it. Then he offers potential solutions.
The whole premise is all about how to manage price risk in the boat business, he says, and to determine what factors are increasing or steepening the price risk curve.
Many builders, he says, still release their new models in July, effectively the middle of a boat dealers relatively short selling season, crippling the dealer. Keane would like to see a shift to winter launch dates.
Before the recession, price decay occurred at a slower rate because banks gave dealers more time before requiring them to pay curtailments. Keane would like to see dealers and trade organizations appeal to lenders to push those back.
Lastly, he says, builders should foot a percentage of the bill so theyre invested in helping the dealer move the inventory, Keane says. Price decay is the thing dealers fear the most because they cant share that risk with anyone, he says.
After making the correlation between stock options and boat inventory, Keane sat down and began to measure the curve of price decay for higher-value boats. The curve really isnt that different, he says. Boat dealers would probably make pretty good options traders if they put their minds to it. Even if you dont understand what an out-of-the-money stock option is, it holds its value most of the year and then goes into pretty big decay, and the probability of making a profit is diminishing every day.
Coffee to boats
Keane approaches the industry a little differently than most because of his background. He thinks highly of boat dealers and their business savvy and says he has no interest in bashing builders. Keane began working at Hills Brothers Coffee in Edgewater, N.J., after graduating from high school in 1974. He worked the night shift, and it was his job was to determine whether beans that were burned could be mixed into other batches of coffee or whether they should be scrapped.
After three years he moved to the day shift and answered phone calls at the plant often from commodities traders trying to sell coffee to Hills Brothers. When an entry-level job opened up at a commodities trading company on Wall Street, Keane took it.
Eventually he became vice president of a company with a $100 million trading desk and 14 offices around the world. But after his car was broken into several times and he was mugged twice (once getting roughed up pretty well) he decided to leave the urban rat race and live an outdoor life in a field he enjoyed.
A friend knew someone with a boat dealership on the Hudson River. I told him, Ill start in the yard; I dont care, Ill scrape barnacles off hulls, Keane recalls. He hit the ground running and says he has never looked back on his Wall Street life.
Working from the ground up, he helped build the Hudson River dealership into one of the nations largest Donzi outlets. In the process, he befriended Tom Russell, who was then vice president of sales and marketing for Donzi and Pro-Line. When Russell decided to buy a nearly defunct marina and dealership in southern New Jerseys Stone Harbor in March 1999, he tapped Keane to come with him. Keane joined him that August.
Keane doesnt claim to have all the answers, but he does want to generate discussions that might inspire positive change for the industry. If you threw a dart at the calendar you couldnt come up with a worse month to release the new model year, he says. I have inventory that I took last July and August and have been paying curtailments the last two months. Im waiting for the season to kick in, and Im sitting on these rotten tomatoes.
Although Brunswick and a few other builders have decided to permanently shift the model year to the fall, many havent wavered from July release dates. Keane says autumn is much better than summer for new-model introductions, but he thinks a Jan. 1 release date is ideal.
That would help attendance at the fall boat shows, Keane believes. In his view, there would be two camps: people seeking deals, knowing the retailer wants this last opportunity to move his inventory, and people coming to get a sneak peek at the next years models.
Winter boat shows would be the perfect opportunity to showcase new models, Keane says, and dealers wouldnt be undercut by having to turn the model year in the midst of the busiest season.
Keane says dealers arent the only ones who would benefit from changing the model-year release date. Customers would, too. A customer is paying $250,000 for a boat that, two weeks after delivery, [is] a leftover, he says. Its going to depreciate like the guy who took a boat in July of last year. I dont know any other industry where the demand curve is April through August, and yet the model year [expires] in the middle of it.
The result is a customer who is frustrated when his friend at the dock has a boat from a brand-new model year, even though their vessels are roughly the same age. We dont have a consumer-centered model, Keane says.
Theres never a zero cost to anything, but in the big picture whatever Brunswick paid to move the model year, the benefit of moving it is so big the cost of moving it is moot, he says.
Standard practice in the industry compounds consumers and dealers frustrations because the new National Automobile Dealers Associations price and boat value book arrives with the new model year in July, Keane says.
All the boats that are 2011 will be devalued and depreciated as used boats, so if youre carrying 2011 inventory or you just bought a 2011 three weeks ago its going to be worth thousands of dollars less than it was last month, he adds.
The fear of aging inventory causes dealers to lose sales, Keane says. Dealers hesitate to order boats they arent sure will move, he says, so even if inventory gets thin in May or June peak selling season a dealer often will opt not to replace it until the new model release date, giving customers fewer options and potentially depriving the dealership of sales.
You cant control the price of fuel, so lets look at things we can control, and whatever it costs, move it, Keane says. Its bad for the consumer, its bad for distribution, and if you dont make the change, youre not going to be around 12, 18 months from now, anyway.
Uncertainty about builders futures also discourages Keane from ordering too much. When he asked people at GE Capital how many dealers are on their books, compared with early 2008, the response was fewer than half. Like many, he wonders whether builder failures are imminent, too.
Keane says he does not want to lament the past, but he believes that to identify a problem you have to understand how it was born. Before the recession, dealers had 540 days to sell a boat before banks required them to make curtailment payments. After the recession, that period was halved to 270 days.
How many manufacturers and dealers realize that the effective model year for floorplanned boats has been reduced from 16 to only seven months? Keane asks in his report. And how many realize how accelerated the steepness of the curve in retail price decay is today, compared with pre-2008?
Unlike the auto industrys products, big and expensive boats are difficult and costly to transport. Without big auto auction-style venues for boats, dealers rely on customers who come through their doors. The boat business is more like real estate than the auto industry, Keane says. The boats got to get surveyed each time someone buys it, and in order to buy a house I have to find someone to buy my house to make it work.
He would like to see dealers go through the Marine Retailers Association of America to encourage GE Capital to increase curtailment periods. He points out that banks are on more stable ground now than when the meltdown occurred.
Skin in the game
To move past a certain level on Wall Street, traders cant just put the firms money on the line. At some point, their employers make it clear that the traders have to invest some of their own cash to move forward. They call this shared price risk having skin in the game.
One of the problems at the start of the recession was that dealers were sitting on millions of dollars of inventory for which the manufacturers had already been paid. I know the economy going south was the biggest factor, but a contributing factor was directly linked to the abandonment of field inventory, Keane says. [Manufacturers] didnt have any skin in the game. It ended up bankrupting a lot of dealerships.
In the 28- to 50-foot class, all hell broke loose because of the sheer dollar amount of inventory, he says. Manufacturers really washed their hands of the inventory. It left a pretty bitter pill in some of our mouths.
A new model
Any new distribution model would have to include at its foundation the notion of shared retail price risk, Keane contends. Without that, inducing dealers to stock new boats in anything but minimum quantities and the smallest models would be the manufacturers greatest sales challenge.
If the meltdown of 2008 taught us anything, Keane says, it is that there must be a link between production and outcome, right down to a unit-by-unit basis. The industry will only be truly consumer-centric when the retail sales transaction occupies the pinnacle of the pyramid and the money cascades down its sides to all from there.
Shared retail price risk can take many forms, Keane says, and can incorporate many mechanisms. Among them are factory showrooms for the larger boats, consignment inventory and purchased inventory, executable repurchase agreements, or, perhaps, some pro forma invoice agreement whereby a large percentage of the dealer net invoice can be paid today, and the balance at the time of retail sale.
The backbone of the new model is the recognition that no boat is sold until its retail sold, Keane says. Then, and only then, does everyone get to share a payday. The benefits of such a new model, I predict, will be manifold and result in better field inventory management, a more homogenous price marketplace, a more cooperative distribution network, more boats placed within easy reach of consumers, and minimum lost sales opportunities, just to name a few.
This article originally appeared in the June 2011 issue.