Industry pros, outside analysts expect boat sales to pick up steam in 2011
Disappointing new-boat sales this spring and summer have prompted dealers and manufacturers to get creative in their efforts to outlast one of the nation's most stubborn recessions.
Some dealers have made drastic moves - partnering with former competitors or shelling out cash - to stay afloat. Many manufacturers have made significant cutbacks, led by industry giant Brunswick Corp. Brunswick's most recent contraction, announced in late July, involves the sale of its Triton Boats subsidiary and the elimination of 135 jobs at its Ashland, Tenn., plant.
Despite estimates that 2010 sales are lagging behind 2009's record lows by about 15 percent, many dealers and manufacturers are confident they will weather the storm. Dealers, manufacturers and analysts believe that the industry has reached the bottom of the decline and, although a rebound is trudging along at a turtle's pace, they seem optimistic that next year will bring improvement.
Wells Fargo Securities analysts predict that sales of new fiberglass and aluminum boats will be down between 17 and 22 percent in 2010 from 2009 levels, but should rise 10 percent in 2011. "We believe 2010 will represent the trough in new-unit sales," says senior analyst Timothy Conder.
"I think the momentum is all upward," says Thom Dammrich, president of the National Marine Manufacturers Association. "It's going to take a breather now and then as it works its way back, but every time it takes a breath or a rest isn't cause for alarm. For the boating industry, retail sales of new boats are still declining, but I do think that 2010 will see the bottom of that decline."
An industry turnaround will require improvement in the general economy and no clear pattern is emerging there. The housing market improved slightly in June from May, according to the Department of Commerce, but was still down from June 2009. In July, home resales were down sharply after the home-buyer tax credit expired, but home prices continued to gain, according to the National Association of Realtors.
The stock market continues to fluctuate and that may have contributed to the June and July declines in the Consumer Confidence Index. "In the old days, if the stock market moved 20 or 30 points, that was a big day, but hell, we've got 200-point swings," says Barry Lieberman, owner of Hardin Marine Arrowhead, which has three locations in Southern California.
Dammrich says the up-and-down stock market influences the willingness of wealthy people to part with their money. "It plays a role in consumer confidence that can't be ignored," he says.
BP's Deepwater Horizon rig explosion and oil spill in the Gulf of Mexico also prompted potential customers to delay purchases, MarineMax president Bill McGill said in his third-quarter earnings statement. "We have had customers stop a boat purchase over concerns related to the oil leak's impact on their businesses and others telling us they are just going to wait and see," McGill told shareholders.
Nationwide, new-boat volume is lagging behind the record lows of 2009 - a year in which an estimated 142,100 boats were sold, according to the NMMA. That's a little more than half of the 277,800 units that were sold in 1991, the first full year of the notorious luxury tax on boats.
"I think we have a long way to go to get where consumer confidence builds up to the point that people are willing to spend money on a luxury item," says Alan Bohling, CEO of Seattle Boat Co., a Cobalt dealership. "We are a luxury item and absolutely non-essential."
It's increasingly difficult to anticipate consumer whims in such a long-lasting downturn, says Larry Russo, president of Russo Marine, which has three Boston area locations. "I don't know how much I can retool my business," Russo says. "I thought I had found the new normal, but now people are not buying new boats and we have to redefine the new normal again."
A rebound in consumer confidence is the first step to recovery, but a change in lending practices also is crucial, says Carl Johnson, partner at Sportsman's Outfitter & Marine in Lee's Summit, Mo. He echoes the sentiments of many who have struggled to secure consumer and wholesale financing since major national players got out of marine lending in 2008 and 2009.
Banks were too lax a few years ago, when they would finance risky customers with no money down on a 15-year loan, Johnson says. "I don't want it to go back to the way it used to be, but banks have 100 percent overcorrected," Johnson says. "The right answer is somewhere in the middle."
Local credit unions that used to finance people who had less than an "A-plus" credit history have completely stopped boat and recreational vehicle lending, says Southern California dealer Lieberman. Some of those lenders made as many as 500 marine loans a year, he adds.
For his operation, retail finance is the toughest hurdle. Others are stuck without access to floorplan dollars, says Phil Keeter, president of the Marine Retailers Association of America. Keeter thinks manufacturers should consider consigning boats to dealers who find themselves in that situation.
Johnson knows firsthand what it's like to run a business without wholesale credit. He says his Sportsman's Outfitter & Marine is now essentially a cash operation since GE Capital, the industry's last major national wholesale lender, pulled his floorplan financing.
Johnson says he now stocks boats in two ways. He uses cash to bring in Tracker and Tahoe models for spring boat shows, and he has used his own funds and tapped private backers who he says asked half of GE's new rates. He has since turned a quarter-million dollars worth of boats, but he doesn't have much inventory left.
"I'm pretty proud of being able to make all those turns on cash and not have a finance charge," Johnson says. "[But] the few customers that are walking in - we don't have a lot to show them."
The ability of small and medium-size dealers to outlast the recession is entirely in the hands of banks, says Johnson. He says he is now courting local banks for floorplan money. "Most banks are terrified when you say floorplan," Johnson says. "We know what it takes, though, and we would make life pretty easy on a bank."
Johnson continues: "Last year they said 'Go get a year under your belt [running a cash business],' and guess what? We're going to go knock on those doors again."
Sportsman's Outfitter & Marine also stocks its showroom through a partnership Johnson formed among Sportsman's, Bruce Marine and MarineMax to reduce costs. "We brought in some other big names to do business with us and we share the revenue of that," Johnson says.
Bruce Marine had been in business nearly 50 years and didn't want to quit selling, but it needed to reduce its brick-and-mortar costs, Johnson says. Bruce Marine is now selling Sea Rays on behalf of MarineMax at the Sportsman's Outfitter & Marine location, Johnson says.
Johnson carries expenses such as running the service operation and paying the insurance. "We still have Tracker Boats and a service department and retail operation like we always had," Johnson says.
"We're incorporated, but there was no new corporation formed," he adds. "We're still three separate companies who signed a partner-dealer agreement and operate under one roof."
Partnering with Bruce Marine worked for MarineMax as it tried to downsize to boost revenues. It worked for Bruce Marine's owners because they no longer wanted to carry the risk, responsibility and overhead of running a business out of their former location, Johnson says. All three dealerships were competing with two regional Bass Pro Shops that opened in 2007 - particularly Johnson's dealership, which had been founded as a Tracker dealer and had sold only fishing boats for more than a decade.
Because Johnson's dealership had gained a reputation in service, all three decided to maintain operations at his Lee's Summit location. As a result, Sportsman's Outfitter & Marine made inroads into some new segments - runabouts, deckboats and pontoon boats - despite a drop in overall sales.
"This is what we love to do, so we really had to" do something creative, Johnson says. "It's helped us survive until things get better."
One advantage of smaller floorplan lines is that dealers spend less on interest, curtailments and storage. Dealers once were expected to estimate their sales for the entire year each winter and Russo used a 60,000-square-foot warehouse to store 200 Sea Rays. Now he has given up the lease and stocks 50 new Sea Rays in his showroom. That has helped offset sluggish sales, as has his reduction in interest, he says.
Some speculate that more marine businesses will go under during the coming winter. "I don't know how they can weather it," Russo says. "I know some [manufacturers] have ramped up and reloaded for the first quarter and a second-quarter selling season that never happened."
Maybe this is the "master plan - the purging this industry desperately needs," Russo says. "There are too many dealers, too many brands, too many manufacturers. We can't all live in an industry that's 50 percent of what it was three years ago and continue to support as many dealers and manufacturers and brands that we have in the marketplace."
Johnson agrees that, at least in the Midwest, more dealers will shut down this winter. Dammrich predicts that a handful might go under.
The bulk of the dealership failures already have occurred, Keeter says. The number of dealerships that have gone out of business is difficult to pin down, but estimates vary from 500 to 1,400, he says.
"I think those surviving have multiple sources of revenue," Bohling says. At his Seattle Boat Co., he has relied on money from service, storage, and the marina and fuel dock to offset slow sales. "All of those components have remained healthy," he says, with each pulling in about 95 percent of the business it did before the recession.
Additionally, Bohling says, the dealership has cut overhead by scrutinizing every facet of the operation, from examining overtime to renegotiating cell phone, drinking water and uniform contracts. "We've absolutely reduced everything down to the bare minimum," he says.
It's the savvy dealers who are surviving, Russo says. They have learned how to run their businesses more efficiently than ever and will enjoy more market share when demand increases, he says.
Demand for used
Sales of used boats also have been helpful for dealers, especially because such boats are easier for dealers to buy outright when they face limited wholesale financing.
Spader Management Group's financial report in August showed that new-boat sales were down 4.2 percent in the first half of 2010, but overall sales were up 3.2 percent among the dealers the company tracks. Spader advises and tracks an undisclosed number of marine dealers that subscribe to its consultation services.
Still, the company urges dealers to continue their cautious spending while new boat sales remain sluggish.
In June, 15 of the 40 boats Russo Marine sold were new - the highest new-to-used ratio in the last year, Russo says. But except for one 48-foot Sea Ray and a couple of larger Boston Whalers, all were boats with a price tag of less than $100,000.
"There is no traffic for new boats, no conversation about new boats, no leads on new boats and no walk-ins for new boats unless the boats are small," Russo says. "When we're talking about big boats, we're talking about big savings between new and preowned."
The so-called bottom feeders have dissipated, but the market still dramatically favors used boats, Russo says. Used-boat sales were up 7.7 percent industrywide in 2009, while new-boat sales were off about 25 percent from 2008, according to the NMMA.
"This goes back to, 'This thing's paid for and I don't want payments for another 10 years,' " Lieberman says. "A lot of retirement accounts are not where they were just a few years ago. I always joke that I was going to semiretire a few years ago, and now I'm going to work the rest of my life and then some."
Some think new-boat sales will have to increase because the used-boat inventory is dwindling. Many dealers say they can't keep used boats in stock. "People are paying high retail value for [them]," Bohling says. They'll bargain on a new boat, but pay high book price on a used one, he says. "There's still a little bit of this guilt sensation out there."
Instead of folding outright, more dealerships will stay alive by cutting staff and selling only used boats in conjunction with their service, storage or marina components, Keeter speculates. "Some dealers are just getting out of the new-boat business," Keeter says. "I think we're going to see a lot more of that." That will pressure manufacturers, who need dealers to buy their boats, he says.
But Dammrich believes those dealers who have put new-boat sales on hold will begin selling new again when demand increases and manufacturers tap them to fill holes in their distribution networks. "When times are good, new-boat sales are very profitable for dealers," Dammrich says.
Attracting Gen Y
Many agree that attracting more newcomers to boating also will be a crucial component of an industry rebound. The NMMA recently selected an agency to help revive the Discover Boating campaign that was all but discontinued when the market tanked, Dammrich says. "We've got to promote the boating lifestyle," he says. "All of our data shows it works."
Bohling agrees it's time to get Grow Boating up and running again because once young people find good jobs, they will find a place to spend discretionary income.
"People will gravitate toward boating if we expose them to boating," Dammrich says. "If we don't expose them to boating, they'll gravitate to something else."
This article originally appeared in the October 2010 issue.