The state's high unemployment rate and housing market collapse are cutting deeply into boat sales
Throughout the recession, South Florida has been the poster child for boating industry hardship, but lately, it seems, that role might rightfully belong to Southern California.
Like their counterparts in other regions, dealers in the Los Angeles area were hoping the surge in consumer confidence in early spring would signal an industry turnaround. But a steady stream of bad economic news - debt problems in Europe, a fluctuating stock market, the Gulf oil spill - appear once again to have left consumers reluctant to part with their dollars.
In May, small-boat sales (the under-17-foot segment) were down 50 percent from May 2009 totals in Los Angeles, compared with only 8.3 percent for Miami, according to Statistical Surveys Inc., the Grand Rapids, Mich.-based firm that tracks new-boat sales. In the 18- to 29-foot segment, Los Angeles was down 43 percent year to year, compared with 28.4 percent for Miami.
There were no sales of large yachts (43 to 60 feet) in Los Angeles in May, compared with four in May 2009, according to Statistical Surveys. Four boats in this size range were sold in the Miami-Fort Lauderdale area this year, compared with six in May 2009. The only segment in which Los Angeles outperformed Miami was cruisers between 30 and 42 feet. That segment was down only 20 percent in LA and nearly 30 percent in Miami.
Southern California dealers wonder how long they can get by with those kinds of numbers. "I sure put more back in this business than I ever expected," says Barry Lieberman, owner of Hardin Marine Arrowhead, with locations in San Bernardino, Lake Arrowhead and Corona. "We put some money away for a rainy day, but we didn't expect a flood."
Lieberman continues: "I've been around 40 years, so you say it was a bad year. But it's been three bad years and you wonder ... Well, it's never going to be like the old days, but you would have thought it would be better than it is."
Spring boat-sales data shows California's new-boat volume in key segments was exponentially lower than the rest of the country. Sales were up 1.5 percent nationwide on boats smaller than 17 feet in April from the same month in 2009. But in California, that segment saw a 13.8 percent decline, according to Statistical Surveys. In the 18- to 29-foot segment, April sales were down 7.8 percent from April 2009; in California, they were down 35.7 percent - more than quadruple the national decline.
The Los Angeles area saw a 43 percent year-to-date decline in the under-17-foot market and a 42 percent decline in the 18- to 29-foot segment.
Towboat sales are "just gone," with the wakeboard segment particularly hard-hit, says Bart Hall, organizer of Fred Hall Shows in Los Angeles and San Diego. Fishing boats were still selling at the Hall shows, which include travel, fishing gear, hunting equipment and automobiles.
Some say that despite the disappointing spring numbers, sales then were better than in early summer.
"Every time I see these consumer confidence reports, I'm like, 'Dude, I could've told you that three weeks ago,' " says Mike Basso Jr. of Sun Country Marine, a family-owned dealership with locations in Ontario and Dana Point. "Our sales in May were good; our sales in June were horrible, so obviously something wasn't right. I can't tell you what it is, but the numbers don't lie."
Jobs and housing
California's unemployment rate was 12.4 percent in May - well above the national figure of 9.7 percent. That rate is the third-highest in the country, trailing only Nevada and Michigan, according to federal statistics. Unemployment in the Riverside, San Bernardino and Ontario areas just east of Los Angeles and Long Beach hit almost 14 percent in May, according to the U.S. Department of Labor.
Real estate values have dropped between 50 and 60 percent in some parts of California, says Don Parkhurst, senior vice president of marine lending at SunTrust Bank.
"Southern California was the hardest hit because it had the most rapid rise in values," says Bob Brown, a spokesman for the Southern California Marine Association. "It's still expensive here, but compared to five years ago, home prices are probably half."
The housing market will have to bounce back before the boat business can stabilize, says boat show promoter Hall, and he predicts that won't happen for another four or five years.
The dealers who make it that far will be smarter and the new climate probably will not allow novices to break into the industry, Basso says. "Anybody could've run a business for the last five years," he says. "It's the ones who make it out who will know the business - every in and out - with no gray areas. That's for sure. We got in, in 1989, and our philosophy was if we can do it now, we can do it anytime. And it's much harder now."
Duncan McIntosh, who edits and publishes several boating publications in California, including Sea Magazine, says some dealers have stopped selling new because they're unable to get floorplan financing.
"The builders, in some cases, haven't missed a beat and had other dealers to sell their brands," says McIntosh. But with fewer dealers left overall, that's not always the case. The small-boat market, in particular, McIntosh says, has been hard-hit in California - and those are the boats that sell inland.
"I think we're looking at a fairly long haul moving out of this," says McIntosh, who also produces boat shows. "I don't know if 2011 is going to be the turnaround or not. I can't speak for the rest of the country, but I know it's been particularly tough for the last year."
The marine industry on the West Coast took an additional hit when Olympic Boat Centers and Cope & McPhetres went out of business in 2008 and 2009. Both were large franchise operations and their failures flooded the market with repossessed vessels.
Cope & McPhetres' reach didn't stretch into the market area of San Diego-based M2O Marine Outfitters, but sales manager Ian Morton says the repossessed inventory affected the dealership, which sells Sanger, Correct Craft/Nautique, Yamaha and Hyperlite boats. For example, people were picking up MasterCraft's 24-foot X45 - a $100,000 unit - for $60,000, Morton says.
"I'm not going to sell a boat at cost," Morton says. "I'll buy it and sit on it for three years if I need to, but my policy is, I will not sell a boat at or below cost. If you start that way, you're going to end up that way."
Not all dealers have had the luxury of making that choice. The Southern California Marine Association is reluctant to estimate how many dealers have gone out of business, but Lieberman, who was president of the association for eight years, guesses that membership has halved.
"Probably 15 have gone under in Southern California and, if you count the performance guys, it's probably more than that," Lieberman says, counting dealers from San Diego to Bakersfield.
As is the case everywhere, some dealers have stopped ordering and selling new boats, but continue to store and service boats and, in some cases, sell used boats. Those dealers might have lost floorplan financing or didn't get the support they needed from struggling manufacturers.
Selling used and brokerage is now vital for dealers looking to stay in business, many say. "We don't have margins, but we have the volume and have less general expense in inventory," says Ray Jones, owner of Long Beach Yacht Sales. "We have about the same bottom line as if we sold new boats. The problem is we can't dial up the manufacturer and ask for red and green used boats."
A number of dealers have gone out of business, but that's to be expected with the sales declines, Basso says. "That piece of the pie shrunk five-fold. That's tough to deal with," he says.
Jones estimates that five dealers have gone under, but says those failures had a bigger impact than in other areas because California doesn't have the "depth of dealers" found in other markets. They deal in larger areas than other places because property and expenses are so high in California, he says.
A budget deficit plaguing San Diego has caused an additional increase in taxes for business owners, Morton says. "The taxes and levies that we're expected to pay by the city [are] pretty hard," Morton says. "California is harder to do business in than someplace like Nevada or Texas or Arizona and you see business moving that way as a result."
Although California used to be home to several sailboat builders, most of them left the state in the 1980s, McIntosh says. Recently, Brunswick announced that it was moving Cabo Yachts to New Bern, N.C., where it manufactures Hatteras. "If you look at Cabo's market in general, they probably sell more boats on the East Coast than here, so even from a shipping standpoint it was probably a good move on their part," McIntosh says.
Industry leaders were optimistic that if dealers were able to survive the winter of 2009, they would be around for the long haul. But some worry that more dealerships will fail if sales don't improve this summer. "That's the tough part; there's nothing to put away," Lieberman says.
This year will be the most difficult for the dealers to endure, Hall predicts. "This year was not appreciably better than last year and most barely got through the wintertime," he says.
Unit sales are down 50 to 60 percent from last year, Basso says, but the dollars have stayed pretty consistent because sport yacht sales were better. "I think that tells you old money's in good shape; new money is in bad shape," Basso says.
"It's the upper-middle-class, white-collar guy that's disappeared," Morton says. "He's the guy that's on a high fixed income ... and he could just about afford his house on one of those loans that are bogus - interest only, or a seven-year ARM - so he's upside-down on his house. His loan has come to fruition and he's stuck."
Most Nautique buyers are self-employed, Morton says.
"Our South Orange County yacht store [in Dana Point] is doing very well," Basso says. The inland location in Ontario, however, is not doing so well, he says. "It's that old-money, new-money thing."
Basso and his family are discussing uprooting the Ontario location after 21 years because the area has been hit so hard. "We don't owe anything, but if I wanted to move away, I can't just go because I can't and don't want to sell for what I can get right now," Basso says. "So we're going to try to find a couple of automobile dealerships that have gone out of business and see if we can't trade some property."
He adds: "Even if we have to trade down, it might be worth it."
It's difficult to say how many used boats are selling because statistics aren't tracked on them. Banks are still dealing with at least slightly more volume than in the past. As a result, they automatically send smaller boats to auction and give Long Beach Yacht Sales larger or more specialty boats, Jones says. "Banks would rather have us sell those because we can probably get them a higher return."
In May, Long Beach Yacht Sales sold 34 vessels, Jones says, although the business has geared up to do 100 each month during the recession. He compensates for lagging volume with sales of larger boats, giving him the same bottom line.
The repossessions have started to dwindle, Jones says. He attributes his increased inventory in the last few years to banks deciding to use fewer dealers to unload repossessed inventory.
Basso agrees that the repossessions have largely been worked through - to the point that used-boat prices have become overinflated. "You're selling used boats as fast as you can get them and they're just so hard to get," Basso says.
Tough all over
Still, Sun Country Marine will hit its goal, Basso says. "You don't have the big inventory, so you don't have the interest," he points out.
The high-end Sea Rays he sells are typically 2010 models; the lower-end Chaparrals tend to be non-current, Basso says. Of Basso's 67 boats, only 13 non-current remain, or 19 percent.
"We're not selling low-end," Basso says. "If you were selling midline or lower boats, that buyer [doesn 't exist] anymore. Thankfully we have higher-end product, and though that buyer is not as prevalent as he was, he's still out there."
The dealers left now will survive, Jones speculates. "The inventory levels are in check at this point. ... There's not an overabundance and that will stop part of the problem of discounting and purging product with no margins," he says.
Lieberman, however, says used and repossessed boats are still coming on the market, making sales difficult. "There's still inventory out there. A lot of people haven't made a gross profit on a boat in two years; they're just trying to get rid of them," Lieberman says.
Retail credit has become even harder to secure for customers than a year ago, Lieberman contends. Credit unions that used to approve loans won't even consider a boat or RV loan, he says.
"A lot of people have put a fortune back in their businesses and my family has been one of them," Lieberman says. "But I can tell you out of 20 top dealers in the country, 16 have got some red ink. Someone in Connecticut is having the same problems as me. It's just maybe mine are a 10 and his are eight."
This article originally appeared in the September 2010 issue.