Production cuts ease flow of current product, but older models sit in showrooms
Aging inventory has always been a monkey on the boat dealer’s back. These days, it’s more like an 800-pound gorilla.
With the weakest economy in decades, marine lenders disappearing and banks tightening standards on consumer loans, dealers are scrambling to sell last year’s models. In some cases, the inventory is even older.
Manufacturers have slashed current-year production to reduce the number of boats in the pipeline, but older product continues to sit in showrooms.
There is no firm data on the number of older new boats in dealer inventories, but the situation so concerns the National Marine Manufacturers Association that it is allowing 50 percent of new inventory displayed by dealers at its boat shows to consist of models older than 2009. The NMMA usually limits older product to 20 percent.
New boat sales have been off as much as 40 or 50 percent this winter; and some dealers are carrying models as old as 2006, a reminder of just when the slowdown first began impacting recreational boating.
“We’re making new-boat loans on ’06 and ’07 models,” says Don Parkhurst, senior vice president of SunTrust’s marine finance division and past president of the National Marine Bankers Association. “There was a loan being sold today, in January ’09, but it was [on] an ’06 or ’07 model, which tells you that boat was in inventory all those years, and that’s indicative that dealers have a lot of backed-up inventory.”
Most manufacturers have slowed production dramatically in the last year.
“It is becoming so tight in terms of manufacturing … there are no boats being produced,” says Genmar chairman Irwin Jacobs. “Once this bulk gets through the system, we can start manufacturing new boats for people.” Some dealers and manufacturers, however, won’t make it to that point, Jacobs predicts.
“Clearly the amount of aged inventory at the dealer level is a concern,” says Thom Dammrich, president of the National Marine Manufacturers Association. “Dealers and manufacturers are going to have to work together to provide some incentives to consumers to buy that product.”
Although there are no hard statistics, anecdotal evidence suggests manufacturers have cut production somewhere between 40 and 60 percent, Dammrich says. “I think the amount of aged product is certainly higher than anyone would like to see,” he adds.
At Brunswick Corp., the number of boats sent into the dealer pipeline last year was reduced by 6,700 units, or 22 percent. During that time, marine sales declined by 21 percent. In the fourth quarter alone, marine sales were off 50 percent, chairman and CEO Dustan McCoy told investment analysts in a conference call.
Even with the cuts in production, 40 percent of Brunswick dealers’ boats were more than a year old at the end of 2008, compared with 20 percent at the close of 2007, McCoy said in the conference call that followed the company’s fourth-quarter earnings report. The amount of finance dollars that poured into boats older than one year increased by about $70 million, he says.
Even though dealers are reluctant to sell boats for less than what they owe the bank, they have to come to grips with selling the product short sometimes, says Larry Russo, owner of Boston area-based Russo Marine.
With low demand and a faltering economy, the market doesn’t allow dealers to sell aged inventory at a profit, Russo says.
But, “Dealers are out of cash and banks aren’t lending to dealers right now, so although a dealer may have a willing buyer, he may not be able to do the deal, because he can’t fund the shortfall,” Russo says.
MarineMax, America’s largest boat retailer, also has “cranked down on the handle” in terms of inventory, according to chairman, president and CEO William H. McGill. “Obviously we do have more 2008s than we would have historically, because sales were substantially down,” McGill told Soundings Trade Only late last year. Nevertheless, he said he is “not uncomfortable” with that inventory, even though the company had hoped for higher sales.
A deluge of repos
Competing with all the repossessed boats flooding the market has become a major hurdle for dealers.
There’s no slowdown in sight on the repo front, considering boats are being liquidated at every level — from the guy who lost his job and couldn’t make his payment to the dealer who couldn’t hang on any longer and gets his inventory repossessed. And some worry that floorplan lenders who left the marine field could liquidate models that dealers can’t sell or get picked up by other lenders.
According to the American Bankers Association, the national repossession average on marine loans has risen in the last year, from 1.7 repos per thousand loans per month on July 31, 2007, to 2.16 repos per thousand loans per month as of September 2008.
Bob Toney, owner of Fort Lauderdale-based National Liquidators, had more than double the number of recovery orders in 2008 than he had two years earlier.
In 2007, he filled 1,847 recovery orders; in 2008 the figure jumped to 3,060, he says. In 2006, it was 1,545 — about half the 2008 figure.
He thinks those numbers will continue to grow, at least in the first half of 2009.
“We’ve had some contact from several clients — largely banks — that say based on delinquency numbers and the way things are trending, they expect between 20 and 50 percent increases” in 2009, says Toney.
Toney hears from his bank clients and other sources that 2009 will be the real struggle, and 2010 should be a year of stabilization.
But Toney isn’t all that certain. “If it’s truly as bad as they say it is, I’m concerned about stabilization in 2010,” he says. “As busy as it is, we are looking for it to stabilize. We don’t need this incredible fluctuation in the market; it’s not good for the industry and, long-term, it’s not good for us either. ... With banks restricting lending,” Toney added, “18 to 24 months from now, our business will be very slow.”
Competing with the glut of repossessed boats has been difficult for dealers.
While the average sale price of a repossessed vessel at National Liquidators has been $57,000, if Toney excludes government recoveries, which include a higher percentage of smaller boats, the average is probably closer to between $85,000 and $100,000. Government recoveries typically are boats seized by U.S. agents from drug runners, alien smugglers and suspects in various other federal crimes. The government sells them off through liquidation businesses such as Toney’s.
Repossessed boats typically are 30 feet and above, Toney says — too big to auction at auto shows.
That makes it challenging for dealers to unload aging inventory, Toney says.
“If we’re selling a boat at 20 percent under market value, you’re not going to have a buyer willing to pay [a dealer] much more,” Toney says.
‘All boats must go’
Splashed across the home page on Ohio-based Sima Marine’s Web site is a banner reading: “All boats must go.” It’s a result of Textron Financial’s decision to leave the marine floorplan finance arena.
“We’re trying to market it as, ‘It has to go,’” says second-generation owner John Sima. “It’s just a marketing decision we made to help us move some product. We’re concerned that as dealer failures continue, we’re going to have to be competing against that liquidated inventory.”
Since the Web announcement, Internet activity has increased tenfold, Sima says. And the Web, he says, is the key to bringing floor traffic to a showroom during Ohio’s cold winter.
For now, all Sima wants to do is sell the 2008 models for enough to pay off the floorplan; profit, at this point, is not a consideration.
“The first thing that comes out of the customer’s mouth is, ‘If I buy a repo, I can go buy this for X dollars,’” Sima says. “Even if he is looking at a repo in terrible condition, he still has preset the value of what he will pay.”
Sima tells the customers the same thing many other dealers do: He will be able to service the boat once it is purchased, since the nearly 50-year-old dealership will still be around. And buying from a dealer, the customer is assured the boat has no hours racked up, Sima says. “With liquidations, you don’t know what you’re buying.”
Customers these days are savvier than in recessions of the past, Russo says.
“These are the economic realities,” he says. “Customers realize that prices are dropping and falling, and they go to a dealer and say they don’t want to buy a boat from a private party or auction house, they want to buy from a dealer, but this is all they’re willing to pay. There’s a whole new competition for dealers.”
On a more optimistic note, Genmar’s Jacobs points out that if repossessed boats are selling, that should signal dealers there still are buyers out there.
“There’s a lot of excess and repossessed inventory, but once that gets out of the way,” there will be sales again, Jacobs says. “We just have to flush the system to get there. I don’t think it’s peaked, and until this [inventory] gets through the system, we’ll have suffering to go through.”
Trade-ins have created another problem for dealers, says Phil Keeter, president of the Marine Retailers Association of America.
If someone wants to buy a boat that’s worth $100,000 and has a $50,000 trade-in, the cash-poor dealer either has to find a way to cover the difference or reject the offer.
“The dealer has to say, ‘See if you can sell your boat and come back,’ ” Keeter says. “In good times, the dealer can take the hit [of coming up with the difference], but in hard times, he can’t do that.”
The lending side
When potential buyers head to the boat shows this year, dealers will suffer again, Russo predicts.
“This thing is a spiral, and it’s just a spiral that hasn’t seen the bottom yet, and the bottom is a long way off, because this is a seasonally driven business,” Russo says.
Russo thinks more dealers will go out of business as winter progresses, and predicts the liquidated boats will be up for sale, creating bargains on both used and new boats.
“By spring, all those liquidated boats are going to hit the marketplace and it’s going to be hell to get noticed, to get your share, when people are selling new boats for 40 cents on the dollar,” Russo says.
KeyBank and Textron Financial’s recent exit from floorplan lending has some concerned that unsold boats will be liquidated from dealers unable to find new sources of floorplan finance, although thus far lenders have seemed to stick with dealers trying to find new financing.
“The dealers right now are really struggling to find floorplan financing,” says the MRAA’s Keeter. “The ones who were with KeyBank or Textron are really suffering right now and trying to find a place to put their inventory.”
That’s partly because the two national marine floorplan lenders left have hinted to some dealers they won’t allow financing on 2009 models until some of the aging product is sold, Keeter says.
“They told me yesterday they have the highest amount of aged inventory ever in history,” says Keeter. “They’re not letting manufacturers ship new inventory in until they help dealers move the old stuff.”
GE Financial spokeswoman Beth Revers did not want to comment specifically, but did say, “We are currently financing our dealers that meet our credit and pricing criteria.”
Whether through pricing incentives or warranty guarantees, dealers must go to manufacturers and work out a plan to get rid of aging inventory, Keeter says.
In addition to providing incentives and reshuffling inventory, Brunswick has had to buy some boats back.
The company has spent about $16 million repurchasing inventory, McCoy said in the earnings statement, including $5 million for Olympic Boats, a West Coast dealer chain that declared bankruptcy in the third quarter of 2008.
“I would tell you the manufacturers are in a hell of a hole; financially, they’re going to be really hard-pressed to do anything like that,” Keeter says. “But they’re in a better position to do that than the dealer.”
This article originally appeared in the March 2009 issue.