Companies closely monitoring sales as they ramp up to avoid shortages
Boat and engine manufacturers were casting a hopeful eye to the winter boat shows as they wrestle with the uncertainties of how much product to build.
With inventory levels at record lows, manufacturers are trying to shorten lead times to meet seasonal demand and structure employment so they don't land in an annual layoff situation. Builders are approaching the issue in different ways - from reducing the number of options and variations on boats to designing add-ons that are easier to install at the dealership level. Some say parts have been difficult to come by because of a drastically weakened supply chain, sometimes resulting in production slowdowns.
Dealers, on the other hand, are trying to decide how many boats they will order - decisions that will be contingent to some degree on how many boats lenders will let them stock. Some say they can't get the boats they need. Others are shopping for new brands, some because manufacturers have discontinued various lines and some because they were caught up in the fallout from the Genmar bankruptcy and subsequent sale.
Some who had been reluctant to enter the brokerage and used-boat markets have done so and they say that has been their saving grace as new-boat sales remain near modern-day lows.
The entire industry continues to discuss the "new normal" and is scrambling to predict what that will look like.
Winter boat shows have been a source of tentative optimism because customers are showing up with brighter attitudes than many had expected. But that elevated consumer confidence presents another challenge, says Paxson St. Clair, CEO of Cobalt Boats.
"Being able to meet seasonal demand will be a challenge that all of us manufacturers will be dealing with," St. Clair says. If boat shows do deliver the hoped-for sales bump, he worries that dealers will have a shortage moving into peak season.
"The real dilemma at that point becomes whether we want to ramp up production to meet that demand," St. Clair says. "You can't ramp up and get back into a layoff situation when retail sales start to fall off in July. So it's a real dilemma whether you can ramp up and stay at that level or ramp up and fall back off."
Cobalt management is trying to schedule workweeks and time off to give more in-season supply without falling back into the old industry model of predicting demand and stocking accordingly. "We'll have to find a way to shorten lead times and take care of seasonal demand to a degree," St. Clair says.
Peter Truslow, president of EdgeWater Powerboats, says a recent uptick in both production and custom powerboat orders has been encouraging. "For the first time in almost two years, we have a steady backlog," Truslow says. "It's not what it was, but it's decent."
Bombardier Recreational Products, which manufactures Evinrude outboards, as well as Sea-Doo personal watercraft and sportboats, is anxiously awaiting a wholesale bounce, says marketing director Chris Berg. "There's a certain degree of risk when you try to forecast the future," Berg says. "I think we'll be on target and, if not, we'll adjust."
BRP is maintaining a position of flexibility - an asset in the new "just-in-time" production climate, Berg says. BRP can typically ship between one and two days of receiving an order, he says.
"The new normal behavior out there both from consumers and OEMs - that's still a big question mark," Berg says. "About midsummer, some truths will be coming out."
BRP is looking at orders-in-hand to guide production and is discussing inventory needs at least weekly in order to plan manpower requirements throughout the year, Berg says.
Brunswick Corp. is maintaining a focus on quality, delivery and employee morale as it addresses production needs, says Stephen Wolpert, vice president of global boat operations. "We are being vigilant balancing demand with our ability to ramp up, while maintaining quality and reasonable amounts of overtime," he says.
Many of these changes are permanent, Wolpert says. Therefore, the world's largest boatbuilder has been open with its work force about the shift in overall market size and the need to match production to retail demand. Only through that kind of inventory control can the company avoid the drastic measures it was forced to implement during the last 12 to 18 months, Wolpert says. Those included layoffs, furloughs and factory closures.
Tracking dealer inventory against dealer registrations and model demand in real time is critical to making quick production decisions, St. Clair says.
Addressing production at Hydra-Sports will be "fairly easy," says MCBC Hydra Boats president and CEO John Dorton, who also runs MasterCraft Boat Co. MCBC Hydra Boats - a subsidiary of Wayzata Investment Partners, which owns MasterCraft - bought Hydra-Sports in the Genmar bankruptcy proceedings.
"There will be nearly a fully depleted pipeline and that gives us a better opportunity to know what to produce going forward," Dorton says.
Hydra-Sports already has exceeded expectations, with a high demand in both large and smaller boats, Dorton says. As a result, he plans to build more 33s, 35s, 41s, new bay boats and smaller center consoles. Dorton plans to manage production at Hydra-Sports much the same as he does at MasterCraft, where retail registrations are immediately available online and compared to inventory already in the pipeline.
"We tend to build on a steady basis just below order demand," he says. For example, if MasterCraft has a commitment for 200 boats, 180 will be scheduled for production, allowing for a 10 percent dropout, Dorton says.
Employees build for 10 hours a day, four days a week. If demand holds, they will build on Fridays to meet demand and earn overtime. "That may increase our run rate, but at the end of the day, we do little, if any, sort of start-stop with employees," Dorton says. "They are more apt to be here on an overtime Friday than they are to be sent home early."
This will be a transition year for production at Brunswick, Wolpert says. First, the company will have to sharply increase production to support wholesale volumes, he says. These "welcome increases" are a direct result of aggressively discounting 2009 product to reduce pipelines and protect dealers' financial health, he says.
Despite a building backlog of dealer demand, Brunswick is working hard to design production and staffing plans around lean manufacturing concepts that more closely parallel retail demand without compromising annual earnings of the core work force, Wolpert says. That lesson was learned the hard way when manufacturers were forced to lay off high percentages of their work forces and close factories.
Although dealing with the market contraction was painful, Brunswick's quick response prompted analysts at RBC Capital Markets to upgrade stock expectations from "sector perform" to "outperform" status in September. And while analysts anticipate marine sales will remain flat throughout 2010, they expect Brunswick's production will have to double to meet demand.
Theoretically, this will hold true for other builders who have helped dealers sell excess inventory that sat unmoved when demand went over the cliff in autumn 2008.
Progress over a year
Although inventory was clogging the pipeline at this time last year, most builders agree that much of the excess has been cleared and, in some cases, supply has gotten uncomfortably slim.
Manufacturers won't push product on cautious dealers, says Thom Dammrich, president of the National Marine Manufacturers Association. "As a consumer buys a boat, manufacturers will build a new boat to replace it instead of just building boats and hoping somebody's going to buy them," Dammrich says.
Although no one expected the historic declines the market has endured, BRP, for one, took steps early on to slow production and position inventory, Berg says. BRP has cut inventory by more than 25 percent from last year, alleviating an "uncomfortable" situation, Berg says, and now is poised to meet anticipated demand.
"We're paying very close attention to all the signals we get, whether it's hard data or soft information we get from dealers, boat show traffic counts and that sort of thing," Berg says.
Dorton says floorplan lenders tell him MasterCraft dealers are turning their inventory more than other brands.
In February 2009, Cobalt dealers were averaging 11 boats per showroom. This February, that figure was down to six boats. Dealers successfully reduced the risk associated with aging inventory but now are critically low, due in part to limited wholesale financing, St. Clair says.
"We feel that Cobalt and much of the industry will have a shortage of boats this spring," says St. Clair. "And as manufacturers try to ramp up production, many of our suppliers have been sitting idle, with few boats being built. We're having a number of parts shortages and that is hindering that ramp-up."
Clint Moore, president and CEO of engine manufacturer Volvo Penta of the Americas, says having safety stock at hand allows plants to ramp up quickly. "In order to manage cash, everybody brought down their inventories," Moore says. "Historically, builders and manufacturers carry what you characterize as safety stock ... that enables a plant to spurt briefly. Whatever safety stock existed is used for assembling, but once it's consumed you can hit a wall because the suppliers haven't been able to ramp up new production quickly enough."
Some vendors have worked through safety stock and are pushing themselves harder as manufacturers increase production demands, Dorton says. "They continue to work extra hours to deliver products to us," says Dorton. "They have slowed down, but not shut down."
At Cobalt, engines and windshields have been hard to come by, St. Clair says, and at times the builder is relying on safety stock. "Knock on wood - we have not had line stoppages, but we have had to push some boats aside and wait for parts," St. Clair says. "Hopefully this problem won't get worse."
Moore says Volvo Penta has had a hard time meeting demand and was "disappointing customers." Demand was more than three times what the company had anticipated when it ordered parts from suppliers and it still delivered two-and-a-half times what it had forecasted, Moore says. But not being able to get spark plugs one week, for example, or a specific wire the next, has slowed them down.
"We thought the spurt to replenish low inventory would drop off," he says. "We're disrupting their plants, and it breaks my heart. They've survived the storm, and now they have an opportunity to start recovering. They're straining to build orders, and we're unable to meet their demands."
BRP isn't having any problem meeting orders, Berg says. "There's a competitive edge we feel we have right now" by building in Wisconsin among BRP's target clientele and having such a short lead time, he says.
Communication with the supply chain is especially important to help vendors know what is needed and when, Berg says. "What we know, they know, so that helps," he says. "We're thankful that we have some of the best partners in terms of suppliers and they have been able to adjust and meet our demand, so we don't anticipate lack of supply."
The vendors' ability to keep up will depend on which segments ramp up most in the upcoming season, St. Clair says.
Like many builders, Brunswick is looking to simplify product offerings by replacing individual line item options with bundles of the most popular features, Wolpert says.
Some brands have been dropped altogether. In December, Yamaha Motor Corp. discontinued Century Boats, citing poor market conditions. Brunswick reacted early. In spring 2009, it sold its Baja brand and discontinued Sea Pro, Sea Boss, Palmetto and Laguna. Last fall, Maxum joined the list of casualties.
A couple of years ago, before the downturn and the decision to shed brands, Brunswick commissioned a study to see how many permutations were theoretically available. That study showed that the manufacturing, engineering and supply chain had to be prepared to deliver 900,000 different possibilities, though in reality all were never actually ordered, Wolpert says.
Chris Stevens, general manager at Grand Pointe Marina in Dimondale, Mich., remembers Brunswick CEO Dustan McCoy quoting that number at the most recent Marine Retailers Association of America convention in Orlando, Fla. "There's no way a manufacturer can be profitable with that many options," Stevens says. "That's a big catalog."
Bundling the most popular features will decrease complexity, cost and lead times to dealers, Wolpert says. That, he believes, will increase the availability of boats with the most highly ordered features. "Additionally, we are hard at work engineering our boats to accommodate dealer-installed personal customization packages," Wolpert says.
Cobalt is taking a similar approach - both in paring down options and in designing boats to better accommodate dealer add-ons, St. Clair says. "When you look at boats today and all the different power options, canvas options, engine options, electronic options and then all the different colors and graphics, you rarely build in a given year two boats the same," St. Clair says. "The options have just grown and grown. We at Cobalt - and as an industry - need to have fewer options."
Paring down choices will make things less confusing for consumers and make manufacturing cheaper, faster and more streamlined, St. Clair says. Cobalt is assessing its option usage report and seeking to eliminate those ordered in fewer than 11 percent of sales, for example. And the company says structuring options so they're more easily added in the field will benefit dealers.
"Dealers today need to turn that inventory, so if we can facilitate the dealer selling off the floor rather than it sitting and someone ordering a slightly different boat, everybody wins in that scenario," St. Clair says.
Volvo Penta offered 141 variations on its five different gasoline engines in the first half of 2009, according to Moore. It was a bad practice that eventually snowballed, but Volvo sought to standardize those variations, Moore says, projecting that the number would drop to 14 by 2011.
BRP management continues to ask whether the company has extended its product lines too far - a natural question in any market contraction. While Berg foresees trimmed-down product offerings as an industry trend, he says BRP is confident with its product line and has even extended its E-TEC technology - previously only available on larger engines - across all platforms.
MasterCraft also is comfortable with its options menu, Dorton says. "What we're seeing is people are buying the boats they want, which often require high levels of options and customization," he says. "The cookie-cutter, off-the-shelf boat is not moving in this downturn and the specialty builders are not likely to struggle with that."
Add-ons that are optional with many other boat lines typically are included in the MasterCraft and Hydra-Sports standard packages, Dorton says.
Another curveball manufacturers and dealers are grappling with in assessing production and inventory control is the credit crunch that developed when several national lenders pulled out of both wholesale and retail marine finance. GE is the only national lender still offering wholesale financing and dealers have complained of rising rates and diminished credit lines.
"The recovery of our industry will in part be paced by the availability of floorplan lending," says Dammrich.
In a report issued by RBC Capital Markets, more than 65 percent of dealers who participated in the fall boat surveys said they were "very concerned" about the cost and availability of floorplan financing.
Lending criteria will ease as dealers work down their backlogs of aging inventory and make creditors more comfortable with their risk, Dorton speculates. "I think they will be more cautious going forward, which means more challenges for production," he says.
It also means additional challenges for dealers trying to create room on their lines for new product. "I would like to see floor lenders offering a carved-out line to get new products in, because those tend to turn quicker, which means quicker cash flow for dealers," Dorton says.
Lenders focus on total average turn without considering that new boats typically turn four or five times a year, where one leftover model might have a rate of .5. "I think the key is to give [the dealer] access to some of the quicker turns and that helps him clean out the slower turns," since he has more cash in hand and can offer better incentives or bigger discounts, Dorton says.
On the other hand, Wolpert believes "relying on a high-cost, wholesale finance push system ... only increases the end consumer cost." Increased wholesale credit is just a bandage for builders' inability to manage production to the retail curve, he says.
Marine Retailers Association of America president Phil Keeter agrees that manufacturers need to help dealers cope with the wholesale credit problems.
Don Galey, owner of Galey's Marine Supply in Bakersfield, Calif., says his rates are rising and, for the first time, he has to pay an additional 3 percent contract fee.
Despite rising costs, Galey, who sells Brunswick brands including Trophy and Lowe, appreciates Brunswick's solution.
"You're going to see manufacturers ... only producing legitimate orders," Galey says. "They're not going to guess industry sales or stockpile anything, not anytime soon anyway."
Manufacturers will need to find ways to bypass production ramp-up challenges to get new boats into dealer hands, says Keeter. "There's not an easy end to that," he acknowledges. "I think there's going to be a lot of brand switching, too. Dealers will go for different brands based on the fact that another dealer has gone out of business or his manufacturer has gone out of business and he has to switch."
Chris Hoover, of Texas-based RV and Marine Center, says he was having a tough time getting engines and was dealing with some backlogs. According to RBC Capital Markets' fall surveys, close to 17 percent of dealers felt their inventories were "way too low." A year earlier, only 5 percent expressed that concern. Just over 5 percent felt their inventories were "way too high" in 2009, compared to more than 15 percent in 2008.
"GE has forced every manufacturer and dealer to become better and, in the long-term, more profitable," Grand Pointe Marina's Stevens says. "It's very painful now, but instead of having one turn a year, GE is making their dealers have two-and-a-half to three turns a year."
That will force manufacturers to become smarter about production and helping dealers to sell more wisely without storing a yard or warehouse of inventory, he says. "That's true probably for every dealer that had volume-based sales," says Stevens. "That [storage] does not exist anymore; GE doesn't allow it to happen. You cannot have five or six boats deep anymore."
Dealers are interested in either restocking or taking on EdgeWater Powerboat's line for the first time "in awhile," says Truslow, the company president. "Dealer inventory is at fairly low levels and they see us as a stable business and a safe bet in the marketplace."
Even though the trend is toward having less inventory, dealers still have to keep an eye on local trends, Galey says. "We're constantly learning," he says. "Nothing is an absolute cookie cutter year after year."
In his California marketplace, he says, "Boats can't be a solid color; they've got to have flashes and arrows and fire coming out the side. And trailers have to be painted to match the boat; it has to be pinstriped and have chrome wheels."
Used and brokerage
Larry Russo, owner of Boston-based Russo Marine, sees another trend emerging. At a time of peak production about 20 years ago, the industry was turning out more than 600,000 boats a year, Russo says.
For 2009, the NMMA estimated new powerboat retail sales to be around 135,000 to 145,000 units and approximately 75,000 powerboats wholesale. Despite the sharp decline in production, the number of registered boats has remained steady, Russo says, at about 17 million, based on NMMA counts in 2008.
"If the industry builds 150,000 units, that's 25 percent of what we were producing 20 years ago," Russo says. "But there are as many boats being registered and used out there every year."
Russo attributes that to a simple fact: Boats age well.
Boaters haven't stopped boating; they have just stopped conspicuously buying in the recession, Russo speculates. As he sees it, used boats constitute as much as 75 percent of the market. "New-boat sales are shrinking to the point where traditional dealerships can't sustain operations anymore just being a new-boat dealer," Russo says. "If you're not in the used business, I don't know how you support your operations."
Used-boat sales give the dealer more control than new boats, Russo contends. "There are no restraints, no restrictions - you're not having to get permission from the manufacturer to do something. You are the business person," Russo says. "You make all the choices. You take all the risks yourself. But there is no floorplan and no warranty. There's nothing wrong with that. I think a lot of boat dealers are going to see their needle move from dependence on new boats over to the other side."
From October through most of January, 63 of the 80 boats sold at Russo Marine were used, Russo says, representing 79 percent of total sales. In prior years, only about 33 percent were used.
In good times, dealers often tried to take a used boat in trade for a new one, Keeter says. But tightening retail credit and diminished dealer cash flow has made many trade-in deals impossible. "Now, even if you can't trade for it, you're going to take his boat and get his boat in your place so you can sell it for him," Keeter says. "Better to make that 10 percent or 5 percent than to not get anything. And then maybe you can sell him a boat."
RBC Capital Markets' fall boat survey results support that theory. Between 42 and 47 percent of dealers surveyed said new-boat sales were "very weak" in 2008 and 2009. In 2008, 16 percent classified used-boat sales as "strong," and about 27 percent said they were average. Another 31 percent classified used-boat sales as "below average," but less than 3 percent said they were "very weak."
In 2009, dealers had more positive feedback for used sales, with about 22 percent calling them "strong," another 28 percent labeling them "average," 32 percent saying they were below average and less than 2 percent designating them "very weak."
There's a stigma around buying a new boat, Russo says, and he thinks that attitude will linger at least for the foreseeable future. But St. Clair has seen some positive signs at boat shows this season compared to last winter, when nobody wanted to buy new. Then, even people who had the resources were worried neighbors would see it and feel resentful because of their own situations. Or perhaps the would-be boat buyer had laid off people in his or her own business and didn't want to be seen spending money on a luxury item.
This year, St. Clair thinks there is some pent-up demand that may bring out buyers, but he thinks people still are more hesitant than in previous years. Many debate whether the "aspirational buyer" - a term applied to the middle class consumer who splurged on luxury goods and often relied on credit to do so - is a thing of the past, partly because of tightening credit requirements.
"We believe the consumer's post-financial-crisis buying behaviors will favor smart spending as opposed to conspicuous consumption," Wolpert says.
Others, like Galey, think the American public won't change their ways on a long-term basis. Berg is confident that, whatever happens, people will remain passionate about boating.
"I believe what we experienced last year will have a long-term effect on the behavior of everyone, from consumers to manufacturers," Berg says. "Will we reach those historic peaks again? That's hard to judge, but I do think it will head back to the new normal, and we don't know yet what that is, but it will get back to a healthy state."
This article originally appeared in the March 2010 issue.