Gray Market

It’s a question that’s been nagging in the background of the marine business for several years, and only now are people on the inside of the controversy willing to admit the existence of a “gray market” within the outboard boat segments.
Recently, frustration over the practice of boat builders selling excess outboard engines to retail dealers (instead of including them in boat/engine/trailer packages) was the topic of a sometimes heated panel discussion at the Marine Retailers Association of America (MRAA) Annual Convention in Las Vegas.
No solutions were developed as a result of the MRAA panel discussion. However, now that the existence of the outboard engine “gray market” has been discussed publicly, it’s possible certain engine and/or boat manufacturers will come up with remedies in order to gain a competitive advantage.
Certain boat builders may decide to do a better job matching engines with their boats to discourage dealers from breaking apart packages. Or boat builders might decide to do a better job of anticipating consumer preferences for engine/boat combinations, thus eliminating, or at least reducing, the need for a dealer to break-up a package in order to install a different engine that was requested by the customer.
So do gray market engine sales hurt the industry, or is it a victimless crime?
Dealers Worry About Pricing
One major problem dealers have with more outboard engines going through the gray market is pricing.
Generally, large orders of outboard engines are sold to boat builders at deeply discounted prices — below dealer wholesale.
Dealers attending the MRAA convention believe boat builders receive about 32–35 percent discounts from engine manufacturers, while the discounts on “loose” engines available to full-line engine dealers range from about 18–19 percent.
In turn, some dealers are able to get discounts on loose engines in the 22–25 percent range when buying engines from boat builders, according to dealers who spoke during the MRAA gathering.
This price differential encourages boat builders to sell surplus engines on the gray market to dealers, several dealers said.
Such transactions intensify the competition among dealers, because they allow a dealer who, for example, is not a Mercury dealer to buy a Mercury engine for a customer on the gray market — and possibly buy it cheaper than the local Mercury dealer.
Fortunately, consumers, at least so far, don’t appear to be harmed by the two-step system because engine manufacturers have reportedly been honoring valid warranty claims even if a boat/engine package has been split-up, according to MRAA President Phil Keeter.
Why Is It Happening?
The controversy has arisen because the distribution system for outboard engines and boats went through a revolutionary change over the last two or three years.
Previously, the outboard engine manufacturers wholesaled the vast majority of their units to dealers, who then matched the engine with a boat that was “pre-rigged” to operate with a particular brand of engine. But now, several engine manufacturers prefer that boats, outboards and trailers be shipped as a “package” from the boat builders to the dealers.
There are major outboard engine manufacturers who now want more than 80 percent of their units sold to boat builders, with the remainder going as loose engines to dealers, said Kent Wooldridge, president of the United Marine Manufacturers Association (UMMA), a Springfield, Missouri-based engine buying group that represents numerous boat builders.
Brunswick Corp.’s Mercury Marine subsidiary is among the outboard engine manufacturers that is encouraging the packaging strategy with price incentives for boat builders.
“What we are trying to do is transition our boat builders from being engine distributors to actually requiring them to bring a complete package to [dealers],” said John Ward, president of Mercury’s Dealer and Retail Division. “We are not there yet, but once we are able to provide a package to [a dealer] that is rigged, that is complete, that is tested and is ready for [the dealer] to deliver to the consumer, then we can eliminate some of these issues that are pricing related.”
Meanwhile, Yamaha Motor Corp. is not quite as definitive.
“We do not have a strategy to drive the outboard business through one distribution channel over another,” said Tim Fernandez, general manager of outboard sales for Yamaha’s Marine Power Group. “The dealer/customer preference is driving the business.”
However, Fernandez added that “the industry has been moving very strongly toward complete packaged boats” including the boat, engine, electronics, trailer, trolling motors and everything else “but the battery and fuel.”
Larry Russo, principal of Russo Marine in Medford, Massachusettes, and a moderator of the MRAA panel discussion, emphasized that there is room for improvement in the way boat builders assemble the boat/engine packages.
“Dealers are unhappy with the manner in which boat manufacturers do their factory [engine] installation,” Russo said. “A lot of dealers think they can do it better at retail. Many dealers think they can be more profitable by doing it at retail.”
Additionally, the “full-line motor dealers” who sell more engines than boats, because they concentrate on re-power business, are being hurt by the switch to the packaging strategy, Russo said.
(Re-power is more important to dealers in coastal markets where the corrosive affect of saltwater often requires boat owners to replace several outboard engines during the useful life of their boat. In freshwater markets, boat owners usually trade-in their boat/engine package when buying an upgrade so re-power is less significant to dealers in freshwater markets.)
Engine Choice Has Its Advantages
In certain cases, the reason why a dealer might want to split apart a boat/engine package that what delivered from the boat factory is understandable, Ward said.
“There’s a couple of dynamics working here,” he explained to the MRAA gathering. “No. 1, in many segments, like pontoons, any particular boat has a wide range of power, both horsepower as well as [engine] technology, that the consumer might want.
“On one hand, it’s good that we give them those choices,” Ward continued. “On the other hand, it’s bad because the dealer doesn’t necessarily know exactly what the consumer’s going to want.
“So, in many instances, in many segments, the dealer wants to have the flexibility to deliver that pontoon boat with the 50-[horsepower] or the 75-[horsepower], the two-stroke or the four-stroke, whatever it is. So, in some segments that [engine choice] is good.”
Engine choice also enhances customer satisfaction “a little bit,” said Eric Sorensen, director of marine practice at market research firm J.D. Power and Associates, who gave a separate presentation to the MRAA.
“When a person says, ‘I want a 135 [horsepower] Mercury instead of the 90-horse Yamaha,’ they are assuming ownership,” according to Sorensen. “They are taking responsibility for the decision for that brand, that horsepower, that technology on their boat. So, they tend to be more satisfied with it.”
Ward agrees.
“Many [dealers] have probably built businesses on being able to provide that [boat] with the engine that the consumer wants,” he said. “We, as engine builders, have to continue to push at the OEM level for [boat builders] to deliver a finished product — a real package — to the dealerships.
“But dealing with that flexibility that dealers want relative to some of these segments [where engine choice is desirable] is a huge question mark,” Ward concluded.
Meanwhile, pulling an engine apart from a boat/engine package carries a risk to the dealer because the engine removed from the package might not sell for a long time or at a price the dealer considers acceptable, said Russo, the Boston area dealer. “It might die on the vine,” he said of the separated engine.
Back To The Gray Market
Keeter, the MRAA president, said it is his understanding that a dealer can call a boat builder and buy an engine at below dealer wholesale because the boat builder bought the engine at such a deeply discounted price from the engine manufacturer.
But not all engine builders are happy with the arrangement.
Roch Lambert, vice president and general manager of Bombardier’s Boats and Outboard Engines Division, said such boat builder-to-dealer engine sales violate Bombardier’s supply contract with the boat builders.
Bombardier, manufacturer of Johnson and Evinrude outboards, enforces the loose engine sales prohibition in its supply contract “as best we can,” although Lambert added that the clause needs more teeth.
Now, Bombardier’s contract with boat builders states that Bombardier will stop supplying them with engines if they sell engines to dealers, Lambert said. But he believes boat builders should be made to pay “financial penalties” for violating the loose engine sales prohibition.
Boat builders have the greatest incentive to sell outboards from their inventory near the end of the model year, when they may conclude that they ordered too many units from their engine manufacturers.
However, in such cases, Yamaha Motor Corp. will “take back” its surplus engines from boat builders, Fernandez said. Yamaha then re-sells those engines to its dealers.
“If a builder was selling Yamaha outboards without boats to the dealer, we would be very concerned,” Fernandez added. “We have a program to address this issue. The actions that Yamaha might take would depend upon the facts of each individual case.”
Wooldridge, the UMMA president, said he also knows of instances when engine companies will transfer engines from an over-stocked boat builder to a boat builder with a depleted engine inventory, particularly if the engine company feels it could not supply the short-of-engines boat builder in a timely fashion.
But such market imbalances need to be smoothed-out, Ward said.
“We do not want boat builders to be in the engine distribution business,” he said. “I don’t think Roch [Lambert] does or that Tim [Fernandez] does. We want them to be in the propulsion system business, taking our engines and putting them in the boats and putting together a finished package.
“We’d much rather have the engines come back and go into the dealers. It’ll cost money, but it’s the right thing to do.”
The Boat Builders Perspective
Meanwhile, Irwin Jacobs, chairman of Genmar Holdings Inc., the largest recreational boat builder, was asked during the MRAA gathering why his various boat building companies sell outboards to dealers instead of including them as part of a boat/engine package.
Jacobs, during the MRAA convention, did not answer the question directly. However, when contacted a few days later, he denied selling outboards on the gray market.
“We do offer everybody’s engines, I think that fact is well-known,” Jacobs told the MRAA audience. “The fact is we need to use our buying power so the engine manufacturers could do the things to create more efficiencies for themselves. A dealer isn’t going to order $1 million worth of engines a year.
“A dealer is in the boat business. I understand they’re in the engine business to some degree, but they’re really in the boat business. The dealers who are most successful are the ones who are making it from selling boats, although, obviously, an engine goes with that.”
After the MRAA event, Jacobs said, “I’m not in the loose engine business. Selling loose engines is not the future of this business,” adding that Genmar buys more than $4 million worth of marine engines a year but he is not aware of his company having agreements requiring its engine suppliers to re-purchase its unused units at the end of the model year.
The problem may get smaller when the marketplace reaches the point where it views older engine technologies, such as two-stroke carbureted models, as being obsolete, Ward said.
Currently, the lower retail price is maintaining the demand for carbureted two-strokes, despite the fact that they generally have higher emissions, make more noise and are less fuel-efficient than newer-technology outboards, he said.
“I think, as we reduce the number of [engine] technologies that are available, which we are working toward,” Ward says, “and we begin to eliminate all of these choices, which I think you’ll begin to see, both from an engine-providing standpoint as well as from a technology standpoint, that choices will narrow-down for the consumer and I think will make it easier to drive that type of [packaged boat/engine business] model.”
The Future
So boat builders say they’re not in the business of re-selling engines, and engine builders say they’ll do a better job of policing the practice. But the gray market still exists, and many agree that, at some level, it probably always will.
Market influences could also have an impact of the issue and dry up some of the gray market. For example, Bombardier Recreational Products does not believe its boat builder customers will have surplus engines at the end of this model year because “everyone was cautious this year and we don’t want them to take more motors than they can use,” said Lambert.