Dealership Consolidation Likely to Continue

It’s not too often that boat dealers are confronted with a new way to conduct business. So it really came as no surprise that, when three dealership “roll-up” firms burst onto the scene in the late 1990s, many retailers prepared to jump on the consolidation bandwagon.
Years later, however, that bold and potentially profitable dream hasn’t become a reality for most dealers. Consolidation has slowed in recent years, and with two of the three roll-up firms facing financial troubles, many dealers may have assumed the trend has now come full circle.
In reality, though, that doesn’t seem to be the case. While most industry experts agree that mass consolidation is unlikely on a national level, there does appear to be a trend toward regional consolidation. In addition, two of the three roll-up firms are now talking about the possibility of further acquisitions in 2004.
The theory behind the boating industry’s roll-up firms is simple: Boat retailing is fragmented, comprised of thousands of family-owned, single-location companies that are so small — less than $5 million in annual sales — that they are inefficient. If many dealerships merge, the larger firm will combine administrative functions, thus reducing overhead, retaining quality employees by offering more professional and financial growth opportunities, and getting quantity discounts from boat manufacturers. The resulting “economies of scale” would allow them to offer lower prices and better service to retail buyers.
The roll-up phenomenon, which has occurred with varying degrees of success in other retailing industries, created either delight or anxiety among the boating industry’s dealer body. Some dealers were delighted because they felt roll-up firms offered an opportunity to get an attractive return on the investments they had made in their businesses. Others, particularly those who were not interested in selling, worried about competing against behemoths with larger financial and marketing resources.
Of the three roll-up firms, MarineMax Inc., has been the most successful in terms of profitability and the number of locations it operates. Formed during 1998 with the combination of six large, major Sea Ray dealerships — Bassett Boat Co., Louis DelHomme Marine, Gulfwind USA and Gulfwind South, Harrison’s Boat Center and Stovall Marine — MarineMax is the only national boat dealership roll-up firm. With 66 stores in 15 states, MarineMax stretches its reach from Florida to California, extending as far north as Minnesota, New Jersey and Ohio.
Meanwhile, Travis Boats & Motors Inc. actually was the industry’s first roll-up firm, completing an initial public offering in 1996. It has remained in its home Gulf Coast states region, however, and because it incurred significant financial losses in recent years, it did not make any acquisitions during its fiscal years 2001 through 2003. It also reduced its number of stores from 34 to 30 between Sept. 2002 and Sept. 2003.
The industry’s third roll-up firm is Olympic Boat Centers, which began as a major Bayliner dealer in Washington state and became a roll-up when it was acquired in 1998 by management and leveraged buy-out firm The Riverside Co. Olympic is now a significant West Coast regional player with 18 sales and service locations and two service-only locations extending from Vancouver, British Columbia, Canada, to San Diego, Calif. However, Olympic’s attempt to extend into the Upper Midwest with the acquisition of Link Recreational Inc., with locations in Minnesota and Wisconsin, did not work out, so Link was divested by Olympic and Riverside, said Rik Tokuno, who became Olympic’s president and CEO during the summer of 2003.
Planning for acquisitions
Currently, there are about 8,500 to 9,500 boat dealers in the U.S., including those who handle other product lines such as snowmobiles, motorcycles and all-terrain vehicles, according to Phil Keeter, president of the Marine Retailers Association of America (MRAA). Of that number, Keeter estimates that only 3,500 to 4,000 sell only boats, marine engines and related equipment.
Although MarineMax, a New York Stock Exchange-listed company, has acquired 15 boat dealership firms, two boat brokerage businesses and one full-service yacht repair operation since its initial public stock offering in June 1998, the MRAA data suggests the boating industry’s dealer body remains fragmented. So it’s no surprise that MarineMax executives still are on the acquisition trail.
Although MarineMax declined to respond to questions about its future plans, the company revealed in the Securities & Exchange Commission report for its fiscal year 2003, that it will continue “pursuing strategic acquisitions to capitalize upon the significant consolidation opportunities in the highly fragmented recreational boat dealer industry by acquiring additional dealers and related operations and improving their performance and profitability through the implementation of our operating strategies.
“The primary acquisition focus is on well-established, high-end recreational boat dealers in geographic markets not currently served by us, particularly geographic markets with strong boating demographics, such as areas within the coastal states and the Great Lakes region.”
MarineMax’s most recent acquisitions include: Sundance Marine, with locations in Grand Junction and Denver, Colo., completed last June; Killinger Marine, with locations in Pensacola and Ft. Walton Beach, Fl., and Gulf Shores, Ala., completed last September; and Fort Lauderdale-based yacht brokerage Emarine International, completed last October.
Meanwhile, Olympic, which made its last major acquisition in 2000, when it purchased Marine Center Inc., and its 11 California locations, wants to get involved in acquisitions activity again, Tokuno said.
“Going forward, our plans are to either evergreen (build from scratch) or, through acquisitions, add new stores,” said Tokuno, who left Seattle-based mobile electronics and wireless communications equipment retailer CarToys Inc. last July to join Olympic. “We’ve done a lot of work the last eight months and gained a lot of traction and made a lot of improvements. We’re in a position today where, if the right opportunity is presented, [an acquisition] is feasible. But we are not aggressively seeking as we speak.”
As a result of the Marine Center acquisition, Tokuno said Olympic is “the dominant (marine) retailer west of the Rockies. We are the only marine retailer to service all western cruising waters. That’s a pretty strong strategic position to be in.”
Even if MarineMax completes more acquisitions at a rapid pace, Tokuno believes, “There exists an opportunity for an excellent operator to intelligently and methodically consolidate this very fragmented industry. Whether or not it’s Olympic remains to be seen.”
Meanwhile, Tokuno described Riverside, Olympic’s parent, as a venture capital fund in the business of “buying existing companies to add value and sell at a profit. So, it’s not a question of if Riverside might sell (Olympic), it’s more a question of when it will sell. And the answer clearly is ‘Yes’ if the price and timing is right.”
When asked if Riverside might sell Olympic to MarineMax, Tokuno replied, “The MarineMax question probably is better left unanswered.” He added, “I have not engaged in any conversations with MarineMax.”
Regional Consolidation
Although the pace of acquisitions by the three roll-up firms has slowed in recent years, another trend has emerged: successful boat dealerships in certain regions adding more locations through acquisitions, evergreen start-ups, or by partnering with another marine retailer or marina operator.
A few examples of this trend are the Crystal-Pierz Marine organization in the upper Midwest, Skipper Bud’s along the Great Lakes and Gulf Coast, and Russo Marine in New England.
Crystal-Pierz, with nine retail locations in Minnesota and one each in Wisconsin and North Dakota, is primarily a seller of brands built by Genmar Holdings Inc. Crystal-Pierz has around $80 million in annual sales, of which roughly 75 percent is Genmar-built product, said Myron Kujawa, the company’s owner.
Kujawa owned a NAPA auto parts store when he began selling boats as a sideline in 1984. But by 1989, Kujawa’s boat sales exceeded his auto parts sales, so he became a boat dealer full-time.
Although Crystal-Pierz has grown as a result of evergreen start-up and the acquisition of “failed or failing dealerships,” Kujawa said the company has been profitable each year since 1987. And as of January, he said he was planning to add another store in the southeast portion of the Minneapolis-St. Paul metro area.
The growth on a regional basis of Crystal-Pierz and other dealerships helps explain why Genmar President and CEO Grant Oppegaard believes the dealer body will consolidate, although he added, “I don’t think it’ll be dramatic.
“I don’t see a lot of dealer organizations going public, but I do think you’ll see more and more dealers combining their operations or one selling to another,” Oppegaard continued. “It (dealer body consolidation) will continue because the consumer is becoming more sophisticated and is demanding better service. In order to give the type of service the customer expects, the dealerships are going to have to be much more sophisticated and it takes more capital resources, (employee) training, things like that.
“So, I see more regional consolidation. I think the MarineMax (national roll-up) strategy is interesting and they’ve done very well in the marketplace, but I don’t see a large number of public companies coming about because of dealerships consolidating.”
Genmar’s attitude toward dealer body consolidation is “it’s fine,” because the larger retail organizations “will deliver better service to the customer and grow boating by making it easier (for the consumer) and more profitable for the dealer and manufacturer,” he said.
Also, in smaller communities, smaller boat dealers are “exactly what’s needed,” and Oppegaard said some of Genmar’s smaller dealers “do very well in terms of CSI,” (consumer satisfaction index ratings).
Concerning Crystal-Pierz, Oppegaard said, “We consider them an outstanding dealer, but I can tell you we have several outstanding dealers in the (Minneapolis-St. Paul) metro area that can compete very effectively with Crystal-Pierz.”
Other Opportunists
Perhaps the largest non-roll-up in the boating industry is the Skipper Bud’s/Skipper Marine retail sales and marina management company with 21 locations in Wisconsin, Illinois, Michigan, Mississippi and Florida.
“We’re a consolidator,” said Skipper Bud’s Chairman and CEO Mike Pretasky. “We’re buying out marinas and marine dealerships as they fit our game plan. We’ve more than doubled the number of our facilities in the last 10 years and nearly tripled our sales in that period.”
He declined to reveal the company’s sales revenue figures.
“I wouldn’t say we’re shopping, but we’re opportunists,” Pretasky continued. “If the right opportunity came either adjacent to, or in our current markets, we’d take a look at it.
“A roll-up, to me, is done after a new entity is formed, so I don’t think we qualify for that. We’re not out there [making acquisitions] for the same reason MarineMax or Olympic would be doing it. We were growing within our market areas and absorbing the fringes of other market areas that made sense for us along the Brunswick product line.”
About 75 percent of Skipper Bud’s sales are Sea Ray brand boats, built by Brunswick Corp., proving that MarineMax has not crowded other Sea Ray dealers out of the marketplace.
Representing Sea Ray helps explain MarineMax’ success, Pretasky believes. “Sea Ray is such a strong product line and its dealers, generally, are in better shape. It’s a higher-end product that has a higher volume and it’s easier to make money with higher volume.”
Operating retail sales locations a significant distance from the home office does present challenges, Pretasky admits.
“In the case of operating marinas, we don’t find it difficult at all,” he says, “but when it comes to retail boat stores, every time you move further away, it does get a little more difficult.
“Fortunately, all of our retail stores are within what we consider our model of operation. We’re not on the West Coast, the East Coast and down South where you really have distinct methods of operation. Where we operate, we use the same model for all our stores. Some may have more large boats and others more small boats, but the markets are pretty similar, and that makes it easier for us.”
Boston area dealer Larry Russo, owner of Russo Marine, which generates $30 million in sales from retail operations in Medford, and Quincy, Mass., and Wakefield, R.I., said MarineMax would be a formidable competitor, although not because its size and finance strength allows it to exert brute force in the marketplace.
Russo does not compete against MarineMax because its closest location to his territory is in New Jersey. But he respects MarineMax for not using its size to squeeze smaller dealers out of business by driving down prices and eroding wholesale profit margins.
“They are not tough to compete against on (profit) margin,” Russo said. “They get top dollar for their product because they’re delivering the dream. Their marketing message is: ‘Let us take care of your boating needs. We’ll do everything for you. We’ll not only sell you a boat but we’ll teach you how to run it, we’ll find you a place to keep it. We’ll provide the maintenance the insurance, the services that are required.’
“Hassle-free boating is what MarineMax delivers. Well, that comes at a price. But that’s my model too. We do not sell on price. We sell on service and amenities. We offer the same bouquet of services that MarineMax does.
“I respect their model because that’s the way it should be,” he said. “Boating is complicated. If you make it simple for the consumer, you win. The price will become secondary.
“They (retail boat buyers) are overwhelmed by all the challenges, the barriers and the unforseens about acquiring, servicing, storing, maintaining and financing. If you can, upfront, deliver in your marketing message that you have answers for all their questions, you’ve captured that customer. Because when he goes elsewhere in the market and all they’re selling is price, price, price … they’ll come back to the retailer who offers the most value, not the best price.
“That’s the MarineMax model and I respect that.”

MarineMax, Brunswick Have Close Ties
The MarineMax Inc. boat dealership roll-up was formed when six major dealers of Brunswick Corp.’s Sea Ray brand combined. But the relationship between MarineMax and Brunswick is deeper than the typical manufacturer-dealer partnership because Brunswick also owns a significant amount of MarineMax’ stock, and MarineMax provides a significant portion of Brunswick’s annual revenue.
When MarineMax first sold shares of its common stock to the investing public during 1998, Brunswick, also a New York Stock Exchange-listed firm, bought 1.86 million MarineMax shares, an amount that was equivalent to 39 percent of MarineMax’s stock at that time.
Since then, MarineMax has issued more stock, but Brunswick continues to own the 1.86 million MarineMax shares, an amount now equivalent to 12 percent of the dealership roll-up firm, according to a Securities & Exchange Commission (SEC) document filed by MarineMax on January 5.
Brunswick’s interest in MarineMax is understandable, given the fact that MarineMax is the largest retailer of Sea Ray, Boston Whaler, Meridian and Hatteras boats and yachts, all Brunswick brands.
MarineMax believes its sales accounted for more than 10 percent of Brunswick’s total marine sales during the 12-month period that ended last September 30, and that its sales accounted for around 33 percent of new Sea Ray boat sales.
Sales of new Brunswick boats also accounted for around 65 percent of MarineMax’ sales revenue, which totaled $607.5 million during its fiscal year 2003.
However, the dealer agreement involving Brunswick and MarineMax gives Brunswick the right to block an acquisition by MarineMax that would result in MarineMax accounting for more than 49 percent of all Sea Ray sales, according to the MarineMax SEC document filed on December 29.
In addition to its product offerings, MarineMax’s success comes from implementing the best practices of the dealerships that combined to form MarineMax, plus the best practices of the dealerships it has acquired since 1998, said Bill McGill, chairman, president and CEO.
“Our success can be tied directly to the strength of our team,” said McGill, who owned Gulfwind USA, one of the original MarineMax dealerships. “We operate MarineMax with a fairly decentralized approach that helps to ensure the local community interaction is not lost when a dealer becomes part of our family. Yet, we also capitalize on our size and ability to leverage part of our inventory and team across the country.
“Our corporate headquarters (in Clearwater, Fla.), which we call Team Support, recognizes that we are here to serve our stores to make their lives easier, so they can focus on taking care of our customers and our team. When operating in this fashion, we ensure the passion stays within our people, which ultimately helps ensure our success. Our team is focused on reducing the hassles of boating for our customers, focusing on the lifestyle trends today of family and stress relief.
“Most true ‘roll-ups’ have to rely on cutting costs to gain enhanced profitability and an increasing stock price to complete mergers. The overwhelming majority of our growth comes from increased same-store sales. When we do complete a merger, we flow significant cash from operations that allows us to grow regardless of our stock price.”

Russo/Pretasky Skeptical about roll-up potential
At least two boat dealers who operate from multiple locations are skeptical about the possibility of dealership roll-up firms, with the exception of MarineMax Inc., succeeding on a national scale.
The two dealers, Larry Russo, principal of Russo Marine and Mike Pretasky, chairman and CEO of Skipper Bud’s/Skipper Marine, believe the success of MarineMax, which has locations as distant as Florida, California, New Jersey and Minnesota, is a one-time-only event.
MarineMax was successful primarily because it mainly represents Brunswick Corp.’s popular Sea Ray brand of boats. It grew by purchasing the strongest or second-strongest dealership in each market it entered, and it competes by offering “hassle free” boating to its customers, not necessarily the lowest prices, they said.
But aside from MarineMax, Russo, who generates $30 million in sales from two dealership locations in Massachusetts and one in Rhode Island, said, “This industry is not the office supplies industry (where Staples and OfficeMax virtually made the locally owned office supply store extinct). This is a very difficult industry to identify because marine retailing is done differently in almost every state in the country.
“It’s not just a regional thing, not just a North-South thing, it’s an East-West culture, a freshwater-saltwater culture, a trailerable-non-trailerable issue, a winterzing-non-winterizing issue,” Russo said. “And businesses are built around the nature, the culture, the seasonality of where business is done.
“It’s very difficult for a national corporation to consider a massive roll-up because they can’t build a purchase model and they will not be able to sustain a business operations model because of all of the vagaries and the variables. The best boat dealer in the state of Maine doesn’t look anything like the best boat dealer in the state of Arizona. Where are the commonalities? If you can’t see commonalities, then how can you create economies of scale? If you’ve got to do it differently in every dealership, you’ll go mad trying to create balance and efficiency.”
Meanwhile, at Skipper Bud’s, which operates 21 dealership and marina locations, mainly in the Great Lakes region, but also along the Gulf Coast and in Florida, Pretasky believes many independent dealerships are too small to interest consolidators or roll-up firms.
Pretasky, who considers himself a consolidator said Skipper Bud’s grew by building new dealerships, or acquiring existing operations at the fringe of its market areas.
However, the average boat dealership is a small, single-location, family business with less than $5 million in annual sales, according to Phil Keeter, president of the Marine Retailers Association of America and is therefore too small to interest Pretasky,
“There’s a plateau that it takes, whether you’re in the boat business or the car business, to just stay in business today,” Pretasky said. “We have virtually no appetite to buy a $3 million or $4 million store, unless it’s in a market where we think we could get it to $8 or $10 (million), but I don’t know of too many of those.”
Independent owner/operators of boat dealerships in the $3 million to $5 million annual sales range can earn an adequate living and most likely, will remain in the business because “they just don’t know anything else to do,” Pretasky said.
He believes that when they want to retire, they will have difficulty finding a buyer. And if the next generation of the family is not interested in staying in the business, then the number of boat dealerships will decline as the owners either close or sell the real estate to someone who puts the site to some other use.

Olympic poised For Growth
As is the case with the MarineMax Inc., West Coast regional dealership roll-up, Olympic Boat Centers benefits from a relationship with boatbuilder Brunswick Corp.
While MarineMax is the leading retailer of Brunswick’s Sea Ray brand, the second-most popular fiberglass boat brand in the U.S., Olympic is the top-seller of Brunswick’s Bayliner and Maxum brands, said Rik Tokuno, Olympic’s president and CEO.
Bayliner is the top-selling fiberglass brand in the U.S., according to independent market research firm Statistical Surveys Inc., and Takuno said Olympic, which also has stores in British Columbia, is the leading retailer of the Bayliner and Maxum brands worldwide.
Now, with 18 sales centers and two service facilities extending from Vancouver, to San Diego, Olympic plans to have “north of $140 million” in sales revenue during 2004, he added.
More than 80 percent of Olympic’s sales are likely to be Brunswick-built boats.
Olympic became a dealership roll-up shortly after its principals, David Keyes and Barry Mattaini, sold control of their business to leveraged buy-out firm The Riverside Co. during 1998.
Olympic has been profitable each year since Riverside became involved, Tokuno said.
Among the first executives to join Olympic after the Riverside transaction was Bob Steinway, the former president of U.S. Marine, now a Brunswick subsidiary and manufacturer of Bayliner, Maxum, Meridian and Trophy brands.
However, Olympic did have one misstep during the first few years of its existence under Riverside’s control, when it acquired Link Recreational Inc., a multi-location boat dealership company with stores in Wisconsin and Minnesota. Olympic and Riverside eventually divested Link and Steinway moved to the Link organization.
“Bob (Steinway) went with Link and that turned what could have been not so good a situation into a win-win,” Tokuno said. “Remote locations certainly are a challenge to manage to maintain consistent quality of service, and the level of the company’s ability to service those Midwest stores was not adequate. There were no economies (of scale) to be gained.
“It (Olympic) was an extremely powerful force in the Northwest, and it got to be a success because its two founders (Keyes and Mattaini) were extremely capable and knowledgeable boating experts. They enjoyed great success for many years because they were very passionate about what they did and exercised extreme control over the management of the company.
“Now, add a remote location, one that is out of arm’s reach, that you cannot simply run down the street and do this or do that, that introduces a new challenge,” he continued. “It goes beyond just transferring the culture and the levels of service. It amounts to how good you can be when you’re not around to oversee the business very carefully. Careful planning, ensuring the consistency of culture and levels of service, and effective methods and management systems are critical for managing multiple remote locations. Without them, companies get in trouble.
But a lot of improvements have been made since Tokuno joined Olympic during July 2003, so he believes some expansion in 2004 is also possible.
Olympic may grow by building locations from scratch (evergreen), or through acquisitions. Although the evergreen approach can require more upfront investment, Tokuno said acquisitions mean “you get all the good and all the less than good.
“To maintain culture and to operate the business exactly as it should be, the challenges certainly are less with new stores as opposed to integrating (existing) cultures and systems.”

Travis to sell additional Tracker Models
Dealership roll-up firm Travis Boats & Motors Inc., which has struggled financially in recent years and now is controlled by an affiliate of boatbuilder Tracker Marine LLC, plans to inventory more Tracker boat models during its fiscal year 2004, which began Oct. 1.
Tracker Executives did not reply to an e-mail from Boating Industry containing questions about the future of dealership roll-up firms and consolidators. However, Travis, a Nasdaq Stock Market-listed company, reported in a Securities & Exchange Commission (SEC) document dated Jan. 13 that it will buy 30 to 40 percent of its fiscal year 2004 inventory from Springfield, Mo.-based Tracker.
An affiliate of Tracker called TMRC LLC controls Travis by virtue of owning 4.61 million shares of Travis stock, or about 57 percent of the dealership firm.
During Travis’ fiscal year 2003, which ended last Sept. 30, Travis ordered $10.9 million worth of inventory from Tracker, 15.6 percent of its inventory for the 12-month period. During Travis’ fiscal year 2002, Tracker models accounted for only 3.6 percent of Travis’ inventory.
While Travis’ ordering from Tracker is going up, its ordering from Genmar Holdings Inc. is decreasing, according to the SEC document. Travis ordered 35.6 percent of its fiscal year 2002 inventory from Genmar compared to 25 percent of its fiscal year 2003 inventory, it reported.
The Genmar brands Travis ordered during its fiscal years 2002 and 2003 included AquaSport, Carver, Larson, Ranger, Scarab and Wellcraft.
Most of the multi-year supply contracts that Travis had with Genmar had expired before Sept. 30 and had not been renewed either by Genmar or Travis, according to the SEC document.
Meanwhile, Travis has entered into multi-year supply contracts with Tracker.
Travis became the boating industry’s first dealership roll-up firm in 1996 when it sold stock to the investing public to help finance more acquisitions. It was started in 1979 as a single-location dealership in Austin, Texas, and by 1996 was the operator of 12 “superstore” locations in Texas, Arkansas and Louisiana.
It grew to 39 locations during its fiscal year 2000 but earned a modest $897,000 on sales of $217.7 million during that period. During its fiscal year 2002, Travis operated 34 stores but lost $16.8 million on sales of $176.5 million.
Travis closed four more stores during the 12 months that ended last Sept. 30, reducing its number of locations to 30. It closed two stores in Tennessee and one each in Arkansas and Florida during the April-through-June portion of 2003.
Although Travis’ fiscal year 2003 sales revenue declined to $109.1 million, from $176.5 million in fiscal 2002, its net loss also narrowed to $4.7 million.
During its fiscal year 2003, Travis embarked upon a restructuring program that included the aggressive discounting of “prior year and discontinued inventory” that it still had in its showrooms and on sales lots. As expected, the deep discounting had “a short-term adverse effect on average retail prices and gross profits,” the company reported in an SEC document.
Travis also hired a new chairman, former Circuit City consumer electronic store executive Richard Birnbaum, during April 2003. As executive vice president of operations and marketing, Birnbaum, 50, was part of the management that expanded Circuit City from 50 to 600 stores.
Birnbaum retired from Circuit City in 2001 and is the principal of an independent consulting firm, RSB Group LLC, in addition to being chairman of Travis.

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