Independents’ Day

Consolidation. For years, industry pundits have warned of a dark day when this common business reality would rear its head in the boat building market.
Rising consumer expectations, technological advancements, increasing regulations and stagnant capitalization would put myriad small boat builders out of business, leaving a handful of boat building behemoths, they predicted.
So far, that just hasn’t happened.
In 1995, the independents comprised about 60 percent of the total boat market over 15 feet, according to new boat registration data assembled by market research firm Info-Link Technologies, Miami, Fla. They control that same amount today.
That doesn’t surprise Mike Stamler of the Small Business Administration (SBA). More than 99 percent of all businesses in the United States fit into the “small business” category — defined as 500 or fewer employees. And he doesn’t expect that percentage to shrink.
Small businesses have certain advantages over their larger competitors, and “there’s always going to be somebody who has a new idea and wants to try it out,” he explains. Despite increasing regulations and the threat of big business, Stamler believes that it’s as easy today to start a new business as it was five, 10, even 15 years ago.
Many independents have been able to hold their ground thanks to buying groups. Even while their biggest competitors have grown, these groups have leveled the playing field with the likes of volume discounts on engines, accessories and materials.
One group in particular — the United Marine Manufacturers Association — has even created joint ventures with supply firms in the hopes of receiving further price advantages.
Known as perhaps one of the most vocal leaders of the three buying groups — which include the Independent Boat Builders Inc. and the American Boatbuilders Association — Kent Wooldridge often speaks out on controversial issues in support of his members and continues to push the limits of traditional buying group practices by developing innovative ways to give his members an advantage in the market place.
Now, with Brunswick Corp. aggressively pursuing a vertical integration strategy, it’s no surprise that Wooldridge is a proponent of an industry first — harnessing the collective power of the three buying groups to give their members a leg up on their common competitors.
Brunswick vs. the independents
Despite the independent boat builders’ ability to preserve their market share over the past few years, many challenges lie ahead if they are to grow or even maintain their piece of the pie.
One such challenge is how to respond to recent and future acquisitions by Brunswick as it pursues a vertical integration strategy. The Lake Forest, Ill.-based company, which has owned both boat brands and the Mercury Marine engine manufacturing business for many years, recently began acquiring the very suppliers and distributors with which it — and its competitors — do business.
Consider Attwood Corp., which Brunswick bought in September 2003. So far, it appears most independent boat builders continue to do business with the Lowell, Mich.-based marine hardware and accessories manufacturer, as well as the other suppliers Brunswick has acquired.
“There’s always initially a bit of apprehension in the market place, but these businesses are growing and are in fact meeting or exceeding their financial and strategic goals,” says Dusty McCoy, president of the Brunswick Boat Group.
McCoy believes the independents continue to do business with Brunswick-owned suppliers because “businesses make financial and strategic rather than emotional decisions about who they do business with.”
And he expects those businesses to grow as long as they produce products and services that meet the market’s needs. That traditionally sound business philosophy might prove difficult in practice, however.
For example, many of the independents have multi-year contracts with Attwood. Once those contracts expire, the independents may decide to switch suppliers.
“To the extent that we believe the conglomerates have pricing advantages — thanks in part to the higher prices paid by independent builders, which in turn helps subsidize the low prices paid by the conglomerates — it will be increasingly necessary to re-examine those relationships,” explains UMMA’s Wooldridge.
Jay Patton, ABA president, echoes Wooldridge’s concerns. “We will continue to evaluate our suppliers based on quality, competitiveness and our own strategic initiatives,” he says.
McCoy denies that Brunswick is taking a risk by pursuing a vertical strategy that is new to the industry.
“I think our biggest risk lies in not executing this strategy,” he says. “This industry has not been growing. And one can argue that we’ve not been growing because we have not as an industry been meeting consumer needs.”
The buying groups appear particularly leery of the possibility that Brunswick might soon acquire a supplier with a dominant market position. Gloversville, N.Y.-based Taylor Made Systems, for example, is the largest windshield supplier in the U.S. boating industry. If Brunswick were to acquire it, independents would have little choice over whether to continue their relationship with the company.
Because independent boat builders require access to a strong dealer base, any boat builder that controls or restricts access to dealers also is a particular threat.
Brunswick has had a small equity position in MarineMax and Olympic Boat Centers for several years. But the company doesn’t have a say in the management goals or strategy of either dealership chain nor does the company expect to increase the size of those investments, according to McCoy.
Tracker Marine, however, is a majority shareholder in dealership chain Travis Boats & Motors. In addition, the founder of the boat building firm, John L. “Johnny” Morris, controls Bass Pro Shops, a growing chain of outdoor supply stores that also sell boats and engines. This gives the boat building firm influence over both the dealer base and the retail world.
Other challenges ahead
Competition with the boating behemoths isn’t the only challenge facing the independents, the most common of which is under capitalization.
In good times, explains Wooldridge, a boat builder may want to introduce a product, but not have the resources to create the tooling. Or it may want to launch a marketing campaign to spread awareness of its brand, but lack the advertising dollars.
Capital resources also play a substantial role in regulatory compliance, of which there seems to be a never ending stream, from product and worker safety to plant emissions and other environmental restrictions.
Once feared to be a significant threat to small boat builders, compliance with federal emissions standards for the moment appears to be a non-issue for most builders. The Maximum Achievable Control Technology (MACT) Standards were scheduled to go into effect last month, although the National Marine Manufacturers Association reported that the majority of its members were compliant in 2002. Consequently, any costs incurred to meet that deadline have likely already been absorbed. The federal government isn’t scheduled to reconsider the issue until the Residual Risk Regulations are proposed in about six to eight years.
Genmar Chairman Irwin Jacobs has been pushing for the federal legislation of closed molding, but so far, his efforts have been unsuccessful. Minneapolis, Minn.-based Genmar was an early adopter of the technology, first building boats using the process in 2000. Brunswick began manufacturing boats using closed mold technology in time for the 2002 model year. And more recently, the independent boat builders also have explored various closed molding techniques.
While boat builders are temporarily protected from further legislation on a federal level, the possibility still looms that state governments could require new boat building plants to use closed molding or a similar method as the best available control technology (BACT) to achieve a certain level of emissions.
The advantages of being small
The good news for the independent boat builders is that being small does have advantages. Small companies, for example, are nimble, possessing the ability to enter niches quickly during times of growth. And during softer times, they can quickly scale down.
“Smaller companies are very often more agile and more innovative,” says SBA’s Stamler. “They are able to more quickly make changes and respond to different needs and demands from customers in the market place.”
The owners of small businesses are also more likely to be emotionally involved in the use of their products, claims UMMA’s Wooldridge. Many owners spend time working with the products on a daily basis, looking for ways to do things better.
Conversely, large companies have a tendency to conduct market research, he says, something that can be effective but is time consuming and creates different results than an intimacy with the product on the part of the owners.
In fact, Wooldridge claims that much of the innovation in the industry comes from the independent builders. Part of this may be because small companies can often take new products to market more quickly and with less expense.
“If I’m a big company, my costs of doing almost everything is higher, whereas an independent may work on a new model in his garage in his spare time,” he says. “In a large company, they have to make a decision – if we’re going to introduce this product, it has to generate a significant return for us or it doesn’t make financial sense.”
The independents also have greater flexibility when it comes to choosing suppliers. Because their volume is relatively small compared to a Brunswick or Genmar, independents can do business with a variety of different suppliers.
On the flip side, the large builders are forced to choose from a short list of suppliers that can accommodate the required volume.
In the case of Brunswick, its own boat brands might someday be pressured to purchase from a sister company. The obvious upside is that the supplier and boat builder can work together to reduce costs and meet consumers’ needs. The downside is if a non-Brunswick supplier produces a more innovative product that catches consumers’ eyes, Brunswick’s boat companies might be restricted from using it.
Steering the big ship
It’s no secret that most big businesses are like big ships: it takes them a long time to change direction, which makes them less able to adapt to new technology and consumer trends.
According to Wooldridge, one example of this is the trouble Brunswick had with its US Marine division a few years ago. To adjust to marketplace changes, the company had to cut production and close down plants. While the division seems to be on the improvement path today, it took time to make such dramatic changes and then to see results.
During the same period of time, few independent builders went out of business. They were able to adjust to a decline in sales more quickly, Wooldridge points out, and then ramp up in time for a market rebound.
McCoy doesn’t believe that Brunswick is encumbered by its size, however. While he understands the large battle ship analogy, he believes Brunswick is different.
“There are few people in the industry like George Buckley [Brunswick Corp. chairman],” he explains. “He constantly drives innovation, new products, and requires us to stay very close to the consumer.”
McCoy points to the success of Verado and Bayliner as examples of how the company “keeps its pulse on consumer needs better than most.”
“We are not handicapped by our size,” he says.
Sea Ray President Cynthia Trudell also says Brunswick has successfully managed its role as owner, leveraging its size in key areas, but knowing when to let the brands make their own decisions to satisfy their own customers. If anything, Brunswick has been guilty of being too decentralized in the past, something that has changed in recent years, she says. [See “Why it’s good to be Sea Ray,” at ww.boatingindustry.com.] The advantages of being a large company are numerous, according to McCoy. For one, the company can satisfy consumer needs and demands “in a way nobody else in the industry can,” he claims.
Brunswick also heavily invests in its employees, providing them with learning, training, security, growth and career opportunities.
Evidence for this can be found in the many top executives Brunswick has attracted from other industries, particularly the automotive sector. Trudell, former president of General Motors’ Saturn division, is a perfect example. Claus Bruestle, Mercury Marine’s vice president of research and development, is another. Bruestle, who logged 16 years at Porsche, was drawn to Brunswick by the opportunity to work on Mercury’s Verado four-stroke outboard engine lineup.
A third strength afforded to large boat builders is the financial capability to respond to numerous regulations coming down the pike.
McCoy also predicts that rising consumer expectations will put more and more pressure on boat builders.
“Consumers will continue to demand that our products and services parallel or mimic what they’re accustomed to in the automobile industry,” he explains. “All of this, over time, will penalize smaller, less financially robust builders.”
Brunswick has its share of role models in other industries. McCoy says great companies have a full suite of products and services to meet “every need of their dealers and consumers.” With its new strategy, Brunswick aims to place itself in the same league with companies like Harley Davidson, General Motors, General Electric and Exxon.
Despite such lofty aspirations, ABA Patton isn’t overly concerned. “While we’re certainly watching Brunswick’s strategy and its actions, we aren’t fearful that it will put us out of business or substantially harm us,” he says. “Our members have a strong focus on quality and strong dealership organizations, and we have created our own customer base a base of repeat buyers.”
Patton also suggests demographics favor market growth as baby boomers come of retirement age, and that consequently, “there’s enough to go around.”
Despite that optimism, some still predict consolidation is inevitable.
“I do believe there will be fewer independent boat builders,” says McCoy. “It seems to me there is a variety of factors coming together that will require companies that are successful in our industry to invest more capital and have more financial wherewithal than is required today.”
Despite the challenges ahead, the buying groups will continue to fight for the independents.
“This spirit of entrepreneurialism is what made America great and is the real source of the American Dream,” says Wooldridge. “I know of no remaining parallel with such a significant and visible business like the marine industry that remains dominated by small business. To me, this is one of the last bastions of manufacturing free enterprise.”

Buying Groups Strengthen
Independent boat builders’ participation in buying groups just recently seems to have hit its peak, giving them more power than ever.
Independent Boat Builders Inc.’s greatest accomplishment of the past 15 years is that it has “finally won our members over,” says Tom Broy, IBBI president. The buying group now averages about 90 percent participation by its members in the contracts it signs with suppliers, which hasn’t always been the case, he says.
“Any time you have a new concept, it takes time for people to buy in,” he explains. “The first 10 years, there was a learning curve. The buying groups have really been gaining steam in the last five years.”
Buying groups are relatively new to the recreational boating industry. The first groups were formed in the mid 1980s, and the youngest group that currently exists was formed in 1995.
Today, about 50 percent of independent builders’ volume is produced by companies that belong to a buying group. Those companies that don’t “are at a pretty big disadvantage,” Broy states. Added together, the three buying groups comprise 31 percent of the boat building industry, far more than any individual company.
Despite having a common competitor, the three groups haven’t collaborated in the past, largely because all three of the groups are able to achieve prices on engines, materials and accessories that are close to if not on par with the largest boat builders in the industry. As this is the main objective of the groups, there wasn’t a clear advantage to working together.
“The groups are all managed and structured a little bit differently,” added Broy. “It’s hard enough to get the 24 members that we have to agree.”
But with Brunswick aggressively pursuing its vertical integration strategy, that may change. Today, all three groups see future collaboration as a possibility.
“Given the recent actions of Brunswick, and prior to that, Genmar, it’s obvious that it’s important for the independents to work more closely together than in the past,” says Kent Wooldridge of the United Marine Manufactures Association. “While we enjoy cordial relationships with the other two, I think it’s time we consider expanding those relationships.”
By working together, the independents may be able to further grow their strengths and improve upon areas that have been weaknesses in their competition against the bigger builders in the industry. Certainly, the collective market share of the independents far outweighs what Brunswick can bring to the table today. If correctly managed, this market share should translate into leverage with both suppliers and the dealer network, both of which are vital to the independents’ future. — Liz Walz

UMMA president looks outside the industry
Kent Wooldridge, president of the United Marine Manufacturers Association, isn’t afraid to follow the beat of a different drum if he thinks his members will benefit.
For proof, one need look no further than Omni Composites and the United Composites Manufacturing Association, which were launched by Wooldridge last fall.
Omni is a manufacturer and distributor of fiberglass and core materials formed through a supply and marketing joint venture between several suppliers. Its two current customers are UMMA and UCMA.
UCMA is a buying group for the composites industry that Wooldridge created to help build volume in non-marine industries so that UMMA could lower the prices members pay for composites.
UMMA is the second largest consumer of composites in the marine industry, second only to Brunswick, and Wooldridge predicted virtually all of UMMA members’ fiberglass and core materials purchases would go to Omni by the end of this past July.
In addition, while UMCA currently has only six members, Wooldridge believes that by the end of 2005, the buying group’s consumption of materials will be as great as that of UMMA with plenty of room to grow. The marine industry makes up only about 18 percent of the composites business, he points out.
If Wooldridge’s predictions come true, UMMA members will have a price advantage on composites that no other boat builders in the industry will be able to match.
And Omni may not be the only venture of this kind that Wooldridge pursues.
“Obviously, the Omni model opens a lot of doors,” he comments. “It is a very efficient business model that allows us to be extremely competitive. It is certainly possible that we could extend a similar business model into other product categories.” — Liz Walz

Shifting market share
The number of boat building behemoths has been declining for the past several years. At the end of 2000, boat and engine builder Outboard Marine Corp. filed for bankruptcy, narrowing the field of super builders to just two: Brunswick and Genmar.
More recently, the battle for the biggest was resolved when Genmar sold its aluminum boat brands to Brunswick, leaving the industry with one clear boat building giant.
In 2003 Genmar held about 17 percent of the boat market over 15 feet in length and Brunswick had about 11 percent. With the purchase of Lund, Lowe and Crestliner, Brunswick now possesses about 18 percent of that market, while Genmar holds about 9 percent. This puts Genmar and Tracker Marine within a few thousand units of each other, each holding about half the size of Brunswick’s total share in the 15-foot and under segment.
Boat and engine manufacturer Yamaha can also be included with giants like Brunswick because of its ownership of both engine and boat brands, which separates it from the independents.
Despite these dramatic shifts in market share, the collective share of these five boat building giants hasn’t changed. They continue to possess about 40 percent of the market above 15 feet in length, when measured in units.
On the flipside, the independents have maintained their collective share of 60 percent of the boat market over 15 feet in length. The individual share of each of the three buying groups has changed in some cases, however.
The United Marine Manufacturers Association has grown its share from 9 percent in 1999 to about 14 percent in 2003. The American Boatbuilders Association’s share has increased from 7 percent in 1999 to about 9 percent in 2003. And the Independent Boat Builders Inc.’s share has remained steady at 8 percent.
This means that about half of the units being produced by independent boat builders are made by companies that belong to the buying groups. — Liz Walz

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