Is this a recovery?

When you look at the national boat sales data so far this year, the double-digit declines compared to last year – one of the worst in our industry’s history – paint a grim picture of today’s boating business.

But pick up the phone to call one of our industry’s leading dealers, and you may get a different picture altogether.

That’s what Boating Industry’s editors were finding this spring. Such mixed messages are common during times of economic change, as the first signs of recovery often occur in pockets based on factors like geography and product segment. However, having a firm grasp on today’s market conditions is vital for marine businesses if they are to adjust appropriately. After what they’ve been through in recent years, few can afford to be wrong.

Recognizing all that is at stake for the industry, we set out to determine how the market is performing by going directly to where the performance takes place: marine dealerships. In late April, we interviewed 12 leading boat retailers across North America about their local market conditions, their business’ performance and their expectations for the year ahead.

What we discovered was supported by the results of a recent RBC Capital Markets dealer survey.
As analyst Ed Aaron put it, “Circumstances vary widely from dealer to dealer due to differences in dealers’ local market conditions, financial health, OEM exposure, access to floorplan financing, and other factors.”

With that said, the majority of dealers are reporting some improvement in market conditions, which suggests that the industry is on the right path.

Knowing your geography
The national boat registration data provided by Info-Link Technologies Inc. in its monthly bellwether report shows that while sales of powerboats 15 feet and above during the past 12 months continue to track below the previous 12 months, the year-over-year comparisons are improving.

Such comparisons were at their lowest point in May 2009 when the 12-month, year-over-year percentage change in unit sales showed a decline of 35 percent. Since then, those declines have improved to 24 percent. However, that’s still a long way from flat, which is what many boating companies budgeted for this year.

Several of the dealership principals we interviewed say they are outperforming this national average – and their local market. North Dakota dealer Vallely Sport & Marine, for instance, said its sales are up 10 percent so far this year. New York dealer Strong’s Marine reported a sales improvement of 30 percent. Vermont’s Woodard Marine said its sales are “way up.” And Canadian dealership Pride Marine Group expects its 2010 sales to reflect a full recovery to the peak levels it experienced in 2008.

Despite the good news these dealerships share, each of these regions has experienced the recession differently. The “bottom” for North Dakota, for instance, was much shallower than that of New York or Florida, as demonstrated by Info-Link’s boat registration data. In fact, John Vallely, Jr. of Vallely Sport & Marine reported no more than one or two dealer failures in the Dakotas during the past two years. His market was protected by an emerging oil industry and strong agricultural and medical industries.

The Seattle boat market, in contrast, has seen the number of local boat dealers drop by about 75 percent, according to Alan Bohling of Seattle Boat Co. His company’s sales are up about 30 percent so far this year, but that represents only 45 percent of peak sales, he explained. And while David Briggs of Minnesota dealership Wayzata Marine reported sales for the past six months are up 65 percent over the same period of last year, he credited that increase almost entirely to market share gained due to dealer failures, not to a market rebound.

Without exception, these dealers can be described as market leaders. As such, their results typically outperform the local market. But even the best dealers can be hampered by poor economic conditions. Such was the case at Galey’s Marine in Bakersfield, Calif., where the unemployment rate remains among the worst in the country at 18.4 percent, according to Don Galey. And in Phoenix, Ariz., where about 50 percent of boat dealers have gone under, the real estate market has yet to hit bottom, said Debbie Hayes of MasterCraft Boats of Arizona.

“Once the market turns, we usually rebound pretty quickly,” she said. “But we’ve got to turn that corner, and we haven’t turned that corner yet.”
What segment is the right segment?

Another factor influencing individual dealers’ success is the boat segments in which they participate – and in which they can
get product.

Some dealers – like Florida’s Legendary Marine – are primarily seeing demand in the 18- to 25-foot new boat market. Most of the distressed inventory that remains in the local market is 30 feet in length and above, according to Managing Partner Fred Pace.

The recent success of other dealers, like Texas Marine, is still driven in large part by distressed inventory. The company was able to purchase 100 repossessed boats right before its January boat show. Show sales totaled 150 boats, when all was said and done, which is close to an average year for the dealership, said Mike Hebert, owner.

Wayzata Marine is seeing demand for family runabouts, cruisers and deckboats priced below $100,000, while at Woodard Marine, pontoon boats and aluminum fishing boats have proven most popular this year, but fiberglass boat sales are soft.

With the changes in supply and demand have come improvements in profitability across most dealerships we interviewed. As distressed inventory is cleared out and pre-owned boats become harder to come by, consumers are turning back to new boats. And with most dealers carrying much lower levels of new boat inventory, they are less likely to sell those boats at the bottom of the barrel margins of years past.

“While our margins have moved up substantially from last year, we can’t make the margins of a few years ago,” said Texas Marine’s Hebert.

With that said, RBC Capital Markets’ dealer survey suggests that less than 20 percent of dealers were reporting improvements in new boat margins this spring, compared to the same period of last year. About 28 percent of respondents said that new boat margins remained unchanged, 30 percent saw a slight decrease and 25 percent reported they were down significantly. While this might be seen as discouraging, it represents vast improvement over this past fall, when more than 50 percent of dealers reported new boat margins were down significantly.

Facing today’s challenges
Though local market conditions vary from state to state and coast to coast, most dealers share some basic challenges, a few of which are new this year.

The largest percentage of respondents to RBC’s dealer survey indicated that low consumer confidence was their biggest challenge, as they did this past fall. But that percentage had dropped to about 60 percent compared with the nearly 75 percent who named that as their No. 1 challenge last year. Second on the list, both this spring and last fall, was lack of financing availability, though it improved slightly from about 60 percent in the fall to 58 percent this spring. And third was consumers can’t afford the product, a challenge that increased from about 32 percent in the fall to 42 percent this spring.

RBC also reported that credit conditions – both retail and wholesale – are still worsening for most dealers it surveyed. While the largest percentage of respondents said financing conditions were about the same (40 percent retail, 48 percent wholesale), most of the rest indicated that conditions were worse.

Many of the dealers we interviewed were concerned about the state of retail and wholesale financing, though several indicated conditions were improving. Karl “Scooter” Rambo of Alabama dealership Rambo Marine, for example, said in the past 60 days, a lot of bankers have come into his store wanting to loan him money, whereas last year none visited.

Vallely reported that in North Dakota, the availability of money seems a little better. Local lenders, and credit unions in particular, have gotten pretty aggressive with marine financing, he said. All seem to agree, however, that the addition of new floorplan lenders would help the industry recover more quickly. Wayzata Marine’s Briggs also suggested that manufacturers and lenders would be well served by finding ways to help dealers use their floorplan lines of credit to purchase boats from each other.

Perhaps the most frequently mentioned challenge by the dealers with whom we spoke was product shortages. Already, many of them are having trouble getting the product they’ve ordered for the season ahead, and most don’t currently have enough in inventory to last through the season, if demand continues at the rate they expect.

Prince William Marine Sales CEO Carlton Phillips had two ‘08s, 12 ‘09s and 24 2010 models in stock as of late April. With another 20 boats on order for the 2010 model year, the Woodbridge, Va. – based company doesn’t expect to have enough product to get the dealership through the season. He also didn’t have any late model pre-owned boats, for which there continues to be demand.

Vallely Sport & Marine had only one pre-owned boat in stock in late April and had more new boats on back order than at any other time during the past 10 years.

Rambo Marine said it is already short on its most popular models. But it has been hard to build urgency in customers as they’re not yet convinced that the shortages are a reality, Rambo added.

For some dealers, the challenges of low consumer confidence, lack of product financing and consumers’ inability to afford the product may prevent product shortages from being an issue. But clearly, some dealers are confident they can overcome them.

Two steps forward, one step back
Regardless of the challenges of today’s market, most leading dealers seem to agree conditions are improving. While few expect this year to return to pre-recession levels, many predict sales and profitability increases this year. Of course, these increases may be due in part to market share gained as a result of dealer failures and the impact of spending cuts. However, many of the dealers we interviewed also reported growth in consumer demand.

The outlook of the average dealer, while not as optimistic, has improved since this fall, according to RBC Capital Markets. Its survey suggests that most dealers expect recovery by next year at the latest and that their long-term outlook toward the marine business is slightly brighter.

The boat business, like the economy, seems to be moving in the right direction. Industry leaders whose businesses are well positioned to take advantage of the bright spots are already beginning to reap the rewards. However, they aren’t immune from the new challenges and set-backs that may be ahead. The trick is to invest in future success while continuing to run lean and efficient.

As Jeff Strong of Strong’s Marine put it, “I’m going to err on the very conservative side until we see a more prolonged, sustained comeback. This is my third major recession I’ve gone through, and it’s not at all uncommon to have two steps forward and one step backward.”

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