As the new president of Rec Boat Holdings, Roch Lambert was taken aback when he did the math on the number of possible model variations offered on a basic, 19-foot runabout.
“We came close to 500,000 permutations,” says Lambert. “And yet, the industry volume for that kind of boat is probably a handful of thousands. We’re not talking hundreds of thousands by any means.”
Such a high number of permutations has been standard in the boating industry, the success of which is based on its ability to fulfill customers’ on-water dreams. However, market conditions appear to be changing that, at least in one segment of the industry. Lower volumes have boat builders closely analyzing any and all opportunities to increase production efficiency and therefore profits. And economic conditions have some consumers unable to afford the boats they once pursued and others unwilling to spend at those levels.
While a bevy of options will always be available to consumers willing to pay for them, together these forces have led to a recent trend in value-priced boats: a streamlining and packaging of options.
New strategies for a new market
Starcraft Marine and Smoker Craft Inc. started this process of reducing options and consolidating the manufacturing process three years ago, just before the sales decline hit. It was part of the company’s effort to cut costs and reduce the overlap between its three brands, thereby allowing each to attract its own unique customer base.
“The first year, the downturn took its toll on us for trying to accomplish this strategy, but now we’re starting to see the benefits of a more streamlined system,” says Phil Smoker, vice president of sales for Starcraft and Smoker Craft.
Other marine manufacturers have gone down this path after taking inspiration from other industries with similar challenges.
“If you go back 20 years, you could buy an American car pretty much any way you wanted,” Lambert says. “When the Japanese came into the game, they used packages. It forced more commonality between the platforms and configurations, and that made the business much easier to manage.”
It’s unlikely the marine industry will take this trend as far as the automotive industry. Recreational boating is about wants, not needs, and the variation between different regions’ bodies of water limits most manufacturers’ ability to cut options. But there is plenty of room for further standardization, especially within the lower end of the market.
As it is, Lambert doesn’t think the current model of numerous permutations is sustainable, at least for his company.
“The argument you hear is that everyone is doing it, so we have to do it,” he says. “I don’t believe that to be the case. It’s not like we can go from 500,000 to 25 SKUs overnight. But I think there are certain things we can do to simplify the impact of manufacturing but offer enough flexibility to the consumer.”
The higher the number of permutations, the more complex and inefficient the manufacturing process. The current procurement cycle alone requires buying small volumes of a number of different components, which is difficult to manage properly.
“The higher the volume of manufacturing you’re in, the more cadence or standardizations you need to be effective,” says Tom Slikkers, president of Pursuit Boats. “We have to remember that we make our money as a production facility, not by charging high dollar for special items.”
Still, in a time when builders and dealers are desperate for sales, it’s often hard to say no. Market conditions have forced boat builders to agree to projects that they normally wouldn’t consider, such as those involving special requests, says Slikkers. Pursuit Boats is probably processing more special requests today than in 2008, despite the lower volume levels, he suggests.
“Will we continue? We’ll continue to do it as much as we can facilitate without turning ourselves inside out,” he says, “but we have to remember we are a production facility, not a custom shop.”
A paradigm shift
The recession has potential boat buyers holding their wallets closer than in the past.
Equity to fund major purchases such as boats has disappeared, there’s been a backlog of unsold new inventory and there’s been a healthy pre-owned boat market. Customers aren’t just looking for a deal, they’re expecting one.
In response, “value” has become the new industry buzzword. As manufacturers seek the right balance of options, affordability, efficiency and profit margin, some find themselves exploring strategies that they couldn’t have dreamed up five years ago.
Slikkers uses “value” to describe Pursuit’s new Inshore series of 18- to 23-foot fishing and cruising boats, which features fewer than ten options. It’s a departure from the company’s large, luxurious lineup that seems to be resonating with price-conscious consumers. The key to the company’s strategy is pricing.
“Our thought was that we needed to capture as much of the market share as we could without going backward on our own profit and loss,” Slikkers says. “It’s not a traditional math scenario where we price it and ramp it up. I have to look at it from a different perspective.”
Nautic Global Group also made a paradigm shift with its value line.
There’s a yellow price tag icon on the bottom corner of the Hurricane pontoon boat website that reads, “Amazing Boat Deals.” Click on the tag, and it connects to a page of 10 boats, ranging in price from $24,000 to $36,000 — all sold as complete, as-is boats.
It’s a concept that Hurricane parent company Nautic Global Group started pre-recession as a way to attract a value-oriented customer — which it has seen increase since the economic downturn. In the process, it has created a new methodology for how the business operates.
Instead of building a boat, adding up the costs, and pricing the model, the company now starts from the other direction, says Jim Orbik, COO for Nautic Global Group. “We now start with the retail price, and then understand the margin that the dealership would want and then develop a target cost. Then, we look at our margins and develop a target building cost.”
Part of the cost savings comes from internal efficiencies created through a standardized production process. “We’ve tried to balance the needs of the customers with the abilities of the manufacturing process,” Orbik says. “As we have introduced the value lineup, we’ve restricted the number of permutations in the boats, which has helped us hold our costs. It’s also helped us to produce an adequate margin for ourselves and the dealers.”
In fact, dealers have told Nautic that this retail-focused approach and the greater array of value-oriented boats have helped them get through the tough 2008 and 2009 seasons, says Steve Tadd, director of marketing for Nautic Global Group. Value boats now account for up to 30 percent of new boat sales for the company, he says, which includes newcomers to the sport and boaters who are downsizing.
Value packaging is only part of Nautic’s strategy. It’s not something that will work for all customers, Tadd says. “It’s not like we can remove the other 70 percent of our business, but I think the consumer who is looking to pay less money understands that there’s a trade-off for the lower price. They know that they could go up a couple of levels and get boats with 100 different options, but they’ll end up paying for that.”
Upgrade packages, which have been a part of Smoker Craft’s strategy for at least 10 years, have been well received by its customers, according to Smoker. In some cases, consumers can put multiple upgrade packages on a boat for the feeling of a custom craft.
The buy and build experience
Boat manufacturers aren’t the only part of the chain making adjustments: dealers are responding to this trend by developing different inventory and sales strategies (For the dealer point of view, see “Dealers Welcome Fewer Choices, Lower Prices” on page 20).
When Lambert specifically addressed permutations and streamlining at dealer meetings this past year, he met with round support. Now, as the company begins to implement the strategy, he’s expecting a bit more critique, especially when cutting SKUs. “When we get down to the nuts and bolts, we’ll get some push-back,” he says. “We may go overboard a bit, but when we have to add back, it will be from a base that’s manageable.”
Rec Boat Holdings will start designing across all product lines with a modular approach in mind: there will be a series of boats of different lengths, but with elements that are the same throughout. “It’s a transition that will take time,” Lambert says, “but we have a very clear plan of how we’re going to do it.”
The company started implementing this approach in early 2011. Lambert expects to see a significant impact within the product lineup in 24 months and a full transition in 36 to 48 months. The first boats with this approach are in the Four Winns Horizon line, which came out in April.
A simplified lineup can mean a better early-order process, earlier forecasting and a better-stocked service department for dealers, as there will be more parts in common, says Lambert.
It can also change the concept of inventory, Slikkers says.
“The more options that you create and offer, the higher the chances are that what the dealer brings in for inventory is not going to match what the customer wants,” Slikkers says. “If I said, ‘Mr. Dealer, here’s the deal: you’re going to have to invest $1 million and park that money into some inventory, but don’t plan on selling that inventory right away. You’re going to have to use that inventory to sell from so you can get sales because it’s unlikely a customer is going to buy what you have specifically,’ that would be a hard sale, and yet that was exactly what was happening.”
Because of Pursuit’s more streamlined approach, Slikkers says he’s seeing a change coming from the showroom floor. Prior to 2008, the company received a higher percentage of “as sold” build request from dealers. That’s changed: now, more boats are being sold from dealer inventory, which is a substantial shift. “We’ve made our product to the point that it’s OK for someone to take it off the shelf,” he says.
A level of standardization could help resale, too, Slikker says. A pre-owned boat buyer may not be interested in the original owner’s custom features.
“We need to think: what configuration is going to be the most common to 75 to 85 percent of customers?” he says. “Then let’s build the product that way and have a basis that’s about 85 percent right the whole time. Then the options are more regional than personal. When the product goes back on the market, it has a commonality that helps preserve branding and value over time.”
Another benefit to a simplified ordering structure is that it makes the buying process easier for the customer, something the automotive and RV industries have figured out, according to Orbik.
“The option packaging makes it easier to order a car,” he says. “We have to try to group options together that make sense. Maybe two of the 10 people ordering didn’t care if they got a particular feature, but the package made the ordering experience much more simple.”
Some companies are moving toward package-only options, while others are blending this strategy into a hybrid system. Regardless, most agree there will still be a need to account for regional differences, from taste to the demands of different bodies of water.
“If 80 or 90 percent of the retail public can go with the package and the other 10 won’t and want to customize, you have to decide it you’re willing to go after that 10 percent,” Smoker concludes.