Which Brands Will Survive the Recession?

Recently we have received quite a
bit of mail from readers asking if we think this or that brand will survive the
current recession. Typically, readers tell us that they are thinking about buying
a new boat but a salesperson from a competing brand (usually a bigger one) has said
the brand the buyer has their heart set on will not survive the recession. Above
you can see examples of three out of more than 20 brands that did not survive the
devastation caused by the 10% Luxury Tax promulgated by the U.S. Congress in 1991.
So, which builders will survive this rather large bump in the economic road?

Three brands, all different types, did not survive the U.S. Congress’ 10% Luxury Tax: (l to r): 46’ Uniflite, 40’ Trojan, 40’ Jersey.

Since everyone from the President of the United States
on down is saying that this is the worst economic downturns America has seen in the
last 25 years, it is not unreasonable for new boat buyers to want some reassurance
about the brand of boat they are thinking about buying.  Once a salesman finds
out the "other" brand buyers are considering, some are now "confidentially" passing
the word that that brand is in trouble.  What is the truth?

Who Will Survive?

No one has a crystal ball and we are not privy to the balance sheets of any company
that is not publicly traded. Yet based on our experience and our communications
with most of the industry’s leading boat builders there are some very clear indicators
of who will survive. The survivors will have the following five attributes—

1. Good Management

Surprised? Probably not. But what might surprise some people
is that out of the 25 U.S. boat brands that we consider the best managed and operated
in the boating industry, 20 of them are run by people we call “old timers” -- CEOs,
presidents and general managers who have been in the boating industry for 20 years
or more. They have been through bad times before, know how the business operates,
and have learned from their own mistakes and those of others. Newbies, whiz-kids
and Ivy League MBAs usually don’t fair well (although there are a few notable exceptions that
prove the rule.)

 

Sixteen of our 25 best managed companies are independently
owned and 14 of those are actually run by the families or the individual who owns
them. Ten of our top 25 are owned by big companies that own several brands, and
one is owned by a venture capital company. So, just because a builder is small,
or family-owned, does not mean it is in trouble.  There are things far more
important than size when it comes to survival in the boat business...

2. Sound Financial Structure

Again, this is not an earth-shaking revelation, but some people might be surprised
to know that in the boat business there is something just as important as being
big – and that is having no debt, or very little. That is how the small, independent
boat builders survive. In bad times they lay off the staff, lock the doors and go
fishing. When the economy returns they hire their workers back. Because most boat
builders are located in places where good jobs are scarce, they can do this.

Independent builders with no debt, or with moderate amounts of debt that have good
local banking relationships have weathered storms in the past. Not all banks are
in bad shape and the NMMA has recently gotten the boat industry on the list of recipients
of TALF help.

Large, publicly traded conglomerates are usually not going
anywhere and they can be counted upon to protect their most valuable brand names.

Brands owned by exceedingly wealthy individuals or family
trusts should be considered much as one would a large conglomerate.

There are other builders with financial support structures
that are not readily apparent such as government contracts or on-going commercial
business. Some small builders have other sources of income such as old traditional
boatyards with repair, service, and storage cash flow. Lately a number of creative
builders have gotten into rehabbing their customers’ old boats and one builder is
rehabbing other brands as well,
effectively turning part of his factory into a boatyard.

3. Good Reputation

In times like these, even a great brand name with huge debt could be in trouble
in any business. It seems that no brand of boat, no matter how old or highly regarded
can withstand years of mismanagement or hard times with high debt. However, a great
brand has value in itself, and if one goes out of business, usually there will be
another boat builder willing to buy the tooling or rights to the brand name. If purchased by a company with good management, most brands with a good reputation
continue on satisfactorily and some cases go on to be even better than before.

 

Be advised, however, that the buying company usually only
purchases assets and not liabilities. Warranties are liabilities. Nevertheless,
in the past some boat company buyers have taken on warranty responsibility in fact,
if not in contract, to protect the brand’s reputation when there was not a systematic
problem.

4. Good Customer Service

Good customer service is a necessity in good times – and in hard times its absence
spells sudden death.


5. Low Overhead



Because of buying consortiums and anti-trust laws companies these days, both large
and small, pay about the same for raw materials and components. Some companies use
more expensive materials and components and build in more equipment as standard,
but beyond that the great variable cost is corporate burden. Historically, that
has always been relatively low among most U.S. boat builders, lower still among
builders in the Far East, and highest among well-known European builders who have
had to invest in market creation as well as selling their own brands.

Companies that can maintain quality, good customer service,
market efficiently and keep overhead low will be best served. We don’t know of a
company that hasn’t drastically reduced overhead during the last 10 months, so now
the only question is can they maintain quality, customer service and market effectively.


Conclusion



For 40 years we have seen one down cycle after another during which builders predicted
annihilation of their small or seemingly weak competitors, only to find that most
made it to the other side of the rough patch, the large exception being the aftermath
of the 10% Luxury Tax.



Because of the devasation of the early 1990s, there are not many builders of large
boats left in the U.S. and those that are still standing have undergone numerous
trials by fire.  We think most will make it.  Those that don't will be
back under different ownership. 


Small boat brands in the U.S. are protected somewhat from foreign competition by
the shipping costs across two large oceans, so unlike large boat brands, they only
have domestic competition to worry about. We and most others think sales numbers
will be low for a year or two, so surviving companies will be those which can get
buy on reduced cash flow.

 

We are sorry to say that new builders and new brands are
the ones most vulnerable to this or any recession. They have not had time to build
up infrastructure, brand awareness and a customer base, all of which are required
for a chance at positive cash flow. Timing in the boat business is everything.

 

So, a few companies will fail, to be sure, but most will
not. The next time a boat salesperson tells you that a brand you are considering
is going out of business, ask if the merits of his own product are so limited that
he must sink to denigrating the competition.