As recently as March of 2022, marine industry associations and major marine companies were euphoric about the surge in demand for recreational boats during the global pandemic and offered predictions that interest in boating and demand for boats would continue growing for years. Dealer inventories were at all-time lows if not completely non-existent. At the time, I wrote an article expressing the point of view that the laws of economics had not changed during the pandemic, the industry had not suddenly become great at customer retention, and the cyclicality of the industry would soon bring the inevitable cooling off and slowing of the industry.
In the US, inflation, demand that outstripped supply, and supply chain issues led to significant increases in the price of new boats in the past three years, with some models seeing price increases of 30% during this period. Studies have shown that in normal times the price of boats is highly elastic. That is, as price increases, unit volume decreases. And as new boat prices have risen, pre-owned boats become more attractive to first-time boaters.
In the US, new boat sales have fallen in the past 12 months to pre-pandemic levels, dealer inventories for the most part are back to pre-pandemic levels, customers have become more scarce, dealers need to sell again, and some manufacturers are cutting production. And, the recession has not even begun, except perhaps in Germany.
According to McKinsey and Company, business executive confidence is fading, and global business prospects are viewed far less favorably than six months ago. Only a third of global executives believe business conditions are better today than they were six months ago and only a third believe they will be better in the next six months.
According to the McKinsey survey of global executives, inflation and geopolitical instability top their list of concerns, and two-thirds now see these two things as a risk to global growth. Banking issues with regional banks in the US and Credit Suisse have also raised concern about financial volatility which is now viewed as the number three risk to global growth and has resulted in declining availability of credit.
Inflation is a major risk to recreational boating as it reduces the buying power of consumers who have less disposable income as more of their income goes to food, housing, transportation, and other necessities. While consumer spending in the US has remained strong, we are beginning to see softening.
There appear to be four primary forces that propelled inflation: massive government spending during the pandemic, supply chain constraints, labor shortages, and very low-interest rates for a long period of time. Interest rates have risen rapidly and may be near their peak (though further increases are not off the table) and supply chain issues have moderated significantly, but long lead time remain in some sectors. A tight labor market continues to be a concern for wage inflation.
From a macroeconomic perspective, a recession in the US is expected in the second half of 2023 and the first two or three quarters of 2024 followed by recovery and a strong economy in 2025.
As retail sales of new boats declined by 16% in 2022, dealer inventories are back to pre-pandemic levels and dealers are feeling the sting of higher interest rates on their inventories. Floorplan lenders expect inventory turns to decline and MY 2024 production to be down 9-10% as retail sales drop another 5-8% in 2023. As the recession sets in, economists expect interest rates to begin to fall in late 2023 and throughout 2024 which will provide some relief on floorplan financing costs.
First-time boat buyers surged 21% from an average of 346,000 annually in 2018 and 2019 to 415,000 in 2020 and 420,000 in 2021. When numbers for 2022 are finalized, the number of first-time boat buyers is expected to return to more normal levels around 350,000.
In the meantime, geopolitical volatility impacts business confidence and the stock markets. The stock market impacts the wealth effect which has a more significant impact on large boat sales, which have been holding up well, but are expected to begin declining later this year.
Never get too comfortable with current conditions in the recreational marine industry because you can be sure they are about to change.
Dr. Thomas J. Dammrich, DBA
Tel: +1 847 274 5167
Email: thomas.dammrich@gmba.blue
Disclaimer: Global Marine Business Advisors is a registered legal entity and is a network of independent marine industry advisors. In all articles the opinions expressed are those of the author and does not necessarily reflect those of GMBA.
