That said – the inventory bounce might be very spectacular indeed. I wish to illustrate with an (admittedly) extreme example – the manufacturing of recreational motor boats (scornfully known in the Australian vernacular as “stink boats”).
Stink boats are obviously high value highly discretionary items – and they should be (and are) ground zero for the massive swings in discretionary consumption in the global economy. That said the issues in the stink boat industry are highly exacerbated by problems with “floor plan finance”.
Floor plan finance is the provision of finance to dealers (cars, boats, RVs, manufactured houses etc) to finance trading stock on the dealer’s floors. Floor plan finance has become more difficult to obtain and (far) more expensive – so dealers are responding in the rational manner which is to cut back floor stock.
By far the most extreme illustration I have seen is Brunswick Corp – the world’s biggest recreational boat maker. The stock has been a wild ride going from $45 to sub $2 and back to $8. It is operationally and financially levered to the centre of the storm…
End retail sales are down 25-40 percent – see this quote:
First, let me review some of the preliminary second quarter U.S. Marine industry data, starting with fiberglass, sterndrive, and inboard boats, which fell by 34%. In the prior two quarters, the rate of decline was higher, in the 45% to 47% range. In the second quarter of 2008, units fell by 35%. Outboard fiberglass boat retail unit demand fell 30% in the second quarter of 2009. In the previous two quarters, declines were higher, in the range of 40% to 41%. In the second quarter of 2008, units fell by 25%.However the dealers are choosing to reduce their floor-stock at least in part driven by the financing costs for this…
Now let's turn to some key factors that influenced our wholesale demand, that is, the boats we sold to our dealer network. In addition to the underlying retail demand, another factor that is having an effect on overall wholesale demand is the availability and cost of floorplan financing. Several traditional floorplan lenders have exited the market, or materially reduced their exposure, and the remaining lenders have imposed stricter lending criteria as they seek to protect the quality of their loan portfolios. Although Brunswick dealers continue to benefit from the financing availability provided by BAC, our joint venture with GE, beginning April 1, dealers became subject to revised terms, including higher financing costs and loan curtailment payments. These changes translate to higher costs for dealers to carry inventory, which has led Brunswick and our dealers to reassess and ultimately reduce wholesale orders. This will ultimately lead to a healthier marine environment, with lower inventory levels held in the dealer system.
In response to these market factors, and our strategy to do all we can to protect our dealer network, we have reduced the number of units that we sold to dealers nearly 60% in the second quarter versus last year. This is the same percentage decline experienced in the first quarter of 2009.As a result of our reduced wholesale unit levels and the impact of higher discounts, Brunswick's boat segment sales declined by 77% in the second quarter, compared to the decline of 64% in the first quarter of 2009.
As we execute our strategy to maintain high levels of liquidity, and assist the dealer network in this weak Marine market, our production rates during the quarter were well below our wholesale unit sales. This lower network production reflected about a 75% decline in units produced versus the second quarter of 2008. This compares to our 60% decline in the second quarter wholesale units, which I have previously mentioned. More importantly, in our fiberglass boat businesses, our production levels were about 13% of our retail demand, and in our engine business, overall production was reduced by approximately 65%, this follows a 75% reduction in the first quarter.
This looks like a V-shaped recovery – at least for stink boat manufacturers.