Boat, RV makers to buyers: Don't worry, be happy

CHICAGO (Reuters) - When the Chicago Boat, RV & Outdoors Show opens this week, exhibitors have a ready answer for consumers spooked by the deep economic downturn and surging unemployment.

Stop worrying. You can afford this.

Faced with one of the most significant recessions in decades, manufacturers and retailers of pleasure boats, campers and other recreational products are setting aside two areas inside the vast McCormick Place convention center to showcase the less-expensive ends of their lines.

Inside these so-called "Affordability Pavilions," would-be buyers with "smaller budgets" will find an array of boats and RVs they can finance for $300 a month or less, according to the National Marine Manufacturers Association trade group, which produces the show.

If the industry seems to be encouraging people to whistle past the graveyard, Rochdale Research analyst Hayley Wolff predicts it is not would-be buyers who are headed for the cemetery. She is more worried about retailers and manufacturers.

After enduring three consecutive years of rapidly falling boat sales, and four years of declining RV sales, retailers and manufacturers now face what Wolff predicts will be a "precipitous" decline in sales again in 2009. Many are unlikely to survive the first half the year, the industry's key selling season.

"You are about to see a huge contraction in the industry," Wolff said. "Over the next four months you are going to see retailers closing their doors at a pace the industry has not ever experienced."

DESPERATE DISCOUNTS

That loud sucking sound coming from the industry is not just the watercraft side of the business. At last month's Recreational Vehicle Industry Association trade show in Louisville, Kentucky, Craig Kennison, an analyst at Robert W. Baird & Co, estimated attendance was down 40 percent.

"We expect the winter to take more casualties as dealers and manufacturers face liquidity problems," Kennison said. The good news? "Desperate manufacturers are discounting aggressively to convert inventory to cash -- sometimes below cost."

So the emphasis on affordability at the Chicago show is not disingenuous. There really are deals out there, with retailers cutting prices and manufacturers throwing in a lot of their own incentives.

The question is: Will middle-income consumers, faced with skyrocketing unemployment and unprecedented economic uncertainty, buy?

Tom Dammrich, the head of the NMMA, says yes. "It's not as many people as we'd like to have buying," he said. "But they're buying."

Middle-income buyers matter most. Although one-of-a-kind, multimillion-dollar mega-yachts provide the eye candy at the boat shows, this is an industry that lives or dies by volume.

Its best-selling products are much more affordable watercraft. The average price of a new boat is $13,944, according to the latest NMMA figures. The average boat, motor and trailer package is somewhere near $27,000.

NMMA data shows the industry's customers are overwhelmingly middle-class, with nearly three-quarters of all current boat owners having household incomes below $100,000. In other words, the industry is overwhelmingly reliant on the willingness of middle-class consumers, most of them homeowners, to open up their wallets with confidence.

That, of course, is the problem. Consumers are anything but confident, according to government data, as a result of falling home prices and spiraling unemployment.

BOOMER DEMAND WAVE EBBS

The more recent credit crunch has heightened the industry woes by prompting many lenders to exit the boat-financing game. In a business where three-quarters of all boat buyers need to borrow money to make their purchase, that ebb tide of financing has been devastating.

As sales have contracted, inventories have bulged. This has put another squeeze on retailers, who are required to put up more cash to lenders the longer the boats remain unsold, and has forced manufacturers to take one production cut after another.

"The (inventory) aging problem prevents many dealers from ordering more inventory -- hurting manufacturers and suppliers," said Kennison.

The problem is so bad that the NMMA is allowing half the boats being shown at any show this year to be previous model year boats, up from 20 percent last year.

To be sure, the recent drop in oil prices has eliminated one major headwind for the industry, whose products not only epitomize "nonessential" consumer spending but guzzle gasoline as well.

Lower energy prices, however, are not enough to save the day when unemployment is at a 16-year high, house prices are still plummeting and the air is aflutter with pink slips.

The only question is how bad will it be? Rochdale's Wolff thinks the declines will be "precipitous," as much as 40 percent below 2008's dismal boat retail sales figures.

"Boats are expensive to buy and own," she says. "With retirements likely getting pushed back because of falling home and 401(k) values, the wave of baby boomer-induced demand likely has stalled."

Dammrich at the NMMA trade group calls Wolff's prediction "way pessimistic" and predicts boat sales will rebound in the coming years to 2005's level of 300,000-plus units.

But he acknowledges the first half of 2009 will be tough and says the coming consolidation will fall more heavily on dealers than manufacturers, because producers tend to be larger and better-capitalized.

"The manufacturers have more staying power," he said. "But will we lose some manufacturers this year? Yeah, probably. But I don't think it's going to be that many."

(Reporting by James Kelleher editing by Matthew Lewis)