I’ve now spent 30 years working in and around the Powersports industry. The continuing opportunities to contribute to PowerSports Business are an honor that I don’t take lightly. Giving back to the industry that has done so much for me feels like the right thing to do.
In my most recent article, I discuss some of the concerns I have for our industry as we work our way down the back side of the pandemic. The last 2 years have impacted dealers differently, and I have some major concerns that many dealers learned the wrong lessons. Feel free to view my article on pages 4 and 5 of PSB, or you can scroll down to view the original text of the article (due to space, my original article contains a little additional content). Enjoy.
Powersports Business May, 2022 – The Pandemic Paradox – My Greatest Fear (pages 4 and 5)
PSB_May_2022I’m a capitalist, I like to make money. Generally, I believe that capitalism is a good system, although there are some areas where I think there are ways to achieve improve and more equitable outcomes (healthcare, food and nutrition, infrastructure, education, etc.)
While the pandemic has uprooted many lives, the last 24 months have been good ones for most powersports dealers. When Americans were forced to social distance, a new motorcycle or ATV was the perfect solution. Add in a massive Federal infusion of free cash (free to the current generation, very expensive for future generations) along with stretched supply chains, and demand quickly outstripped inventory availability. While most dealers came into the pandemic with more inventory than they needed, showrooms are now empty, and most dealers are begging for more.
I wouldn’t call our current position post-pandemic, but we are nearing a time where most of the U.S. population has been infected and our health care systems are no longer on the verge of a catastrophic collapse. While I don’t believe this virus will ever go away, we are at a point where the majority of Americans have learned to live with it. Annual vaccinations are just going to be part and parcel of our future. We are also at a stage where the government is no longer running the monetary printing presses at warp speed, and the current rate of inflation means that we won’t see much more in the way of stimulus payments.
So what’s my big fear? Well, for most powersports dealers, it’s that they haven’t learned any lessons in the last 24 months.
During the last 20 months, the top dealers in the industry (prior to the pandemic) saw incremental gains in profitability (as a % of sales). While there were nice increases in total revenues, because this group of dealers had done a good job of managing their inventory pre-pandemic, they couldn’t capitalize on all the additional demand that happened once the initial shock of the pandemic had worn off.
The lowest performing dealers in the industry are a completely different story. Many of these dealers had been puttering along, barely breaking even (in some cases losing money) and stocking so much inventory that many had less than a 1.5 annual inventory turn-ratio. They didn’t have strong sales processes, and a lot of these dealers had minimal aftersales (parts and service) capacity. Suddenly, they were selling inventory for MSRP, and since they had so much excess inventory, when the well managed dealers ran out of stock, even dusty old motorcycles in the corners sold at good margins.
The pandemic paradox is that the industry’s worst inventory managers saw the biggest increases in profitability. I’ve seen dealers go from making 1 point nets to 9 point nets. That’s never happened before, and it’s unlikely to happen again. The big problem is that many of these dealers are unwilling to admit that they got lucky. Most wake up in the morning and congratulate themselves for being such incredible operators. The old adage about rising tides lifting all boats has never been truer (although all that extra water makes it easier to drown).
I keep hearing the pundits talking about all the new customers who were introduced to the powersports industry. That’s true. However, what’s not being talked about is the terrible experience many of those customers had when they attempted to purchase a vehicle. Many dealers adopted a take it or leave it sales mentality, while others massively inflated freight and setup charges. Sales staff were so overwhelmed that tens of thousands of leads (probably exponentially more) were never even responded to.
And don’t get me started on Service. I heard of dealers being two or more months out on getting customers in for basic repairs, and then when they could work on the vehicle the parts to fix them weren’t available. Product quality has also fallen to historic lows. Many new vehicles return after their first use for minor, or major warranty repairs.
The customer experience during the pandemic was nothing short of horrendous, and for those who did get the chance to buy, many customers are so buried in their purchase that they’ll never be able to upgrade to something new. Many in the industry refer to these people as “first-time buyers”, while I refer to them as “last-time buyers”. They won’t be back.
While it’s happening slower than I thought it would, dealer inventories are starting to recover. Even with the limited amount of inventory in the field, I’m already seeing some dealers who are using discounting as a closing tool. We are also seeing a reduction in year-over-year lead volume. Now that the population is returning to work and not being forced to social distance, there’s more competition for discretionary dollars.
So, what does the return to “normal” look like? I think many dealers will be surprised by the speed that things play out.
Nobody knows what the real customer demand is
With the limited supply of inventory in the field, customers have been shopping multiple dealerships looking for the vehicle they want. The salesperson tells the customer they don’t have the vehicle in stock. The customer goes on to check with other dealerships. The salesperson tells the sales manager that if the vehicle was in stock, they would have sold it. The sales manager complains to the GM about not having enough inventory. The GM tells the owner that he can’t hit his goals because of all the sales they are missing. Every one of those dealers the customer shopped thinks they missed a sale, when in actuality only one did.
Sales skills have atrophied
Many sales associates haven’t had to sell anything in a long time, they are just taking orders. There’s no negotiation over price, it is what it is. Customers place a down payment, and then don’t hear back from their salesperson for months. Dealerships are no longer conducting sales training. Customers aren’t being logged in the CRM. And, due to all the extra money they are making, for many sales employees, their standards of living have changed. When they have to go back to selling, and paychecks return to normal levels, there’s going to be a lot of stress and turnover.
Supply will again exceed demand
Dealers have picked up new brands and placed orders for all kinds of oddball products. When the showroom is empty, it’s good to have something. However, when showrooms once again start to fill up, that weird stuff from brands that no one can pronounce is going to be a tough sell. Overlay slow moving product with weak selling skills, and dealers will quickly go to the closing tool of last resort, discounting.
It only takes one discounter to distort the market for all the surrounding dealers. I’m not talking about the guy who is willing to give away a $200 gift card with a new ZX-10R, I’m talking about the dealer who is advertising current year model bikes at $200 less than invoice. A good dealer can easily deal with the former, it’s a lot tougher to hold margin when the latter dealers is advertising in your backyard.
And don’t forget that Interest rates are also starting to creep up, and in no time, we’ll be back to spending a bunch of money each month on floor plan interest. Nothing drives discounting more than an owner who just sent a 5 figure check to Wells Fargo to pay for last month’s interest.
Most OEMs are public companies
My last point. All the biggest players in our industry are public companies. Ask any executive from these companies what their share price is, and they’ll respond, “yesterday’s close, or 22 minutes ago?” They will know both and they won’t even have to look at their smartphone. For most of these companies, nothing matters to them more than their share price. If you are a dealer, a customer, an employee, or a vendor, then you are way way way down the list of priorities.
I have always been against public ownership in our industry. Only a small percentage of public companies play the long game. As a discretionary segment, one that relies on cutting edge products, we need suppliers who plan far ahead into the future, not ones who primarily focus on next quarter’s earnings call.
For the last 18 months, every OEM has seen record profits. Even with the supply chain delays, and all of the other issues that we are dealing with, being a powersports manufacturer is currently a license to print money. You ask why, well here are a few reasons
- Not having to subsidize free flooring
- Price increases and shrinking dealer margins
- Borrowing money at rates close to 0%
- Not having to pay out rebates and spiffs
- Surcharges
- Not underwriting customer financing
- Sales reps not incurring travel and lodging expenses
- Slow walking new hires for vacant positions
- Etc.
When the market begins to normalize, manufacturers are going to quickly see a return of the above expenses. This won’t make wall street happy and share prices will start to fall. At that point, the only way to keep the stock value up is to sell more vehicles, and that means we’ll quickly return to the way things used to be. Packed showrooms, full warehouses, and all of the poor behaviors that are associated with those situations.
What’s my greatest fear? Well, it’s not about where we will end up, it’s about the transition period that happens between where we are now and where we will inevitably end up. Our dealership has proven that we know how to make money in the current environment, and we knew how to make money before the pandemic. What I’m unsure about is the time period that falls between those two times, where the competition is flailing around and offering discounts like their life depends on it (because in a sense it does).
As my business partner has said a few times. I don’t know when the market will turn, I just know that when it does it’s going to get really ugly, really fast.
Are you prepared?
#Powersports #RV #Marine #Pandemic #PandemicParadox #Paradox