June 4, 2007 – Data that will change your state of mind

It wasn’t exactly the shot heard ’round the world, but in this industry, it sure could have been.
In early May, David Murray, outside legal counsel for Yamaha Motor Corp., spoke before a Senate committee hearing on ATV safety legislation. The most striking statement in his speech before the Commerce, Science and Transportation Committee was something that should resonate in any future discussion regarding the health of the industry: “ … new entrant sales in the U.S. have grown dramatically, from a few percent of the market in 2002 to nearly 35 percent of the market in 2006.”
Thirty-five percent!
It’s a number that seems almost absurdly high. Yes, we knew that sales of Taiwanese and Chinese ATVs were accelerating, but to that degree? And what does that say about the number of scooter sales by “new entrant” companies? Could they be anywhere close to one-third of the industry’s sales in the United States? Probably, as a recent Powersports Business survey of independent dealers indicated they were selling plenty of new scooters.
The 35 percent number seems a bit high because the traditional ATV market has only dipped roughly 4 percent in each of the past two years, meaning that hundreds of thousands — yes, hundreds of thousands — of new units would have to be reaching the consumer through an alternative marketplace.
Regardless, Murray’s testimony brings up an entirely new dimension to a question that was constantly brought up during a recent trip to the West Coast: What’s the state of the industry?
What we know is that a largely disappointing first quarter has been followed by an equally disappointing April. The why and what for behind that have previously been an exercise in consumer spending 101: If the interest in the product is there, as all indications point to, then what economic impacts are causing consumers to lessen their spending?
But the Murray comment throws the entire state of the industry discussion out of whack because now any such discussion has to include not only if consumers are spending their money, but where are they spending it (franchise or independent dealer) and on what (traditional or new entrant OEM)?
And that’s new, and really a bit scary.
Oh, it was easy enough to discount this element of the industry when it made up just a slight percentage of new unit sales a few years ago. After all, who cares about a few sales here and there when the established brands are pushing thousands upon thousands of new units in their annual market share struggle.
But that’s not the case anymore. Consider: assuming you buy the idea that new entrants are selling 35 percent of the quad market, then the traditional ATV market reported by the Motorcycle Industry Council (MIC) of roughly 800,000 new units would be broadened to roughly 1.2 million vehicles. And if you buy that, then you’re also saying the new entrants are selling roughly the same number of quads that market share leaders Honda and Yamaha are annually selling — combined!
That’s staggering. And again, scary, at least in the short-term economic picture for traditional powersports retail outlets.
The reason it’s scary is far beyond the simple notion that traditional franchise dealers would be selling fewer new units. Metric dealers have dealt with stiff competition for new unit sales for quite some time, so that’s hardly new. What’s new is the idea that the dealer who loses out on the new unit sale won’t have much of a chance to nab that conquest consumer with a great service department promotion or PG&A sale.
That might be too bold of a presumption, but are consumers who spend hundreds rather than thousands of dollars on a new unit going to spend the hourly technician rate on getting their vehicle fixed, assuming the parts are available and the unit in question is even serviceable? Probably not.
Are consumers who spend hundreds instead of thousands on their new unit going to jazz it up with a range of aftermarket products? Probably not.
What about high-end aftermarket products? Definitely not.
And that’s the real short-term economic hit that the industry could potentially see from this surge in new entrants’ sales. PG&A sales, after all, are critical to the bottom line because they have proven to be resilient, and more profitable, even when overall consumer spending lessens. We’ve seen this trend during the past five months in our same store sales information that we run in our Financial section. The chart has shown overall dealer monthly sales were off in comparison to the year before for the past five months (November-March). But PG&A sales have remained largely steady, even eclipsing the prior year in two of those five months. So potentially losing some of that high profit-margin revenue is a real stomach-churner.
Of course, that’s the short-term gut reaction to the surge of new entrants’ sales. There is another side and another argument that says these lower priced units might attract more consumers into the pastime over the long term. And that’s certainly possible.
But it’s also possible that established brands will continue to see their market shares dip — MIC companies, in fact, reported nearly an 11 percent decline in their ATV sales in the first quarter — and traditional dealer profit centers will fall with them.
Which brings us back to the new dimension about the state of the industry that has to be considered: Where are consumers going to spend their money on powersports purchases — franchise or independent dealer?
And on what brand — traditional or new entrant OEM?
Together with this new line of questioning comes a new thought process: It will no longer be enough to simply bring out the best new product. Instead, consumers need to be convinced of the value of the product they’re purchasing and educated on the potential service-related pitfalls with some of the new entrants.
And that might mean rolling up the sleeves and taking a few shots at the new entrants.
Yamaha’s legal counsel, Murray, seemed to do just that when he told the Senate committee, “These substandard ATVs pose unnecessary risks to U.S. consumers and undermine the longstanding safety efforts of (the Consumer Product Safety Commission), consumer advocates and the major companies. The major ATV companies believe that appropriate legislation is urgently needed to address this situation.”
What’s urgently needed — assuming we buy into the 35 percent statistic — is the realization that the new entrants have a firm foothold on the industry and should play a part in any future discussion about its state. psb
Neil Pascale is editor of Powersports Business. He can be reached at npascale@ehlertpublishing.com.