Uncertainty surrounding possible war with Iraq, weakening consumer confidence, a third consecutive year of stock market declines, and a less than stellar Christmas selling season continue to impede the outlook for future economic growth.
At this point, economists’ consensus is for the economy to continue to grow in 2003, albeit at a less accelerated pace than historically experienced following a recession. Consumer spending continues to support economic growth (although anemic) as real incomes are growing in the 2%-3% range while interest rates remain at historical lows.
A resolution to the possibility of war with Iraq and fiscal stimulus should be the catalysts in 2003 for a recovery in consumer/business confidence and corresponding growth in consumer and business spending. Although President Bush’s ‘Growth and Jobs’ proposal is yet to be passed by Congress, we feel that an agreement will be reached, sometime late in the first half of 2003, enacting a sufficient portion of the president’s package to boost growth.
llegal Cross Border Shipments
A specific issue of concern relating to the powersports segment involves the illegal sale of products (ATVs, Sleds, PWC) into the U.S from dealers in Canada.
The Canadian dealers are able to sell product to U.S. consumers at prices below U.S dealer cost, effectively pricing out the U.S. dealer in his/her market. This activity, as stated, is illegal and a violation of many manufacturer agreements with Canadian dealers who sell into the U.S.
Conversations with U.S. dealers (those who operate in border states) indicate that this problem is serious, and is possibly the largest negative impact on their sales volume. Manufacturers are aware of this issue, however it is unclear how effective their individual policies have been to date in stopping this activity.
In our opinion, manufacturers must take decisive action (i.e. cut off floor plan financing, stop shipping product) to ensure a level playing field for dealers on both sides of the border or risk disrupting smooth distribution on both sides of the border, and losing market share to competitors who do address this issue and can be seen as effectively enforcing dealer agreements.
Outlook: Moderate growth
Overall, our thesis relating to each of the powersport segments (ATV, Sleds, PWC) continues to be that each of the segments in the longer-term should grow at least in-line to double the rate of overall GDP growth.
We feel that growth in consumer spending as it relates to leisure and recreation is sustainable based upon two broad trends:
- Demographics. Peak spending by individuals does not occur until age 46-47, with leisure spending peaking near age 52 (the largest portion of baby boomers will not reach 46-47 for approximately 4-5 years).
- Attitudes. An ongoing positive shift in attitudes toward vacation and leisure activities (especially those involving the family).
Specifically, we expect ATV growth over the next several years to approximate high single digits to possibly low double digits in a normalized economic environment, as this segment remains the most under penetrated of the three major powersports segments (40% of purchases are from first time buyers).
Additionally, ATV sales appear less volatile as they are sold across all regions of the country, have multiple applications that allow use year- around, and less impacted by regional weather patterns.
Snowmobile growth will continue to be highly correlated with winter weather patterns. However, longer-term (adjusting for a more normalized weather pattern in the Upper-Midwest and Northeast regions) we feel this segment can grow in the mid-single digit range driven by favorable demographics and a high repeat purchase pattern of users (approximately 90% of sales are repeat buyers).
The PWC market has likely entered a bottoming pattern in 2002 and should see, at worst, stability over the next one to two years as the economic environment improves and new four-stoke engine technology overcomes some impediments of governmental regulations. Long-term, we see this market growing in the low single digits.