PRICES GO UP; nothing new there. As the general economy experiences inflation, so does the powersports industry.
In the past couple of years, however, increased costs for fuel and freight, record oil prices, and rising prices for raw materials such as steel, aluminum, titanium, nickel, nylon and chemicals have put a strain on aftermarket manufacturers, and their profits have slipped.
Companies that import European-made products to the United States are reeling from poor currency exchange rates. When compared to the euro and British pound, the dollar's value has sunk since 2000 (see line graph "Currency Problem? What Currency Problem? "). When European manufacturers convert dollars into their own currency, they lose money — just as if it were snatched from them.
The rapid ascent of the Canadian dollar in the past year has also caused a problem, because the manufacturers haven't adjusted their prices accordingly. The result? Canadians are crossing the border to buy vehicles and aftermarket products from U.S. dealers. Heck, they don't even need to get in the car; the Internet enables Canadians to order the U.S.-priced apparel and parts directly from home.
There is a powerful pressure to keep prices flat or even to lower them, and it comes from the general slowing of the powersports industry. Lower demand typically means lower pricing. One would assume PG&A sales track somewhat with decreasing vehicle sales. Knowing that prices won't be as unstable due to lower sales volumes isn't exactly reassuring.
SO WHAT SHOULD DEALERS WATCH OUT FOR?
Dealernews senior editors Guido Ebert, Dennis Johnson and Arlo Redwine spent much of December and January contacting manufacturers and distributors, and speaking with economic experts. What they found out is what dealers should watch for in 2008:
Increased prices. Raising prices is the most obvious way for a manufacturer to counteract rising costs, though the decision is far from simple. Market share vs. profits is a constant dilemma. The manufacturer must decide whether to raise wholesale and retail prices, or just wholesale. The majority of vendors raise both, but dealers should monitor their margins. At least one vendor featured on the following pages admits to lowering its dealers' profits.
Decreased selection. As production and shipping costs rise and sales and profits fall, manufacturers often cut their slow movers. Whatever the product, enough has to be sold at a high enough margin to warrant the cost of producing it. Look for fewer imports from not only Europe but also Asia, due to higher freight costs and the slowing market.
Companies moving production. The Big Four learned their lesson when the dollar lost much of its value against the Japanese yen; they moved a portion of production to the United States. If a foreign company builds its product with dollars and sells in dollars, currency exchange becomes a moot point. Now a few European aftermarket vendors are doing the same. This may give them an advantage over other products on your shelves.
Fewer promotions and less advertising. Vendors that do retain their prices often suffer lower profits, which means less money for marketing. Have you noticed that your favorite brand doesn't seem to be "out there" as much?
Cheaper materials. No vendor will admit to cutting corners on production, but quality often suffers during bad times, so watch out for it. Sometimes, of course, manufacturers just get lucky. Take, for example, the growing popularity of blacked-out parts as opposed to those plated in more expensive chrome.
Growing exports. When the euro is worth more than the dollar, U.S. companies selling products to Europe reap the benefit. Distributors Parts Unlimited, Tucker Rocky and Global Motorsport Group have been selling globally for a while, and some vendors are following suit. Companies that globalize may be affected less by a slowing domestic market. Dealers are also getting into the international game (see "Should Dealers Sell Internationally?").
AN UNFORTUNATE SERIES OF EVENTS
MANY AFTERMARKET VENDORS blame high oil prices and the weak dollar for forcing them to raise prices more than usual in 2008. For some perspective, Dealernews talked with Esmael Adibi, director of the Anderson Center for Economic Research in Orange, Calif.
First, the weak dollar. "It's a very complicated matter," Adibi says. Whether a vendor is hurt by an exchange rate depends on who's doing the building in what country with parts or materials of what origin. An American-based vendor importing materials, for example, might have to pay more for those materials.
Even vendors whose factories are in China may suffer, Adibi says. If they pay the Chinese in dollars (or dollars converted to yuans), they benefit from the exchange rate because their costs are based on a weak currency. But if they're instead charged in strong euros (as many European vendors are), they're hurt. "It depends on what currency they write their contract in," he says.
U.S.-based companies selling to Canada, the U.K. and the European Union love receiving payments in the strong currencies, but Adibi notes that values could always shift in the other direction. "You don't want to suddenly build infrastructure for exporting based just on the exchange rate," he cautions. He suggests that companies plan for the long term instead.
Higher exports would add to the national GDP, but Adibi says the weak dollar is bad for the overall economy because Americans lose purchasing power as the prices of imported products go up. "Inflation is obviously bad news for the average worker," he says. Higher prices for imports could help pull up prices of domestically made products as well.
Is there any chance the dollar will bounce back? Only in the short term, Adibi says. "Against the euro and even the Canadian dollar, the dollar depreciated too much, too fast, so I think it probably has a little room to improve. But in the long run, there will be pressure on the U.S. dollar."
Eventually we could see another 20 percent decline in the dollar's value against the euro, Adibi warns. What's to blame? Mostly, the country's inability to save. "We are borrowing a whole bunch of money from abroad," he says. "Those lenders —whether they're Chinese or Japanese or whoever — they say, 'Hey, why should we lend over there if the currency is going to be weaker?' Because if they lend money, and they want to transfer it back to their own currency and the dollar is weak, they're not going to get as much."
And if the demand for Treasury bonds (i.e., dollars) weakens, the dollar's value naturally declines.
THREE FACTORS INFLUENCE OIL PRICES, ACCORDING TO ADIBI.
- Supply and demand: "Demand particularly from China and developing countries has been strong," he notes.
- Politics: "If we had total peace and no enemies in the world, oil prices could have gone down by $20-$30," Adibi hypothesizes. "You don't know what is going to happen to even Iraq or Iran or Russia or Venezuela, so this geopolitical factor makes predicting very difficult."
- Value of the dollar: The world's supply of oil is priced in dollars, making a natural connection. "Those guys who are selling us oil, they need to buy things in Europe, so the oil prices have to reflect that."
Adibi sums up the situation like this: "If the dollar gets stronger, oil prices are going to go down. If the geopolitical situation improves, oil prices are going to go down. And if we experience a significant world economic slowdown, oil prices are going to go down. On a fundamental basis, I think prices should be around $70-$75, but there are all these additional factors."
NOLAN HELMETS: Prices Up
Nolan manufactures its helmets in Italy and gets paid in dollars by U.S. distributors, says Nolan's Catherine Epain. The company decided to increase prices this year at all levels: distributors, dealers and retail. "Since the dollar started sliding compared to the euro, Nolan has been holding their prices because they did not want to show a price increase at retail," she says. "That meant working with very narrow margins for several years."
Because of low margins, money for promotions has been limited. "Even though our sales have been increasing, we will operate with the same promotion budget as last year," Epain says.
Nolan helmets are imported by CIMA international. The company distributes several other brands, such as France's Bagster (luggage and covers), Italy's Bodz and Skoz (technical underwear and socks) and Germany's Hads (headwear). Despite the higher prices of these products, Epain says they have an advantage over their Asian counterparts: "We believe that at a time of many recalls due to uneven quality control in the Far East, European or U.S. products are a better guaranty of consistent quality." But the weak dollar remains a problem. "We are holding [prices] as long as we can, hoping for the currency trend to change," she says. "Some suppliers actually gave us extra discounts to help us with the change. Another supplier agreed to sell to us in U.S. dollars that he will use to purchase raw materials."
Not surprisingly, Epain says CIMA's margins can't approach those often found with products made in developing countries. But this reportedly does not affect dealers: "Their margin is protected," she asserts.Putting a good spin on the situation for importers of European products, Epain sums up the situation like this: "The consumer has a choice: buying cheaper products made in Asia wondering what the quality is, or pay more for higher-quality products that protect 'endangered jobs' — because the situation is the same in Europe as it is here. For helmets, the choice looks obvious, quality before price, no? For the rest, we hope that American consumers can tell that the difference in quality justifies the difference in price."
RC Components: Leaner Manufacturing
RC's president and owner, Rick Ball, says the skyrocketing cost of nickel has hurt the company's chroming business, especially for its RC Components Brand forged wheels, which come with a seven-year warranty.
During the chroming process these products spend more time in the nickel tank, Ball says. Given that the cost of nickel is up by 12 percent to 14 percent year to day (compared to a standard 1 percent to 2 percent annual increase) things are starting to pinch.
"Last year and again this year , we raised our dealer retail price 2 percent and are making less profit each year and are taking a little profit off the top," Ball says. "I don't think this market right now can bear the high prices."
The company is looking for ways to cut waste and streamline production. Faster methods for machining, polishing and shipping — they're all fair game. Over the past three years RC Components has changed its assembly line twice to lean out manufacturing. The result? The company's sales for 2007 were relatively flat, dropping by only 1 percent to 2 percent.
S&S Cycle: Combating Trade Imbalance
The aftermarket engine giant does not use unilateral pricing strategies; rather it looks at each specific product group and bases prices on raw material costs and overhead for design and product support, says S&S president Bret Smith. As such, there have been some increases based on these factors.
"This year, I believe the largest contributing factor was the cost of raw materials and shipping as it pertains to the cost of fuel," Smith explains. "Exchange rates are actually helping us in overseas countries right now because the dollar is weaker.
"We are and continue to be a predominately — if not nearly exclusively — U.S.-based and -oriented company that exports to other countries," Smith says. "We are doing our part to combat our trade imbalance with other countries, not increase it."
AMSOIL: No Cutbacks Planned
Amsoil is a Wisconsin-based maker of lubricants. Says the company's Ed Newman: "Rising costs of doing business — guess that is something that concerns a few people. We have a price increase scheduled for March, I believe. Offhand I do not know the amount as yet. My assumption is that they would be across the board. Rising raw materials costs is the primary driver.
"As for cutting back promotions, no plan to do that," he continues. "At this point we plan to stay the course and continue with more of what we have done that works, expecting continued growth."
ROMAHA: Splitting the Cost
Romaha is a regional distributor based in Huntington Valley, Pa., that does 80 percent of its business on the East Coast. It has a 450-page catalog and a new dealers-only Web site at www.romaha.com.
Among the company's imports are Suomy from Italy, Zox from China, and THH from Taiwan, which is also where Romaha makes its house-branded products. The distributor's Frank Drachman says the company is going to split any price increases with its dealers.
"We will eat a significant portion of the price increases," Drachman says, "because if we pass 100 percent of it on, it would be so frightening to the dealers that they may go elsewhere."
As a rule, Romaha does not raise prices throughout the year. "We only raise them one time and one time only, and that is when we print our catalog that comes out right around Indy time," Drachman says. Unlike some distributors, Romaha won't raise wholesale prices during the year. "That's not right. Then your dealer doesn't know what to charge," he says.
Because most of Romaha's imports come from Asia, freight costs are the main concern. Luckily, Drachman says, fuel surcharges can go away as fast as they appear. "We'll eat some of that and hope that we can reap the rewards when prices for fuel go down a little bit. But as a natural course, prices do go up," he says.
Baker Drivetrain: Steady Prices — Until Now
Despite the steady rise of steel and aluminum prices — especially for the grades that Baker uses — the 10-year-old company has held its prices steady for the past five years or so through smart purchasing practices and more efficient manufacturing. Owner and founder Bert Baker says the company's location in Michigan allows it access to highly skilled labor left behind by the fleeing automotive industry, thus helping the manufacturing and design side of things. Baker himself is a veteran of General Motors.
But change is afoot. For 2008, Baker says, "We will probably increase prices by 3 per-cent on the average across our products ... at the wholesale level and about 5 percent at retail. It was probably a long time coming." The company is also taking a sharper look at where its advertising and promotions dollars are going. Not slash-and-burn across the board, just being smarter and more thrifty, Baker says.
"These are tougher times without a doubt. The bubble has burst in the whole American V-twin thing," Baker notes. "I think that's good in a way because there were a lot of people in the business who probably shouldn't have been."
On the upside, he expects to grow his export business above its current 10 percent and sees great potential in the Japanese and European markets. He predicts that Parts Unlimited/Drag Specialties expansion into Europe will be good for his business.
CASTROL: Big Enough
Castrol's Rick Elkins claims his company isn't as dependent on spot crude market prices as other lubricant companies because it is a large, multinational company with its own worldwide oil production capacity. "This avoids the huge price increases we have seen in the marketplace," he says. "We are able to add some new-and-exciting leading-edge technology to our products for 2008, but maintain the pricing at 2007 levels. We are increasing our marketplace activities even more in 2008 as we introduce our new-technology products."
Yoshimura: Holding Its Own
"At Yoshimura, we build virtually every component of our exhaust systems in-house and are constantly refining our cost of goods," says Brant Russell VP of sales and marketing. "The goal, of course, is always to lower prices and increase margins, but these last few years we've been focused on simply maintaining existing price points. Our ongoing savings from continually improving manufacturing efficiencies are not keeping pace with raw material inflation, but we are holding our own."
For 2007 the company posted price increases of 2 percent to 5 percent across about half of its product range. There are no "substantive" changes planned for 2008. Russell attributes these increases to (no surprise) rising material costs for commodities such as stainless steel and titanium. Demand in China and kinks in the supply line from producing countries are key factors, he says.
Benchmark Helmets: Harder to Grow
Benchmark Helmets is a relatively new company that imports retro-styled helmets that are handmade in Italy. "With the slowing down of the industry and the falling dollar, it has been harder for us as a newer company to grow," says Benchmark's Michael Bloomer. "This has been especially difficult trying to sell high-end helmets when the market is saturated with helmets from the Far East.
"Some of the manufacturing costs have gone up," Bloomer continues, "and we are taking cuts on our end, leaving dealers and consumers at the same price."
Instead of increasing retail prices, Benchmark has responded to falling profits by focusing on only its most popular helmets. In fact, it is cutting three of the five models it originally carried.
FMF Racing: 'Slight Adjustments'
For 2007 and again for 2008, FMF is making only slight adjustments to select items in its product line, says Doug Muellner, national sales manager. Most of these increases, he says, are tied to product improvements. "We attempt to hold pricing whenever possible and offset materials increases by forecast planning and purchasing of raw materials," he says. "We monitor raw materials prices and other economic barometers and plan in advance whenever we can."
Like other American manufacturers, FMF looks to the European market for a healthy portion of its revenue stream. Muellner says the company has a number of importer/distributors in a number of European countries and is looking for further sales growth on the continent.
Goodyear/Dunlop Tires: Increasing Capacity
In the fourth quarter of 2007, Goodyear/Dunlop posted a price increase for motorcycle and ATV tires, but there no are specific price increases yet planned for 2008, says Dennis Teed, marketing manager. "On average, our increases have been just below 5 percent, varied by product segment. The primary driver to our price adjustment is raw material cost increases. Many of our raw materials [costs] are tied to the cost of oil, which also has an indirect impact to overall transportation costs," he adds.
Given that the brands' tires are manufactured at a facility in Buffalo, N.Y., the company has weathered the currency fluctuations a bit better than those based offshore, he says. The company continues to increase capacity and improve efficiency at the plant, he notes.
Pirelli: Protecting Price Increases
"Here's the thing. If you look at a company as a whole, we produce tires in Europe and it makes it harder to sell the tires into the U.S. But it also makes other markets stronger," says Pirelli marketing coordinator Kevin Allen. Canadian sales are good, as are those to other countries where the exchange rate isn't so extreme he says.
And despite the soft market for bike sales Pirelli has had one of its best years in a while. Allen attributes this to more people spending money to maintain their current rides as well as jumping sales of scooter tires.
The company has also been diligent in predicting price increases so that it can keep its pricing competitive without having to institute any one-time whoppers.
Silkolene: Lowering Prices
Silkolene USA does not plan to increase prices in 2008, says the company's Jim Ricci Sr. On the contrary, it will be lowering prices on some of its mineral-oil-based and semi-synthetic products. "You're probably wondering how we can do this when the price of a barrel of crude base stock is going through the roof," Ricci says. "Well, it's not just one simple factor, but a combination of decisions."
First, Silkolene moved a part of production from the U.K. to the U.S. This helped curtail not only the poor dollar/pound exchange rate, but also the high costs of shipping stuff across the pond, Ricci says.
"The next part of the cost savings was our ability to negotiate a lower price for our base stock here in the States," he says. "Since we were producing more of our products here, the volume levels were much greater than before."
The last piece of the puzzle was a decision to reduce company profit margins based on projections that a lower price point would increase Silkolene's market share and growth rate.
MOTOPLASTIC: 'A Tough Issue'
Motoplastic SA is the Spanish manufacturer of Puig racing screens, which are distributed by Tucker Rocky and Western Power Sports. "The USD topic is a tough issue for Europeans," says the company's export manager, Carles Puig. "We are on a thin line right now, and we are trying to manage to keep our presence in such an important market."
To retain market share, Motoplastic has been working with low margins for two years, Puig says. Now, however, the company has been forced to ask distributors and dealers to accept smaller margins. "We appreciate their understanding and help," he says.
From early 2006 to today, distributors have seen a 27 percent increase in prices, with the bulk of the increase taking effect this year. Dealers have seen a 19 percent increase during the same period. The suggested retail price of a racing screen went from $72.95 to $84.95, a difference of only 16.5 percent.
Puig calls the reductions in distributor and dealer margins "terrible actions that need to be done," adding "the ones who are taking a bigger risk are the distributors and ourselves, hoping on a stronger USD."
Motoplastic has cut its budget for promotions and advertising in the U.S. "It is absolutely the only way," Puig says.
LeoVince USA: Raw Impact
"We are going to raise our prices this year, and this is more a reflection of general market conditions than on the exchange rate," says U.S. manager Tim Calhoun. Much like other manufacturers, LeoVince's price increases and decreases target individual product categories.
The biggest threat to pricing, Calhoun says, is the cost of raw materials, specifically for the high grade of titanium the company uses for its exhausts. LeoVince competes against various governments to secure a supply. Three years ago the metal cost $10.50 per pound. Now it's about $30 to $35 per pound, Calhoun explains.
To confront rising costs, LeoVince three years ago optimized its manufacturing line by cutting materials waste, culling slow-moving products and downsizing its product range. The Italian brand has also cut some of its race support. This has allowed the company to hone its marketing efforts and optimize warehouse space.
"It's painful, yes, but we're handling it well," Calhoun says. "We're not letting it dictate what we do as a company, but we have to be smarter in watching the market."
Kenda USA: Tube Prices Up
The current exchange rate madness doesn't affect Kenda because it's products are made in Taiwan, says John Leale, national sales manager. The cost of petroleum products for both tire manufacturing and transportation costs? Now that's a different story. Leale says the cost of Buna rubber, the main ingredient in inner tubes, has forced tube prices upward 20 percent at a time. Consequently, he says, Kenda is making a little less money, as are its distributors.
Samson Motorcycle Products: Back to Black
Mr. Samson, Kenny Price, says while his business has felt the rising price of steel and other raw materials, these costs are a small part of the manufacturing process. It's more labor-intensive than anything, he says.
What has hit Samson, however, is the cost of chroming, which he outsources. "The cost of chroming our products, every piece we make, has gone up, so we have to pass it on. We try to do it in a very subtle way so we can cover the costs — not make a profit, but cover the costs," he says. "We're not out there to make a killing. We're out there to stay in business." For 2008, Samson is looking at an average price increase of about 5 percent across its product line of 500-plus part numbers.
The company has cut some slow-moving products and brought back some older exhaust designs that had fewer parts that needed chrome plating, such as heat shields. For the coming year, Samson is adding the ceramic-coated Sinister series of pipes to its product line. It's also making exhaust pipes with more interchangeable parts.
Not only is the black ceramic coating less expensive than chrome plating and an effective coating for exhaust pipes, it's also a hot look that is becoming more popular, Samson says.