Special Report: Scooters Suffering From a Hangover

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scooters PPM report market sales 2008

Editor's note: Power Products Marketing, a Minneapolis research firm, has been tracking the U.S. scooter market for more than six years — including manufacturers that don't report to the MIC. This report was prepared by Matthew Camp, a powersports analyst with the firm, with contributions by Greg Boeder, a senior partner.

THERE'S NO DENYING that 2008 was a great year to be selling scooters in the U.S., but sales for 2009 don't look too promising. Many distributors of nontraditional brands are carrying high inventory levels, and the Motorcycle Industry Council reported very weak sales in the first quarter.

But we'll discuss the outlook for 2009 in more detail later. First, let's recap how 2008 was a breakout year for scooter sales. Sales of scooters made by MIC reporting OEMs increased 41 percent to about 77,000 units, but this still was dwarfed by sales of the nontraditional brands. Some early estimates of the total scooter market were close to 222,000 units. Power Products Marketing, however, now estimates that the nontraditional segment actually grew by 155 percent, to 250,000 units. We estimate the scooter segment's total retail sales for 2008 to be 327,000 units, an increase of more than 114 percent from the prior year.

TRADITIONAL AND NONTRADITIONAL OEMS

The OEMs and distributors competing in the U.S. scooter market can be segmented into two groups: the traditional brands that report to the MIC and the nontraditional brands that don't. The latter were arguably the driving force in the scooter market in 2008. The former are Honda, Yamaha, Suzuki and Piaggio. Honda and Yamaha have maintained their market segment lead but the Piaggio Group of the Piaggio, Aprilia and Vespa brands continues to edge closer to overtaking them. Suzuki looks to be having a difficult time with its emphasis on the more expensive maxi scooters which often require financing.

The nontraditional brands are comprised of U.S.-based distributors selling Chinese, Taiwanese and Korean products often sourced from numerous assembly facilities and manufacturers in Asia — some of which also supply parts or machines for the reporting OEMs. Our research identified the following companies as the current leaders in the market: Chuanl USA, Galaxy Motorsports, Genuine Scooter, KYMCO, Lance, Roketa, SunL, Supermach, Sunright and Womoto. To the extent possible, the figures we provide for the nontraditional brands are limited to retail sales in the U.S. and do not include the significant volumes that are being imported into the U.S. and then resold into South and Central America, Mexico and the Caribbean. We also account for units impounded for noncompliance and those which distributors or dealers cannibalize for parts.

2008 MARKET REPORT

Total sales in the U.S. scooter market that come from published reports and Power Products Marketing estimates appear to have increased to about 327,000 in 2008. The nontraditional brands account for 64 percent to more than 76 percent of the market — a recovery from the slight decline of the prior year.

In last year's report we mentioned the threat of higher production costs facing distributors. These costs increased considerably through 2008, but were counterbalanced by increased demand. We have studied the MSRPs of many of the leading nontraditional models sold through the more reputable distributors, and it's clear to us that these distributors are losing their competitive price advantage in some areas. Their MSRPs are getting closer to those of the traditional brands.

We also wondered whether the nontraditional scooter distributors had improved their inventory controls. In 2005 they experienced supply bottlenecks and lost sales through lack of on-hand inventory. After reviewing the data and speaking to the distributors, we think that scooter sales in 2008 had a strong start to the year, and demand outstripped supply by midyear. We heard reports that arriving containers were being pre-sold to dealers. It appears that many distributors saw fairly early in the year that ATVs were not going to sell well and put all their resources into scooters.

The problem came midyear when most distributors were unable to manage their supply channels effectively. In some cases there was limited capacity at the most popular Chinese producers, and in other instances these same producers didn't have sufficient funds on hand to purchase the parts and raw materials needed to manufacture units. This situation was less apparent with Taiwanese-built products. Quite a few industry sources feel that the market could have topped 400,000 units if the supply situation had been resolved sooner. It appears that some distributors tied in to long-term distribution contracts with specific suppliers even sourced from rival suppliers to meet their dealers' demand for scooters.

Many distributors of nontraditional brands felt they were losing significant sales volumes because they couldn't source products quickly enough and consumers were looking elsewhere. The MIC reporting members seem to have been able to manage their supply channel better and may have picked up some sales because of the low inventories of Chinese products in July and August. The nontraditional brand distributors were able to get their second wave of shipments finally in August and September, just as the main scooter season ended and the economy took a severe downturn.

SMALL DISPLACEMENTS JUMP

According to our research, the 50cc-and-smaller class rebounded to more than 55 percent of the market in 2008, up from 52 percent in 2007. This reversed the downward trend of the last few years. There is still some way to go to get back to the 65 percent market share this class held in 2005. These scooters remain popular with riders who have limited requirements (like commuting short distances) and want the ability to park in bike racks. They also appeal to those who don't want to obtain a motorcycle endorsement. The 51cc-to-155cc category continued to increase to more than 32 percent of the market, with most distributors expanding their offerings in this category (for example, the debut of the retro-styled Symba from SYM). It will be interesting to see if the U.S. is finally ready for machines similarly styled to the Honda Cub.

The top two segments of the market, which represent only 8 percent and 4 percent, respectively, grew considerably, albeit at a steadier pace, than the market as a whole. The traditional brands in these categories were impacted to some extent by the credit crunch, but as more models have become available from China and Taiwan, options have increased. (Look for KYMCO's 700cc machine in the near future.) We've also noticed that there is a small but growing segment of motorcycle riders who are shifting from large-displacement cruisers to maxi scooters.

CHANGES IN RIDERSHIP

Scooters continue to appeal to retirees, RV owners, DWI offenders and "undocumented" workers, as well as die-hard scooterists. Power Products Marketing has undertaken research confirming that there is a limited appeal for college students, but most dealers felt this was an extremely short window of opportunity at the start of a school year. Some distributors have found this out the hard way.

It now appears that the ridership is split almost 50-50 between males and females. This may be a reason why the nontraditional brands are doing so well, as they are not as intimidating to potential female consumers as the male-oriented traditional brands. Dealers have seen more middleclass and lower-middleclass customers drawn into the market to save money on gas. Last year's gas prices expanded the scooter demographic dramatically, but it is uncertain whether this was a one-time occurrence.

PROBLEM OF DROP-SHIPPING

There is a clear difference between the distributors that ban Internet sales and operate through brick-and-mortar stores and those who pay lip service to preventing the practice but look the other way when one of its dealers decides to offer online sales. Internet sales, specifically the practice of drop-shipping, have given the non-traditional segment of the powersports market a bad reputation for quality control and reliability. Many dealers of nontraditional products who we've spoken with over the last year have estimated that the chances of a consumer actually receiving a drop-shipped unit, assembling the machine, making needed adjustments and getting the unit started without incident could be as low as 25 percent. Some dealers are more pessimistic, thinking the failure rate on drop-shipment is closer to 100 percent. That's a lot of annoyed and frustrated consumers.

It's widely known among nontraditional dealers that the scooters coming from Taiwan or China require certain adjustments before they'll operate correctly, but it seems that the average U.S. consumer is unable to follow the instructions provided with the units. Despite the headaches this business model creates, many dealers and distributors have fallen into the "drop-ship trap" because it's relatively easy to set up a website and start shipping units — until the problems start to mount. Then they have to sell more units on low margins in order to finance the repairs on the earlier units.

Internet sales may diminish as more distributors that operate on low margins and use this channel succumb to the stresses of the economy. This should allow the more proactive distributors that actually establish support networks of physical dealerships and service centers to grow, assuming they can weather the storm as well. Scooter dealerships now range from boutique stores to more functional warehouse spaces, but in visiting them around the country over the last year, we found that the most important ingredient in a successful nontraditional scooter store is competent mechanics.

Two common complaints from people knocking the Chinese scooters are the lack of reliability and the difficulty in finding parts. Parts availability is improving, and the more proficient scooter stores are capable of fixing almost any problem. It's all about knowing which part or comparable part from another supplier would work; but many dealers don't want the hassle of learning what works. Drop-shipping and home assembly are largely to blame for poor reliability on many nontraditional scooters. Scooters are the one segment of the powersports market in which the Taiwanese and Chinese are actually able to test out ideas in their own domestic markets. They have to be reliable domestically, so this should translate to their overseas exports. Having said this, quality is negotiable (in China at least), and it's as much the fault of the U.S. distributor as the Chinese supplier if the end product is comprised of shoddy components.

THE MARKET IN 2009

Was 2008 a high-gas-price-fueled blip or a look into what the U.S. scooter market could potentially maintain, and exceed? Sales of traditional brands in the first quarter are down nearly 37 percent according to the MIC. Meanwhile, some of our sources for the non-traditional brands have reportedly posted reasonable sales volumes, but are down considerably from this time in 2008. It's hard to provide a compelling argument that the scooter market is going to be able to maintain, let alone exceed, the sales volumes of 2008. Some in the industry have been predicting double-digit sales growth for 2009, but it appears sales in May and June would have had to been spectacular (along those in this month) for the market to even increase at all. So much is still dependent on gas prices, and while they are nudging upward, it seems unlikely they'll get to $4 per gallon in the near term.

Many distributors of nontraditional brands were carrying significant levels of inventory in their warehouses and on dealer floors at the start of the year. To give an indication of the severity of the situation, Power Products Marketing estimates that there were more units in inventory on January 1, 2009, than were sold by nontraditional dealers in the whole of 2007 — around 100,000 units. Dealers and distributors are going to have to sell considerable volumes before they need to re-order, which probably isn't pleasing most of their suppliers. An indication of what producers in Taiwan may be experiencing was provided by the Taiwan Transportation Vehicle Manufacturers' Association, which recently reported that SYM's and KYMCO's wholesale numbers are down 44 percent worldwide for the first quarter.

On the positive side, most of this inventory on hand is 2009 units, but expect some deep discounting early in the season if gas prices don't shoot way up. At least scooters aren't affected by the recent CPSIA lead content law, unlike other powersports categories. It's too soon to tell how this year is going to turn out. The market may parallel the 2008 nontraditional ATV market, which could not sustain its boom during the previous year. It's going to take something extraordinary to maintain anything close to the 327,000 total scooter market unit number in 2009. But even a decline of 40 percent in the scooter market this year would still put the retail sales at around 200,000 units — a level which until last year had not been bypassed since the 1980s.

It appears that there will be continued stratification of the scooter market into a three-tier market with Taiwanese brands and the more progressive Chinese brands, such as CFMOTO, falling just below the traditional brands while working to differentiate themselves further from the bargain-basement scooters.

Hopefully incentives in the federal government's economic stimulus plan for buying two-wheelers will help boost demand later in the year, and memories of gas price fluctuations will cause consumers to consider scooters again this year. Problems with financing more expensive models are likely to continue through 2009, and this may favor the nontraditional brands. The market is unlikely to be as red-hot as it was in 2008, but a good number of scooters are still going to be sold, increasing the base of consumers with the experience of riding a scooter. It's now a blend of saving money, having fun, being environmentally conscious and having a means of commuting.