Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:54} I'm doing research on the industry, specifically on OneWater, who tell investors they have a huge opportunity and many years of runway to buy dealerships because the industry is so fragmented, so I'm trying to assess that story and it sounds like you're a great person to talk to. What is OneWater's reputation in the industry among manufacturers, both in absolute terms and relative to MarineMax and the other bigger players?

{audio:0:02:41} OneWater is known as being a premium dealership and are very selective in their selling locations and the partnerships they make. They have a very good reputation and it is a big deal as an individual dealership to become part of OneWater.

{audio:0:03:19} If I have built a three-location business over the last 30 years and getting towards the end of my career and looking to sell, is OneWater my buyer of choice?

{audio:0:03:49} They aren't the only buyer of choice. Some dealerships like keeping it a privately owned company and others don't have an exit strategy and are shopping for a buyer. OneWater is definitely the person everybody will call, in addition to MarineMax and others. OneWater often has more favorable purchase agreements with the owners. Being purchased by OneWater or MarineMax involves different types of selection criteria as they have different business models in the marine space. They are both accumulating marine dealerships and are publicly traded, but they don't have the same dealership structure. MarineMax has locations in the same areas as OneWater, but OneWater carries a few and very specific brands, whereas MarineMax carries more brands and different types of vessels on a broader scale.

{audio:0:05:41} MarineMax puts everything under their own brand whereas OneWater keeps the name on the door when they buy the dealership, is that right?

{audio:0:05:53} Yes, which is why they attract different dealerships. If MarineMax purchases a SkipperBud’s in Fox Lake, they change it to MarineMax. There is nothing wrong with that but there is an appeal for the owner of three locations who built their brand, and OneWater are fine with it being a Bob's in one place, Rambo in another, and SMG in the Atlanta area.

{audio:0:06:52} If you were the owner of several stores built over decades and were looking to sell, how would you think about that process? Who would you want to sell to? Is it really whoever will pay top dollar or how would you think about that?

{audio:0:07:13} It depends on the brands you carry and the way you sell. I would reach out to a OneWater if I carry two or three different boat lines and most of my sales are above $100,000. If I have seven or eight different types of boat lines from several manufacturers, that's more of a MarineMax method who prefer to become a one-stop-shop. OneWater only wants that top 1% buyer at the highest level, and they will ensure they give them the best customer service.

{audio:0:08:43} One analogy I've thought about to explain the competitive dynamic between OneWater and MarineMax is a town with both a Honda and Ford dealership. They cannot charge 50% more for a very similar car, but buyers might be more loyal to one brand, in which case those dealerships are not that competitive. If I want a Grady, OneWater's dealership is not even an option me because they don't carry them, whereas if I wanted a Cobalt, MarineMax doesn't carry them. How competitive are the dealerships with each other in any given market if they don't carry the same brands?

{audio:0:09:49} The trick with marine is that when you compare it to the automotive world, a mid-sized SUV is equivalent to a Cobalt runabout. You may not be married to it being a Cobalt but you like that style of boat, so you end up shopping various dealerships to learn about the boat. There is less brand loyalty than automotive because you don't get exposed to it as much. They might live on a lake so whatever they see on that lake is what they think is the world of boats, but that is a tiny segment. 

{audio:0:10:49} If a dealership is lucky on the marine side, they know and like their local dealership already and walk in there and buy whatever brands that dealership sells. Both the manufacturer and dealership have to agree they want to sell the product, and there are times where a dealership will drop one product and pick up another, but their market share does not change; they sell the same number of boats regardless of the brand. When someone walks in the door, they get them to pick a vessel type, then sell them the brand they have. It's the same as if you walked into a Ford dealership looking for a minivan and get talked into an SUV. They do the same thing with boats and switch them from a tow boat to a surfing rec boat.

{audio:0:11:57} How do the manufacturers feel about this? Malibu would rather have more professional run dealerships selling their boats than mom and pops, but would they worry about their dealers getting bigger and having more bargaining power once they own 100 to 200 locations. How do manufacturers feel about roll up acquisitions?

{audio:0:12:47} You asked this question in two different ways, and it's an interesting dynamic. Today, manufacturers have complex distribution plans. The marine side lacks an ecommerce outlet so there's no option to go to an Amazon, but manufacturers can choose a MarineMax or OneWater who have the scale and all the systems in place, to move large volumes through. Within certain regions they can go with the smaller guy. As OneWater accumulates locations a manufacturer wouldn't give them a boat line because they bought a building which sells it. 

{audio:0:13:53} Your secondary question was about the current trends with high margin, high demand and what will happen in future. If you think back to the 2008 recession, you can understand why a manufacturer wouldn't want all their eggs in one basket. There is no advantage to being all-in with OneWater or out, but small dealerships will be impacted most by shifts in the economy. It comes down to their ability to finance, move and churn product. As the big guys do these acquisitions, we watch their financial stability when they keep buying and expanding because what happens when it gets difficult to sell again and they become over leveraged? A smaller guy could weather things a bit, but they also have inherent risk, so it's a balancing act. You don't want to weight the scale with too many small or large dealerships. There is definitely a trend of more dealerships being bought out and consolidating. OneWater and MarineMax are the only publicly traded ones but there are many private ones who have 10 to 12 US locations.

{audio:0:15:31} Who are some of the others I should learn more about?

{audio:0:15:34} Tommy's who stock Malibu, Cobalt and Tahoe pontoons, have 12 US locations. There are several others who are doing the same thing, but don't have plans to do a big IPO.

{audio:0:16:07} Do manufacturers effectively have veto power over transactions when dealerships change ownership?

{audio:0:16:18} It is dictated by state because some require a notice period, but both parties have to be willing participants, so it's not a guarantee. Either side can drop them so it's a question of how much and what kind of notice, and the grounds thereof. There is a lot of movement out there but it isn't noticeable to your everyday guy, but many of them shift brands. Someone could drop Sea Ray and pick up Cobalt, or drop Chaparral and pick up Robalo, because dealers and manufacturers are always pitching each other behind the scenes. There are advantages to a new dealer coming on board for a manufacturer in an area where they don't have good market share. There are also advantages for a dealer to drop a line and pick up another one. OneWater purposely choose locations that already have product lines they like, as it makes it an easier transition, but there are times where a dealership acquires a new location and the manufacturer doesn't want to work with that company. It's a small industry and maybe they already worked together and no longer want to.

{audio:0:18:13} How common is it that a dealer group wants to buy a dealer, the seller wants to sell, but the manufacturer pulls out their product?

{audio:0:18:36} It's not common to have that extreme of an interaction. On the manufacturing side, you saw it once or twice a year, which in the grand scheme of things is not a whole lot. Most boat brands roll up to only a few manufacturers, so that's slightly more complex. You're not dealing with a clean-cut Toyota who makes Toyota, Lexus and Scion. It's rare for somebody to completely exit out; it's more that a dealership switches lines with a current manufacturer.

{audio:0:19:55} I would think that as OneWater and MarineMax get bigger, they have more power in those negotiations, or if a manufacturer says, we don't want this transaction to go through and will pull this line from this store, the dealer group can take away their business from 20 other stores. Do they have more power or is it not like that?

{audio:0:20:27} Yes and no; there are balances on both sides. Yes, they have become more powerful and probably do have more advantages than the one store location, as it's buying power. One of your questions asked if dealerships hurt or hinder manufacturability. It is the visibility into orders and the carrot that a OneWater or MarineMax can give because they can place a large order and give stability to the business. The business will give them a bigger discount because they are able to do that. It's the same when you buy boat components, where if you put in an order for five parts, you get a different price than for 500. 

{audio:0:21:27} There are checks and balances which happen in that each time a OneWater makes a smart move like that, there is a MarineMax, Tommy's or others who can rival them. OneWater might be the top selling dealer in one region, but I don't think any particular group would become a single ownership. There are others watching what's been happening with OneWater who went public first, so I would expect this trend of consolidation to create more big players in a less fragmented market. There are less than a thousand dealers out there to consolidate to a smaller list, but not five.

{audio:0:22:33} OneWater have 70 to 80 locations so can provide insight to manufacturers to help them plan their production schedules to make them more efficient. They claim that is important and is a result of their scale; does that make sense to you?

{audio:0:23:24} It does because Bob's Marina who only orders 10 boats a year cannot see trends or consumer demand shifts. Whatever 10 boats Bob gets, they sell because that's all Bob gets. When you leverage up and you're talking hundreds of boats, you start to see some consumer demand trends happening, because a location doing 50 to 100 boats can see what's popular. They have enough inventory people can select. It's not 10 boats on the lot, it's 30 or 40, and they can walk through and cherry pick; I really like this boat. You can see that inventory turns faster. That allows them to reorder that which then places more orders of that type of boat. Data is becoming more critical in helping the planning and build process. It doesn't mean OneWater is holding this secret and not sharing it. Manufacturers can see it because of the orders which get placed, so they can start to see a particular color combo. They can see the take rates across the board and adjust production to make more of what's popular. 

{audio:0:25:13} The way OneWater describe that is that it's more sophisticated than how the marine industry has run but it's basic production planning in any other industry.

{audio:0:25:29} Walmart or Amazon get real time sales information on how a product is doing and want popular products. So does a OneWater who are getting more sophisticated but it's not like ecommerce where you can track time on page and how long until they clicked. The data to make it usable takes some work on SMG’s part to understand the nuances.

{audio:0:26:32} OneWater told me that all their dealership acquisitions have come to them, rather than them sourcing the deals. They say manufacturers are their number one lead generator, and the principles of dealerships they have bought are number two; does that make sense to you?

{audio:0:27:10} I think that's true. Often, they're in discussions with someone, but they don't let us in much, so I wouldn't be surprised if Bob's dealership is calling Anthony to see whether he would be interested in three locations, but on the manufacturing side they usually keep those discussions pretty hush hush until it's locked in and under contract, because there is a risk to both sides. The manufacturer could find out and if it doesn't like it, could intervene.

{audio:0:28:02} If I'm buying a dealership, wouldn't I want to know what the manufacturer thinks before I close the transaction?

{audio:0:28:17} It's not so much that the manufacturer might yank the brands, it's that the manufacturer might hold off on giving boats to that location until it changes hands. They might inadvertently tell people at the dealership who aren't supposed to know. Our daily interactions involve 50 of us talking to 50 of them, so there might be a few people that they will let know at the highest levels of the manufacturer, but it wouldn't be common knowledge. There are probably manufacturers who make an introduction, so if a family-owned dealership is struggling with financial issues but it's good location, they want to see it keep going.

{audio:0:29:23} How competitive are these transactions? If I own three locations and want to sell, am I trying to create an auction with multiple bidders or do I call Anthony?

{audio:0:30:07} They don't follow a strict pattern. Anecdotally, I have known of all those different scenarios you just listed. There have been ones where it was super competitive and the owner made it known that they wanted out, and it was a feeding frenzy to get the best deal, and ended up being bought by an automotive dealership but stayed a marine dealership. They tend to keep this quiet so that the dealership keeps operating. Usually, owners have something change in their life so they call Anthony and say they no longer want to be doing this in a year.

{audio:0:31:13} You can call your competitor down the road and offer them a second location. Motorcycle dealerships and automotive get into marine, and it's not always marine within marine, as there are several conglomerates who have two marine locations but are part of five power sport locations. They start with whoever they know which is not always a OneWater. Often, they have friends or other entrepreneurial folks in town who they will call.

{audio:0:32:07} They do not announce to the world they're selling and then solicit bids?

{audio:0:32:22} It's rare to do anything that public because it would disrupt the daily operations. Your service and sales team would get anxious that their place of employment was up for sale. They know there have been these brothers who buy up selling locations, so it's conversational but that doesn't mean they don't converse with five individuals and take the best offer. You might occasionally hear of a new ownership but, for the most part, these are really quiet.

{audio:0:33:17} OneWater is even quieter as they do not change the name on the door.

{audio:0:33:25} OneWater is public so it makes announcements, but the rest of them don't.

{audio:0:33:31} From a customer perspective, they wouldn't know.

{audio:0:33:38} They don't change the name on the door; it stays Bob's but now it's run by John.

{audio:0:33:45} OneWater claim that when they buy a dealership, they double the profitability in two years; does that sound reasonable to you?

{audio:0:34:02} The manufacturer side doesn't get insights into their business. We sell a boat to them at one price and can see what they sold it for, but we don't get visibility into the business model. They are very smart with their acquisitions by purchasing highly profitable dealerships. If you related it to the housing market, they do not buy prime real estate with a shack on it; they buy a couple of million dollars home that might need a coat of paint and a new driveway.

{audio:0:39:17} Can we talk about the relationships between Brunswick and MarineMax, and Malibu and OneWater? Do these tend to be stable relationships or are they volatile, and what are the main sticking points? Does the nature of the relationship change the economic cycle, what are controversial issues and the areas they are the most aligned, and finally, do they like each other or not?

{audio:0:39:56} They certainly like each other in general. The Brunswick/MarineMax relationship is very tight and at times difficult, but they have both found ways to manage each other. When it has leaned more in MarineMax's favor, Brunswick has done a counter move to bring it back.

{audio:0:40:35} Can you give me an example of that?

{audio:0:40:37} MarineMax is responsible for a large portion of Sea Ray's sales, and it was incredibly difficult for Sea Ray to get margin back on their big boats, so they lost money on sales to MarineMax for several years. Then Sea Ray simply exited as their business strategy did not work. To counter that, MarineMax picked up the Azimut line of boats which was not part of Brunswick, so it balanced itself out. Brunswick decided it didn't need to be in a business that loses money and MarineMax found somebody else to sell them boats. They still sell Sea Rays, but only the sports boats and smaller ones. These shifts happen and both businesses are perfectly fine at the end of the day, but as it's happening, it's not real pleasant.

{audio:0:41:48} The competitive dynamics in the industry fluctuate but a natural balance returns over time?

{audio:0:42:09} It will, and because we've had the Covid influx of huge demand, it is starting to level off and return to normal levels. Production will take another year to catch up to demand, but as it does dealerships will end up with more boats that will be harder to sell, and prices will naturally come back down. It will no longer be high demand and high margin; it will level set back down, and both sides will have to work at it to sell product.

{audio:0:42:54} When we exit this period, will the industry return to pre-Covid levels or will the margin structure of the industry be different in 2025 from what it was in 2019?

{audio:0:43:40} Three years ago, I was worried there would be another recession and that credit would become difficult resulting in a slow down with boats, and we all thought that would happen three months into Covid, but both times, even when credit was tough, boats still sold. If the wealthiest individuals in the country want a new boat, they will still get a new boat. 

{audio:0:45:07} The Discover Boating statistics reveal that baby boomers are still our biggest customer, and it's hard to get new entrants into boating. I would like to think after two years of many people doing more boating, that we can retain them and swing back to reasonable product prices. High demand and high margins meant they could get away with making expensive big boats. I cannot predict exactly what will happen but if we continue to see interest prices rise, we will continue to sell to the elite of the elite. Plenty of baby boomers will still buy my cheaper boats, but you will not reset and get a larger audience back in, like we recently experienced with Covid. 

{audio:0:46:36} The industry is not at risk because people with a lot of money keep their money, but I do expect a shift to get more competitive and bring prices down. We cannot change the current supply chain problems, so product prices are dictated by the cost of goods across the board going up. Fuel prices and interest rates make it less approachable, but I hope that starts to level off. Manufacturers’ costs will stabilize as more boats go into dealerships who have more inventory, and those prices will stop climbing as much and become more approachable to more people.

{audio:0:47:29} If I'm a dealer who is worried about the economy and want to keep my lot a little leaner than I did before because I don't want to end up in a 2008 situation again, can the manufacturer tell me, take it or else I'll sell it to someone else and pull the line. How does that dynamic work?

{audio:0:48:11} That could certainly happen in a very extreme case, but this is a normal discussion which happens every year, regardless of the economy or situation. OneWater tells Malibu they need 100 less boats, and Malibu responds by saying that big a change will shift their business. It becomes a discussion to see if OneWater can buy bigger boats to reduce the revenue loss. In the end, both businesses are not jumping for joy but they have come to a happy medium. There are certainly times where a dealership says, don't send me one more boat and turns off their floor planning, then the manufacturer can decide whether they remain a dealer. If they can't move boats for them, they can sign somebody else up in that territory. 

{audio:0:49:34} Many states don't allow you to make that move overnight because you have to give notice and they have to go through their inventory before you can simply sign up a new one down the road. Once you do though, you can move that inventory over, and those shifts happen. That other dealer can get another line of boats and we all move onto the new. That doesn't happen as frequently. OneWater rarely change product lines but will perform subtle shifts. If manufacturer A could only get a dealership three of the 10 boats they wanted and they sign up manufacturer B for the other seven boats, they can't complain, but it becomes difficult to get manufacturer B back out of there, so manufacturer A is really motivated to try to find him 10 boats.

{audio:0:51:16} I would think that in an environment where demand is not as strong and inventory is a higher, having 30, 50, 70 or 100 stores is an advantage because you can pull the inventory and show it to people elsewhere. Is that a significant advantage or how would you characterize that piece of the puzzle?

{audio:0:51:50} Big conglomeration dealers are changing the industry, but not in the way we originally thought. It is less of a power struggle and more of bringing the marine industry up to the same level as other industries already operating. Consumers today demand transparency with being able to Google and get any answer they want in two seconds. We cannot simply stay behind and try to be hidden, saying you cannot find this boat because it is special. OneWater helps with that transparency because if their local dealership doesn't have a boat, they can find it and get it there in several days, and that scale helps everybody in the industry. There are oddities in the industry but dealers are coming together to get more organized, systematic and processed. That's not a bad thing and manufacturers have also realized that. It's not that we're always like, oh God no, they've bought another location. A lot of times we go, oh good, I'm glad they got that location, they can benefit from it.

{audio:0:53:41} You think this industry will become more consolidated on the retail side in five to 10 years, and although there's concern about increasing bargaining strength as these consolidators get bigger, there are also some good things about it?

{audio:0:54:21} When I look at the marine industry, I take my insider hat off, but if you interviewed a long tenured sales rep for a manufacturer, they would have a different perspective. Nobody needs to boat and one has to make huge sacrifices financially and time wise to be a boater, so making buying one difficult is not my goal. The more streamlined, easier and transparent we can make transactions for customers, the better. It's more difficult to finance a boat than a car. Most banks don't even touch them. There are many complications with joining this lifestyle, and I want to remove as many barriers as possible. 

{audio:0:55:37} You cannot get to a place where Walmart is the only place you can buy things; you need to have a Walmart, Home Depot and an Amazon. We are still making those on the marine side but they are all coming. Manufacturers such as Brunswick, Malibu, MasterCraft and Correct Craft have been consolidating behind the scenes. The entire industry is trending towards consolidation because with it comes buying power across the board, from raw materials to the boats themselves and the engines. We are such a small commodity that it makes no sense to be a manufacturer who only makes 1,000 boats.

{audio:0:56:49} Are you saying that consolidation enables a better customer experience?

{audio:0:56:54} There is still place for mom and pops but not many can finance $250,000 boats and have a whole inventory of it, in addition to managing salaries and service and paying tax on land which is primo on a lake.

{audio:0:57:22} If you could wave a magic wand and parachute into the top of any company in the industry, be it a manufacturer, retailer or other player, who is best positioned for the next decade or who would you want to be if you could be anyone in the space?

{audio:0:57:48} Malibu is very focused; we haven't seen the end of them and I would go back to work for them in a heartbeat. Brunswick is brilliant and working on another counter measure to the MarineMax's of the world, so they are in a good position being very clever. There are a lot of strong dealership networks out there, so I might not pick your two publicly traded ones. I would rather pick one of the family-owned ones simply because MarineMax and OneWater are new to being a public company and are still working on their infrastructure to support it.

{audio:0:58:54} What else should I be asking about that I didn't, thinking about researching, if I'm trying to figure out how successful the different retailers and manufacturers are going to be over the next five to 10 years?

{audio:0:59:15} No; I'm impressed with your questions. How long have you been working on this?

{audio:0:59:21} OneWater for two to three months, but I'm not entirely new to the industry.

{audio:0:59:41} Are you drafting this to do an interesting piece on it or what is your end goal?

{audio:0:59:49} I'm trying to figure out the investment case for OneWater, whose story is that they buy dealerships for four times EBITDA and double profitability in 24 months. They say they are uniquely positioned to be executing this strategy and if you put all that together, the implied financial returns on their acquisition strategy are very high. They claim there are reasons why no one else can do what they're trying to do, or that these are not highly competitive transactions, so they have more than a decade long runway ahead of them to execute it. From an investment perspective, their story is appealing, but my research process has been to tick off the bullet points of that story and figure out whether those things are true or not. If they are true, it could be an extremely compelling investment over the next decade.

{audio:1:01:35} From the manufacturer's side, I have heard the same story from them and haven't seen anything that exactly dispels it. I don't think they are as unique as they say they are, but they are very smart in doing their research. Dealers who know they fit the OneWater mold call them up to talk, and I know they do careful research on their acquisitions. When OneWater go public and make statements like that, it means others will pick it up and run with it. Their claimed uniqueness is the only point I would challenge.

{audio:1:02:35} Imagine we speak again in 10 years and OneWater hasn't accomplished their goals, is that because they attracted competition or will there be another reason?

{audio:1:03:01} They may not reach their goal of buying a location and doubling it every time, so they may not grow as rapidly as they have. I would question their 12-year growth projections. They have shown that can buy certain types of dealerships, but others can also find those and make it slightly more competitive. A Bob's dealership owner dreams that he has multiple bids. Inevitably the capitalism in all of us would drive towards that scenario, and today OneWater might be the one they call, but others are coming and as they get more organized, I would expect there to be more competition.

{audio:1:04:20} Thank you for making time and for the thoughtful answers to the questions, it's helped me understand the space better. I will keep digging to learn as much as I can, and am looking forward to visiting them in a few weeks.

{audio:1:04:47} At their Lake Lanier store in Atlanta?

{audio:1:04:51} Yes, I will meet with the management team at their headquarters and visit a few stores with them. If I have more questions, I will reach out to you.

OneWater Marine & Boat Retailing

Former Director at Malibu Boats

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