OPE Industry Forecasts: How will business rate in 2008? (Part II)


The following is the last of a two-part series:


Outdoor Power Equipment recently asked several OPE industry leaders to shed light on the state of the industry heading into 2008.


Specifically, we asked the following questions:


1) Why should outdoor power equipment dealers be optimistic about the industry in 2008? (NOTE: If you’re a high-ranking official with an industry trade association, please respond on its behalf, too.)


2) How will the outcome of the 2008 U.S. presidential election affect the OPE industry?


3) How will growing concerns about the environment impact the OPE industry in the next 10 years?


4) What will be the top three trends in the OPE industry over the next five years?


5) What is your overall outlook for the U.S. economy and OPE industry in 2008?


OPE received the following written responses, in order, Jan. 14-25, 2008:


 


FRED WHYTE


PRESIDENT


STIHL INC.


(VIRGINIA BEACH, VA.)


& IMMEDIATE PAST CHAIRMAN


OUTDOOR POWER EQUIPMENT INSTITUTE (OPEI)


OPE: Why should outdoor power equipment dealers be optimistic about the industry in 2008? (NOTE: If you’re a high-ranking official with an industry trade association, please respond on its behalf, too.)


Whyte: Challenges are always accompanied by opportunities, if one knows where to look. By all indications, 2008 promises to be a challenging year, but smart businesses will find ways to capitalize on whatever comes their way and differentiate themselves from the competition. A survey conducted by a national, independent business research firm indicated that, in 2007, dealers continued to gain retailer share of handheld outdoor power equipment at the expense of the big box stores. This was supported by recent earnings reports with The Home Depot reporting third-quarter, same-store sales being down 6.2 percent and Lowe’s reporting a decrease of 4.3 percent, as compared to the previous quarter.


While the subprime mortgage situation will likely take some time to work itself out, the Wall Street Journal noted “the potential losses look manageable compared with the savings and loan crisis.” And, both the National Association of Home Builders and National Association of Realtors have predicted the beginnings of a rebound for the housing market in the second half of 2008.


Stihl Inc. enjoyed its 16th consecutive record sales year in 2007 thanks, in large measure, to the ongoing support from Stihl dealers nationwide. We have several new product introductions planned for 2008 and are currently in the midst of another expansion project here in Virginia Beach, which will double the size of our finished goods warehouse. For Stihl, the future remains quite encouraging.


OPE: How will the outcome of the 2008 U.S. presidential election affect the OPE industry?


Whyte: The republicans and democrats both have broad fields for the 2008 presidential election, especially considering that for the first time in 80 years, neither the incumbent president nor a sitting or former vice president is seeking the office. Although a few candidates do appear to be gaining traction at the expense of some others, at the time of this submission (Jan.14), who will come out as the lead contender from the primaries is anyone’s guess, much less who will ultimately become our next president. Typically, business tends to fare better when government intervention (taxes) is minimized and “business can get on with doing business.” Certainly, change within the executive branch of our government will influence our industry. Whether positive or negative remains to be seen.


OPE: How will growing concerns about the environment impact the OPE industry in the next 10 years?


Whyte: Emphasis on low-emission and low-noise technologies will heighten as more and more communities seek to regulate usage, and, in some cases, even attempt bans of some equipment. This trend presents dealers with opportunities to work with manufacturers and local governments to avoid all-out bans. Two excellent examples of successes brought about by such cooperative efforts are the blower exchange program instituted for the second year in a row by the South Coast Air Quality Management District in California and the rebate program initiated last year by the Louisville Metro Air Pollution Control District in Kentucky.


In addition, the issue of alternative fuels will draw more attention, as additional testing and investigation are done into the various types of alternative fuels and their effects on outdoor power equipment. Manufacturers will need to invest more in research and development to address both the challenges and opportunities presented by these new fuels. Gone are the days of simply adding a catalytic converter to reach compliance, rather than truly investing resources in real, long-term solutions.


OPE: What will be the top three trends in the OPE industry over the next five years?


Whyte: While I don’t have a crystal ball, I think it’s fair to say we will see steady but generally slower industry growth, more businesses “going green,” and a continued trend toward mergers and acquisitions.


The slower, more deliberate growth trend will most likely favor OPE dealers given their ability to offer comprehensive, on-site service. Savvy end users will continue to move away from mass-merchant commodity brands toward more aspirational, professional, brand names and products that offer a complete brand experience from servicing dealers, rather than merely purchasing “disposable” mass-merchant products in a box.


“Going green” will not just be a socially responsible catch phrase, but also a good business decision. More and more businesses, not just manufacturers, will work to make positive differences in the environment and gain more business because of those efforts. However, it will be imperative for these businesses to be able to genuinely support their “green” claims to avoid negative backlash from a skeptical marketplace.


A slowing economy, more stringent emissions requirements, and higher energy prices will put significant pressure on manufacturers to remain competitive. Some will continue the trend in acquisitions and further reduce the number of industry suppliers. In the end, there are only two solutions: Manufacturers must either make the necessary investment to develop their own low-emission technologies; or they must partner with, or even acquire, companies to help them comply. Simply put, it is “grow or go.”


OPE: What is your overall outlook for the U.S. economy and OPE industry in 2008?


Whyte: While it’s impossible to know, with any real certainty, the market and weather variables that will influence the economy and our industry in 2008, I believe that dealers who selectively choose their brand offerings and emphasize their points of difference aggressively should expect a year with moderate to strong sales growth.


One issue with potentially serious negative impact on the landscape industry, and thus on the OPE industry, is that of the H-2B guest worker program. The Professional Landcare Network (PLANET) estimates that the approximately 2,800 landscape companies participating in H-2B spend about $77 million annually just on landscape equipment. As I write this response, Congress has yet to extend the H-2B guest worker exemption and is not expected to do so, at best, until late February. Furthermore, there is resistance to taking any action toward a long-term solution on this matter unless in conjunction with comprehensive immigration reform, which will likely not happen until after a new president is elected. The outcome will ultimately influence our industry and must be watched closely. If the exemption is not extended, then landscape contractors will have to make tough decisions on projects, labor, clients and equipment purchases. In fact, many have already begun to do so.


Finally, regardless of what the economy, the legislature and the weather forecasters have in store, dealers that actively and consistently promote their key points of difference through the exclusive brands they carry and the superior services they provide will ultimately prevail, again.


 


PAT CAPPUCCI


PRESIDENT


SCHILLER-PFEIFFER, INC.


(SOUTHAMPTON, PA.)


& COMMERCIAL GROUNDS CARE, INC.


(JOHNSON CREEK, WIS.)


OPE: Why should outdoor power equipment dealers be optimistic about the industry in 2008? (NOTE: If you’re a high-ranking official with an industry trade association, please respond on its behalf, too.)


Cappucci: With the headlines filled with sour economic news from the housing market downturn to rapidly rising fuel costs and declining consumer confidence, many businesses are having a difficult time being optimistic about the upcoming year. Add to that, a number of regions are facing challenging weather patterns, ranging from severe drought to floods. Nonetheless, despite all of this negativity, there are many reasons to be optimistic. Consumers and contractors continue to need and want to care for our outdoor environment. Whether it is creating a great outdoor space to enjoy, or maintaining a property that is beautiful to look at, we will continue to care about the outdoor environment in which we live. People will not stop taking care of their properties, regardless of the economy or the weather. However, they may change how they do care for them in changing times. In some cases, this may mean less equipment sales, but more service repairs, or in drought-prone areas, a shift in how properties are designed and maintained. The key for dealers and manufacturers in the industry is to differentiate themselves and build their brands with their customers by providing great service and value across their offerings. We need to stay abreast of trends and shifts, and find ways to innovate to help our customers maintain and beautify their environments despite what the economy or Mother Nature may throw in their way. With change comes opportunity, especially when people care.


OPE: How will the outcome of the 2008 U.S. presidential election affect the OPE industry?


Cappucci: Immigration regulations, the environment and the economy — three BIG issues that drive change in our industry and how we play in it. Each of the candidates has views on these issues, and some may be better equipped to affect change than others. I am not going to state a political viewpoint here, but whoever is elected will likely be forced to prioritize and address these issues as he (or she) starts their term in office. Given the impact these issues have on our industry, I would encourage everyone to study the candidates and their positions on these issues and exercise your right to vote and participate in your local and national industry associations to drive a strong voice in affecting positive change for our industry.


OPE: How will growing concerns about the environment impact the OPE industry in the next 10 years?


Cappucci: The “green movement” continues to gather momentum, as does the increased concern over the scarcity of precious natural resources such as water. The strength of these concerns will have far-reaching effects on our industry for years to come. As I mentioned earlier, people will continue to want to maintain a beautiful outdoor environment, but they will want to do so in ways that preserve that environment today and for future generations to come. We will likely see legislation that drives “green” solutions for municipal and other tax-supported accounts that ultimately gets driven to the broader industry and population. Water management solutions will also gain favor as communities strive to maintain their outdoor environments while minimizing water usage. In addition, solutions that minimize pollution (air, water, sound, etc.) — while not compromising performance — will also find great growth opportunities.


OPE: What will be the top three trends in the OPE industry over the next five years?


Cappucci: While already mentioned, compliance to ever more stringent environmental regulations and increasing fuel costs are trends that will force us to innovate. While demanding, these trends will also create opportunities for those who embrace the changes. Another challenge that has and will continue to force change is coping with increasing manufacturing costs and competing in a global economy. Costs cannot be simply passed on. We need to continue to challenge ourselves to continue to innovate and be ever more efficient while not sacrificing quality or service. Lastly, another constant that will continue over the next five years is the evolution of our channels that serve our customers. We need to ensure excellent service and value to our customers and profitability to our channel partners and our supply chain. This needs to be done in the context of a globally competitive economy.


OPE: What is your overall outlook for the U.S. economy and OPE industry in 2008?


Cappucci: The economy will continue to struggle for the near term. We enjoyed a number of very strong years where a bit of “irrational exuberance” fed on itself, causing the economy to grow faster than it probably should have grown. This led to record housing starts and hence record OPE purchases. Given the length of time within which this growth occurred, it will now take some time for the excessive growth to correct itself. So, I would look to another year of more stringent economic controls and tighter-than-normal credit. The OPE industry will also likely undergo a year of change as it copes with the prevailing economic environment.


 


BILL HARLEY


PRESIDENT & CEO


OUTDOOR POWER EQUIPMENT INSTITUTE (OPEI)


(OLD TOWN ALEXANDRIA, VA.)


OPE: Why should outdoor power equipment dealers be optimistic about the industry in 2008? (NOTE: If you’re a high-ranking official with an industry trade association, please respond on its behalf, too.)


Harley: The forecast for 2008 is mostly for soft or flat shipments for many products. However, it is not the case for all products. A positive turn has been the increased demand for snowthrowers due to the significant early snowfall in many parts of the country. Consumer zero-turn riding mower shipments are forecasted to increase throughout 2008. Shipments of some handheld products are expected to improve in comparison to last year, albeit slightly.


In addition, many manufacturers will be releasing new products this year. These products will include the latest innovations and technologies, which are likely to be attractive to consumers.


OPE: How will the outcome of the 2008 U.S. presidential election affect the OPE industry?


Harley: Currently, the government’s public policy-making apparatus — the administration and the Congress — is divided between political parties, necessitating bipartisan negotiation and compromise on policy development and implementation. If the election outcome provides for one-party control, this dramatically shifts the potential policy implications for the industry.


Conventional wisdom suggests that if democrats were to win the presidency and maintain control of both houses of Congress, the political agenda would reflect a greater emphasis on environmental initiatives and, in particular, the treatment of climate-change issues. Democrats have long supported the Kyoto Treaty Protocol on limiting greenhouse gas emissions, but the current administration has not supported nor signed the treaty. A democratic administration would likely endorse the treaty and its greenhouse gas limitation targets. Additionally, Congress would likely consider more aggressive environmental policy objectives on a host of issues with a “friendly,” same-party administration at the opposite end of Pennsylvania Avenue. The OPEI strongly supports efforts to improve the environment and reduce greenhouse gas emissions with a balanced approach to policy development.


On the regulatory side of the environmental policy equation, political appointees to the Environmental Protection Agency and Department of Energy in a democratic administration are widely expected to show a greater emphasis toward environmental regulation enhancement and enforcement. Absent bipartisan congressional agency oversight in the regulatory arena too becomes more challenging for business interests. Here again, our industry strongly supports full and complete compliance with environmental regulations. Meeting emissions regulations and adapting to new and changing regulations are costs borne by business and ultimately passed on to consumers. New and/or expanded environmental regulations under a new democratic or republican administration would likely mean additional costs to business.


Taxes are another major component impacting business interests by public-policy makers. Fair or unfair, republicans are viewed as more favorable to business interests on tax matters, and the present administration is no exception. A political party change in the administration may present new challenges on the tax front with new budget priorities. Increased taxes to business usually translate to higher costs to the consumer.


OPE: How will growing concerns about the environment impact the OPE industry in the next 10 years?


Harley: The focus on climate change and greenhouse gas emissions will more than likely increase legislative and regulatory pressures to limit emissions. The industry will continue to use all available technology to manufacture safe products that conform to regulatory guidelines.


Additionally, the movement toward the use of alternative fuels such as ethanol will create technological challenges for the industry. The recently enacted energy bill mandates that 36 billion gallons of ethanol be placed in the marketplace as a step to reduce oil dependency.


OPE: What will be the top three trends in the OPE industry over the next five years?


Harley: Regulation of emissions output of off-road, small-engine products such as outdoor power equipment will be a continuing trend over the next five years. In addition to domestic regulation, the industry can expect additional regulatory movement on emissions in Europe, Australia and China.


Manufacturers will continue to see increases in commodity prices such as costs for gasoline, plastic, steel, copper, etc. Regulatory pressures will also continue to raise costs for manufacturers.


The commercial market will continue to expand as Baby Boomers retire and continue to invest in professional landscaping services. There is also an increasing demand by consumers to increase their own leisure time while maintaining their yards, which will continue to drive the need for landscape professionals.


OPE: What is your overall outlook for the U.S. economy and OPE industry in 2008?


Harley: The overall outlook is one of extreme caution, based on housing market trends and other factors impacting the economy. Economists are 50-50 on the possibility of the U.S. economy going into a recession. It remains to be seen how the year plays out in terms of economic growth. The big trump card for the OPE industry is the weather. A decent spring, following this early snow, could signal good things for our industry.

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