ARCHIVES :: NOVEMBER 2002 :: COVER STORY

Economic Escape

In Tough Times, Americans
Are Still Willing to Spend
Money on Fun

By JOSEPH T. HALLINAN
Staff Reporters of The Wall Street Journal

Few Americans really need an all-terrain vehicle—that half-jeep, half-go-cart contraption that can ride up the sides of mountains. So when hard economic times strike, sales could be expected to drop at Polaris Industries, maker of ATVs, water bikes and other adult toys.

Polaris Sportsman 700 Twin

But instead, Polaris is thriving. It can barely keep up with ATV sales, which rose 5% in the second quarter. Sales of its personal watercraft, popularly known as Jet Skis, climbed 10%. Overall, profits for the quarter increased 16%, to a record $19.9 million.

“There are a lot of things for people to worry about out there, from terrorism to the economy, the stock market, anthrax,” says Tom Tiller, president and CEO of Polaris. “What we offer people is the opportunity to get away from that.”

Apparently, play is one thing Americans haven’t been willing to give up. The same people who are cutting back on expensive dinners and clothes are still willing to dig deep into their pockets for luxury toys, even if their retirement savings have shrunk and the job market has soured. “If I put the money in the stock market, I’ll probably lose it anyway, so what the hell? I may as well enjoy it,” says 43-year-old Ira Holtzman of Glenview, Ill. He just dropped $10,000 on off-road motorcycles and gear for himself and each of his two sons, ages 16 and nine.

It’s a phenomenon that is revving up many makers of sport and recreational vehicles. Second-quarter profits jumped 11% at Brunswick, a maker of pool tables, boats and motors, and 25% at Harley-Davidson. At Winnebago Industries, maker of big RVs, profits rose 45% for the quarter ended June 1.

Low-interest credit is helping drive the trend. “This is the time to buy now,” says George Schunk, 69, of Litchfield, Minn. Since he retired from his excavating business four years ago, he and his wife, Edna, have a lot more time to travel. So a couple of months ago he borrowed money to buy a brand-new $178,000 Winnebago Journey. His interest rate: just over 7%.

‘Nesting Instinct’

 Another factor appears to be Sept. 11. “The nesting instinct has become much stronger since Sept. 11,” says Trent Tobias, a 41-year-old father of two. He says he and his wife had a long talk after the terrorist attacks, and one result is that they doubled their fleet of ATVs to four.

“I tell you, it’s something that my family enjoys the heck out of,” says Mr. Tobias, a vice president of a car dealership in Illinois. He says that many of his neighbors are just as enthusiastic about riding ATVs with their children. “In my son’s eighth-grade class, now probably 50% of the boys have them.”

The fact that demand remained strong after the economy weakened and after the terrorist attacks surprised some industry executives, but not as much as when the sales stayed robust through sickening declines in the stock market this year.

Indeed, for some of these customers, market losses made them want to spend more. Jonas Nygard’s financial setbacks began early in 2001 when the Internet start-up he worked for crashed and burned. He quickly got another job, but then watched as his stock-market investments tumbled. His decided to “just to make sure to enjoy the moment.” He went out this April and bought a $5,000 Arctic Cat snowmobile.

His investment losses, he says, taught him that he can use his money either to gamble on the market, “or I can have some fun with it.”

Buyers aren’t reaching for the lowest-priced models either. Through the first six months of this year, unit sales of Polaris’s top-of-the-line ATV models—the $7,000 Sportsman 500 and the $7,400 Sportsman 700—were up 50.1% from last year. “The people who are buying are buying the best,” says Mr. Tiller, the Polaris chief executive.

The strength of this and other consumer-product categories has helped support the economy through recession and subsequent weakness. But could purchases of ATVs, RVs and snowmobiles this year sidetrack a recovery next year by adding to American consumers’ already heavy debts? (Related article on Page 13.)

Consumer debt payments as a percentage of disposable personal income have climbed to 14%, a level not seen since 1987. The percentage of disposable income dedicated to savings, meanwhile, last year plunged to just 2.3%, the lowest annual level recorded since the Great Depression.

Two Incomes

 But many families feel more secure buying expensive toys these days because they have two incomes to rely on, instead of one. They also have been able to refinance their home mortgages at much lower interest rates. This can free up hundreds of dollars a month in discretionary spending—more than enough to make the payments on a new motorcycle or ATV.

The manufacturers are eager to offer easy credit terms, too, because credit is a growing source of profit for them. At Harley-Davidson, operating income from financing operations rose 60% in the second quarter, is expected to rise 50% for the year. Financing its motorcycles not only adds to profits—it also boosts sales, says dealer Karl Kegel, owner of Kegel Motorcycle in Rockford, Ill. Banks in Rockford required a 25% down payment, Mr. Kegel says, and wouldn’t extend a loan for more than 48 months. Harley, on the other hand, requires only 10% down and will extend the loan for up to seven years. “And you get approvals in under an hour,” he says.