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Economy puts RV sales in the slow lane

With  gas prices going up, consumer confidence going down, and credit getting tighter, Winnebago Industries is sputtering in the slow lane.  CNBC's Brian Schactman reports.  
Image: Winnebagos on a lot
Winnebago motor homes on a lot in Carson, Calif.Ann Johansson / Getty Images file
/ Source: CNBC

The assembly line here at Winnebago Industries usually moves at just eight inches an hour. But as demand for these big vehicles has dropped recently, the pace of the line has slowed even more. Workers are churning out fewer motor homes, and some of them have been laid off.

Watch the news and you can see why consumers are holding back. Stock market gyrations, a major investment bank teetering and the Fed trying to come to the rescue by slashing interest rates.

Along the way, the American psyche has taken a hit.  Confidence in the economy is plunging, and prospective buyers are clutching tightly to their cash and credit.

For Al and Darlene Picconatto from Waite Park, Minn., the pain of the credit crunch became personal when their home mortgage payments spiked.

“I went from my one job to two jobs to three jobs, so I was working at three different jobs … just to make the payments,” said Al Picconatto. “When you add $650 on a mortgage payment something else has got to slide someplace.”

The new home mortgage payments were crushing their budget.  With both a house – and a house on wheels – something had to go.

“It was the camper, motor home or the house,” said Darlene Picconatto. “You have to choose the house.”

Their motor home – manufactured by Newmar – was repossessed.  For a large family that had spent so much time camping together, it left a huge void.

“Going out camping is a big thing in our life,” said Al Picconatto. “The Fourth of July weekend -  we go back for a trail ride in North Dakota. Riding in the badlands of North Dakota is fantastic.  And you go on a horse over trails this wide. ... And you look down over cliffs and you see buffalo.”

For recreational vehicle makers, the Piccanatto’s story — and others like it — don’t help their sales pitch. Joe Barbagallo, owner of the Cedar Ridge R.V. Center in Branchville, N.J., has seen demand shrink. He says the current downturn is probably the worst he’s seen. Those who do buy are going for smaller R.V.’s and avoiding the bigger models.

“We've had to make adjustments in our inventory, “he said. “We're selling a lot more trailers, which people will put in campgrounds and leave them there (for the season).  And they can drive back and forth in their four- or six-cylinder car.”

For some buyers, the great fear is taking on payments they cannot afford.  Scores of owners have had to turn in their keys. For many who bought RVs, the road ends at Midwest Recreational Clearinghouse in Cannon Falls, Minn. It’s a temporary resting place for repossessed RVs that are then resold at online auction to become somebody else’s preowned pride and joy.

The company’s auction Web site is called – an unusual name for a unique business. It acts as a broker for banks trying to sell repossessed vehicles.  Co-owner Brian Livingston says that as the economy has slid, the pace of repossessions has picked up. His sales are up by some 50 percent in the past six months.

“Six months ago we probably did five to six units a day,” he said. “We're up to 10 to 12, and sometimes we've gone up to 15 units a day lately.  And we've expanded locations just to have the real estate to park them.”

For Winnebago, it hasn’t been an easy ride. With the economy slumping, big-ticket items are the first to go — especially when that ticket can be as much as $300,000.

Winnebago is headquartered Forest City, Iowa, home to the largest of their three manufacturing facilities. But because of current market conditions, they’ve had to scale back production by some 20 percent.  Some 300 employees -- 9 percent of the Winnebago work force --  have been laid off or shed through attrition. 

Bruce Hertzke started on the assembly line 37 years ago; today, he’s the company’s CEO.  In his 10 years running the company, he’s never had an unprofitable year – but in the last quarter, earnings were down 67 percent.

“I think the market's going to be tough for the next six to nine months yet,” he said.

To cut costs while they weather the slump, Winnebago executives say they’re considering a plan to shut down their assembly line on Fridays and trim factory workers back to 32 hours a week. Hertzke says he’s feeling the pain, but the company’s seen – and survived – worse. In 1978, company employed 3,800 workers; after the oil embargo hit, the payroll slid to a few as 700.

“We are a cyclical business,” he said. “We have always said that.  And we will flow up and down along with the economy.”

Ironically, the inspiration to create the company that became Winnebago sprang from economic distress. Fifty years ago, local farmers hit a bad patch, and Forest City was in danger of withering away. John K. Hanson, a local businessman, convinced the town fathers that building “travel trailers” was the answer to their woes. In March 1957, the first trailers – called Aljos - rolled off the line.

In 1959 when he bought the business from its first investors, Hanson's had a vision of an America ready to hit the new interstate highway system. The company soon took on the name of its Iowa county, Winnebago, and in 1966 it released its first self-contained motor home. It sold for a little over $6,500.

In time, Winnebago grew, building new models in ever-expanding facilities. Hertzke thinks even Hanson would be impressed.

“The market since he passed away in 1996 has changed so dramatically,” said Hertzke.  “And we've added so many new lines.  He would just be amazed.  Yet he would say, ‘Go do more.’”

But in the current downturn, they’re doing less on their assembly line - a line unique because it makes almost every component that goes into their motor homes. Despite the slowdown, the company hasn’t compromised on the way it builds its RVs. Winnebago’s president Robert Olson recently provided a tour of how the process begins.

"The first thing that happens is the chassis arrives,” he said. “And we start welding bracketry onto the frame to allow us to put our cab structure and our basement and floor structure onto the chassis itself."

The cabs are dropped, fully constructed, onto the chassis. The chassis then move on to a building known as "Big Bertha" - large enough to hold seven football fields and housing three 900-foot assembly lines.

Flooring is lowered from Bertha's mezzanine, carpeting is laid down and interior spaces are created.  Once the walls are bolted on and the roof is attached, the company’s comprehensive approach becomes clear. All the cabinetry and decorative elements are made in-house.

“We build 90 passenger and drivers seats a day plus 40 lounge chairs and 40 couches," said Olson. "It's just another way that we're able to control our own destiny when it comes to quality."

Winnebago even makes its dashboards, bumpers and shower stalls using a vacu-form process in which plastic is heated up and then sucked tight over a mold.

The last step includes rigorous quality checks.

"Water and motor homes don't make for happy campers,” said Olson. “That's why every product that we build goes through a water test that has a rainfall equivalent of 50 inches an hour. That way we can ensure that our product does not leak."

Though sales are slowing, Winnebago is determined to roll on -- betting that the downturn is only temporary.

“Our average consumer is 55 to 60 years of age,” said Hertzke. “They have their kids through college. They probably have their homes paid for. What they're looking for is saying, ‘How am I going to enjoy the rest of my life?’ You know?  And some people are going to say, ‘I want a motor home.  And I want to travel around the United States.’  And, again, they'll complain just like I complain about $3 gas prices. ... They'll still go.”

The Picconattos had planned to spend the next few years of their lives traveling in their RV as often as possible with their children. But this economy has laid waste to their plans.

“I think that the only thing that we can do is take day trips,” said Al Picconatto.