HD - Leveraging Mystique into a Global Powerhouse?

Note: this post was
carried today on Wallstrip

Overview

What is Harley-Davidson (”HD”) without its mystique? It is, in
short, a lifestyle product. It’s not just a bucket of chrome, bolts and
fancy paint - it represents youth, vitality, freedom and free
expression. This is a company so aware of its user base, so in tune
with its brand image that it has its own user group
- H.O.G. An extract from the Company’s website describing H.O.G. -
“It’s one million people around the world united by a common passion:
making the Harley-Davidson dream a way of life.” This is a salesman’s
fantasy. The brand practically sells itself. This is demonstrated by
their recent financial performance,
which is nothing short of stellar. Harley has made many on Wall Street
and across the investment community smile this year. The stock is above
both its 50-day and 200-day moving average, and recently hit a new high
on news of a stellar quarter. Margins are higher than ever, and sales
continue to grow both in the US and abroad. The question du jour: can
they keep this up?



The Core Asset - the Brand

HD is a community-fueled juggernaut. One only has to Google
“Harley-Davidson” to see the breadth and depth of this community.
Hundreds of websites, forums, blogs, online magazines, and alternative
news sources have sprung up which cover every conceivable praise and
criticism. Not bad for a Company grappling with a mid-life crisis (see
Demographics below). A list of a mere subset of the HD community’s web
presence is provided here:

The Hog Blog

Gaijin Bikers in Japan

In High Cotton

knucklebuster

Biker Chick Motorcycle Diaries

Planet Harley Blog

Total Motorcycle

Harley Davidson Forum

Cruisers, Custom Motorcycles & Choppers

V-TwinFORUM

California Harley Davidson Forums

Harley Chat Group

This amount of coverage is a marketer’s dream. Remember focus
groups, surveys, and point-to-point interviews as inputs to the market
research process in order to get some sense of what’s happening in the
real world? Well, one need look no further than the internet to get a
pretty good handle on sentiment, key issues, concerns, areas of
strength and trends among customers and prospects alike. It is almost
as if, given the right web tools and analytical frameworks, one could
replace an entire grass roots research function at a fraction of the
cost and with lightning speed. Pretty darn cool. Few companies have as
much fodder for this type of analysis as HD does, but given that they
do, they’re blessed.

Spending a few hours browsing this plethora of enthusiasts, there is
one unifying message – We like Harley just the way it is. Do not
change. Well, my friends, that may work for you but it probably doesn’t
work for HD stockholders over the long term. So, given the power of the
brand and the organic growth the Company has experienced to date, what
are some of the challenges and opportunities that lie ahead?

The Challenge and the Opportunity - the Demographics

I think a few facts about the composition of the HD customer base
might be instructive: the average age of a Harley purchaser is
mid-to-upper 40s, with 43% of all new sales purchased by pervious
Harley owners. Only 11% of buyers are women. As noted in the Sydney Morning Herald, this older age group was responsible for the this year’s surge: 

THEY’RE often regarded as symbols of youthful rebellion.

But cashed-up buyers in their 40s and 50s are believed to be behind
a huge surge in Harley-Davidson motorcycle sales in the past year.

Figures released on the eve of the Sydney Motorcycle Show next month
show Harley sales grew about 35 per cent in the 12 months to September.

In the past 12 months, Harley-Davidson sales have risen from 2864 to
3862. The average age of a Harley buyer was 43. Overall bikes sales
were also up more than 20 per cent, in part due to the cost of fuel.

Compare this with the profile of the Japanese-dominated sports biker
market (mid 30’s, higher percentage of women, and 30% first-timers),
and one wonders how much time HD has to continue milking this valuable
cash cow.

While this level of devotion and support from a specific demographic is great, with it comes a portfolio of risks. A post
in the motorcycle enthusiast site Kneeslider raises several very
important and relevant questions. I apologize for showing most of the
post here but it is chock-full of good observations and interesting
issues:

Harley Davidson, like any other company, has a customer
base with certain similarities, in their similar taste in bikes if
nothing else. But the story now being promoted is the male baby boomers
are aging enough, the first wave moving into their sixties, that buying
a new Harley may not on their list of things to do. News stories
suggest hip and knee replacements are pervasive and make you think once
you hit sixty, the whole world falls apart. (I think a few of those
writers haven’t been paying attention to the advances in health
recently)

Obviously, most sixty plus riders aren’t going to be putting their
knees down unless they’re changing their oil, but is that a problem for
HD? That sounds like the huge baby boom generation won’t be buying
sportbikes as often but you can ride a big Harley just as well as a
Gold Wing and I don’t see any suggestions of Honda losing touring bike
sales in an aging market. Some older riders will eventually stop riding
and younger riders will pick it up. But, still, is this aging market a problem?

It could be if you focus on serving only the male, primarily white,
baby boomer market but recently Harley has been trying to attract more
women riders, just like all of the other companies and motorcycle
accessory manufacturers, too. Everyone seems to be coming out with
riding gear aimed specifically at women, which is a good thing as
comments we’ve received indicate, and they’ve also been looking to
ethnic markets where HD has been a bit weak. Blacks and
Hispanics are not seen as often in the Harley crowd and HD wants to
change that. This is exactly like the auto manufacturers who are more
recently targeting cars and trucks to those groups.

Harley has promoted a “Harley Davidson lifestyle” for a long time, a
semi fictional series of images that play in the minds of potential
customers to get them to walk into the local HD dealer so they can join
in. Does this lifestyle fit the needs or desires of the groups they want to attract? Probably
not without a little tweak here and there or even some major revisions
and maybe that’s what they need to do. Maybe there isn’t one story or
image that will appeal to enough customers to keep things going and
they may have to diversify that image to fit smaller groups. Someone
interested in the urban biker scene is unlikely to find a Harley to his
liking which is where some Buell derivation might fit. The Vrod family
is more likely to attract the drag racing or horsepower and performance
crowd. The big Harley Touring rigs always have a market for long range
riders and the softail or FXR models appeal more to the chopper or
custom type of customer.

Although Honda used to have their “You meet the nicest people on a Honda” campaign many years ago, no
one tries to fit everyone into a Honda lifestyle because there isn’t
one. Honda covers all the bases and as a result sells a lot of bikes. Harley
can appeal to most of those same riders, too, as long as they don’t try
to force a “one size fits all” strategy on those riders.

Harley may have to adapt in the future but not simply
because their primary market is aging but because there are fewer
homogenous markets for anything anymore and if you think about
it that way, all companies have the same worry, not just Harley. I
expect to see Harley around for a long time, not quite the same Harley
we’ve seen over the years maybe, but they’ll be around, nevertheless.

A few more thoughts: Harley’s recent decisions to push into China
may be an example of the “one size fits all” strategy instead of
targeting groups with focused products. The Harley lifestyle in China?
The market is changing for everyone and trying to do more of what you
did before because it worked here so it will have to work there, too,
isn’t thinking long term and ignores your potential customers. Hard as
it may be for Harley to admit, not everyone wants to be an American
Harley rider, China has no movie history like “The Wild One” and “Easy
Rider” and no Sturgis or Bike Week. Dropping big chrome V twins on
their market may just result in a dull thud when they hit. Looking at
the huge number of Chinese people doesn’t mean they’re going to be HD
customers. The HD appeal here in the US has to change and developing
those other target markets in this country may make it easier to sell
Harleys worldwide.

So, not good answers here, only the point that the very thing
driving HD’s awesome results over the recent past may not have legs.
What to do about an aging cash cow? This is a risk the Company must -
and will - aggressively address.

The Engines of Growth - the Global Expansion and High Performance Plans

Management has demonstrated time and time again the ability to
overcome significant obstacles. They orchestrated a brilliant recovery
in the face of near collapse, catalyzed by a radical restructuring of HD’s supply chain
along with a shift in its and relationship with its 3rd party vendors.
Given this record of necessary adaption and crisis execution, there’s
no reason to believe that they don’t fully understand the need and have
the tools to appeal to new markets.

In 1998 HD acquired
Buell Motorcycle, America’s only significant manufacturer of sporting
motorcycles. This move shrewdly allowed the Company to participate in
the growing market for performance bikes without the risk of tarnishing
the HD image. According to the Company’s latest 10-K, while commanding
less than a 1% share of the US market, Buell has been making solid
progress in Europe. Almost 2/3 of HD’s 359 European dealerships are
actively promoting and selling Buell models. This is smart.

The same strategy is being applied to new performance models such as the XR 1200, which premiered
not in the States but in Europe. The XR1200 prototype is being billed
as a way for HD to work its way into the hearts of the European
motorcycle enthusiast. That’s right. Our proud American motorcycle
company comes up with one of the most bad-ass looking Sporty’s ever
created and offer it up our neighbors across the pond first. Now you
know Management is looking to maximize profits and grow the business
the right way - why else would they give this to the Euros first?
Smart, smart, smart.

Conclusion

Since its brush with near death, HD has become a master at both risk
management and brand management. They know the audience that has been
paying the bills and funding growth - the US boomer cyclist. They
listen to what they say very, very carefully. They will efficiently
milk this cow for a long, long time. In light of an inevitable
demographic shift, HD is prudently moving more aggressively into Europe
and China, but in a risk-controlled manner. Leverage existing
distribution where possible, attempt to cater to the local markets
without losing sight of its global image. Management has done a
terrific job thus far. Many companies have made the grand error of
ignoring their base, with disastrous results. HD looks to be doing this
right, and with consumer sentiment only a few clicks away, there’s no
reason they shouldn’t be able to deftly navigate this shift from an
American icon into a global powerhouse.

Thanks to Rick Calmon for the great research

The author does not hold a position in the securities of Harley-Davidson