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Is Harley Davidson Over the Hill?
Harley Davidson (HOG) has been experiencing a slump in demand for its motorcycles. This is largely attributed to the increase in median age of its key demographic. The real question now for the company, is will it be successful in right-sizing its operations for the lighter sales volumes that an aging baby boomer population foreshadows? And, looking to the future, can it attract new customers to its iconic brand?
There are approximately 76 million baby boomers in the United States (those born between 1946-1964). This generation has become the bread and butter for Harley Davidson. Harley’s motorcycles began to rise in popularity during World War 1, when 20,000 of the bikes were utilized by the U.S. infantry. Once the soldiers came home, they sought out the bikes they were accustomed to riding overseas. Later on, when Indian motorcycles shut down during the early 1950s, Harley was left as the only American-made option for riders. As the counter-culture movement of the 1960s pressed on, many boomers were reaching the driving age. And many found that they could voice their independence and display their freedom by hopping onto a HOG and cruising wherever they pleased.
For many years, Harley’s production could not keep up with demand. This made it difficult to get some of the more popular models and helped to create a cult-like following among riders. During the late 1990s, Harley had waiting lists for some models in excess of two years. The company increased production capacity to meet this demand. However, the aging baby boomer population is starting to show in the decline of HOG’s sales.
Boomers have been the key buying demographic of Harley’s for some time. This, coupled with the cult like status of its products, allowed the company a lot of pricing power. Indeed, the prices of Harley’s domestically built bikes have outpaced those of the company’s foreign competitors, but the more established financially stable boomers had deep enough pockets to purchase higher priced luxury items. But, with the economic downturn and financial market turmoil still visible in the rearview mirror, the desire to spend up to $15,000, the average selling price for a HOG, has waned. Although some models can be had for as little as $8,000, many go much higher. Sport bikes from Suzuki Motor Corporation, Honda Motor Co. LTD. (HMC), and Yamaha Motor Co. range from $8,000 to $13,000.
Also hurting demand is the fact that, as motorcycle enthusiasts get older, vision and reaction time often decline. Moreover, research suggests that when older riders are in an accident, they are more likely to incur serious or terminal injuries as they bring other health problems to the operating table. Neither of these issues should be surprising to anyone over the age of 50, as bodies that once bounced back start to creak and moan a little more than anyone would like. Thus, customers viewing the risks of riding more clearly with the wisdom of age have been a clear hurdle for sales.
The next generation of riders appears to be opting for the faster, more race-inspired bikes from overseas which are offered at more reasonable prices. Indeed, the higher-end bikes from these companies, which still sell for less than the average HOG, are comprised of 1,000+ CC (liter) bikes. These are often referred to as super bikes, and they can reach speeds of 180+ MPH. Cheaper and faster bikes are becoming harder and harder competition.
The company looks to ship 207,000-212,000 bikes in 2010. This represents a decrease of 5%-7% from 2009. This declining trend may continue for a few years, as the above trends likely will hurt results. Although these trends do not augur well for Harley’s top and bottom lines in the longer term, the company does have a few tricks up its sleeve.
On the cost front, Harley has been renegotiating its labor contracts. It also sold off its Buell line of sport bikes and the MV Augusta line, which was sold back to the Italian company’s original owner. Selling the two product lines allows the company to focus its efforts on key product lines, while reworking labor contracts should help keep costs in check. In fact, the goal is to function on an as-needed basis with respect to labor, which would give the company a great deal of flexibility on the cost front.
One can only do so much by cutting costs, however, and Harley Davidson is also working on attracting new customers. One area of focus is women. Harley Davidson is the only motorcycle manufacturer that has created a template catering specifically to this underserved group of motorcycle customers. With new advertisements showcasing Victoria Secret super model Marisa Miller, events to get women into Harley’s showrooms, and new motorcycle models with lower ride heights that make them easier for women to drive, HOG may be able to tap into this market, which, arguably could double its customer base—though that is likely an exaggeration of the potential. That said, Harley’s management believes that if the company can get “Mom” on board, it may able to open up opportunities with the rest of the family.
In addition to women riders, Harley also appears to be targeting younger riders with offerings like the Forty-Eight, Iron 883, and Cross Bones. These bikes have the retro styling that has become very popular with younger riders today. Many bike manufacturers have been offering some throw-back models with vintage touches and a more-raw look to them, however, so Harley is not alone in this effort. That said, bikes from other manufacturers don’t have the heritage that a HOG does, which gives Harley a leg up and can help to justify its higher price points.
Harley Davidson’s finance unit has recently been providing support to the company’s bottom line, but that resource can only be tapped for just so long before it is exhausted and top-line growth is needed. Clearly the company is going to have to find a way to start growing sales again or further cost cutting will be necessary. As the 76 million baby boomers continue to age, that market will dwindle into obsolescence as potential customers for a new HOG, suggesting that cost cutting alone simply won’t be enough. With a long and impressive operating history, it is likely that Harley Davidson can make itself relevant again by attracting younger riders, serving a previously underserved niche, and working toward a leaner more elastic cost structure. How long this material reshaping takes, however, is another question.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.