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

Comments

[Yaser Anwar]

With the repurchase of 21+ million shares, $1+ billion, in 05 & almost 10 million shares
in 2006, one can indeed say "Management has done a terrific job thus far."

Not only that, investors can expect further stock repurchases and dividend hikes as management utilizes FcF. This is a Warren Buffet type of company. From the past couple of years, management has been continuing a series of payout boosts (from 8% in 01 to 18% so far). In the 2nd Q, HOG increased its quarterly dividend by nearly 17%.

Last year the company had a short-term earnings blip and the stock fell 10 points, would have been a great buying point. That's exactly what Bill Nygren, one of the top value investors, of OakMark Fund (OAKLX) did. OakMark is one of HOG's Top Mutual Fund Holders.