Harley Davidson’s cult model for the way forward for transportation
Harley-Davidson’s 2021 models just unveiled include the CVO range, featuring the company’s most advanced audio and infotainment options, as well as the latest in braking, steering and safety features.
As a tradition-conscious 118-year-old motorcycle manufacturer, Harley-Davidson does not seem ideally situated to thrive in a rapidly changing world where vehicles are increasingly electrified, self-driving and shared. But the legendary company could be better positioned than many stock market investors who rely on transport suspects.
The company’s US bike sales peaked at more than 260,000 in 2006 and have declined roughly 40% since then. Demographics are part of history, and they’re well drawn in terms of stock price and the broader representation of Harley’s consumer market. In 1985, the year before Harley went public, the average motorcycle owner was only 27 years old, according to the Bureau of Transportation Statistics. By 2018, the average age had risen to 50 years. But the legendary “HOG” brand is turning around under the leadership of President and CEO Jochen Zeitz, who took over the helm last year after praising a turnaround for European consumer brand Puma.
Zeitz and other new executives drove the “Rewire” initiative, which has led the manufacturer to move away from low-potential international markets to focus on 36 high-growth areas in North America, Europe and Asia. The company also laid off 700 employees to cut costs. 2020 concluded by entering into a distribution agreement with Indian motorcycle maker Hero and outsourcing electric bike operations to a new company in which it has a minority stake.
“We believe you are on the right track,” said Garrett Nelson, senior equity analyst at CFRA Research. He praised Harley’s deal with Hero in late October as mutually beneficial. “Harley will gain access to Hero’s existing distribution network in India and Hero will benefit from selling additional motorcycles through its dealers,” he said. “It’s a compromise. Harley is giving up part of the margin for access to the distribution network in the fast-growing market.”
He added that Harley should pursue similar opportunities with other established players to expand its exposure to faster growing Asian markets.
Harley in a Tesla world
With the new financial strategy, Harley’s is now looking ahead. On February 2, the plan for the years 2021 to 2025 will be presented. The new plan is called hardwire and is “desirable” according to the company, although details have not been released.
Next month, Harley is also introducing the Pan America, a large, adventure-style motorcycle designed to be at home on the road as well as off-road. It is the company’s first foray into the adventure bike market, where competitors such as BMW and Honda are already well represented. The leisure market has become a more intense focus for consumer brands due to changes due to the pandemic.
Nelson was also cautiously optimistic about the manufacturer’s prospects in an increasingly electrified future. The LiveWire, Harley’s only current electric motorcycle, is showing promise, but the company has been slow to bring it to market since its release in late 2019, he said.
“A concrete strategy for the Livewire electric bike will be needed,” said Citi analyst Shawn Collins. However, he added that electric vehicles will remain a long-term rather than an immediate financial priority. “EV cycles are a rounding error right now,” he said of the sale.
The LiveWire costs nearly $ 30,000, making it one of Harley’s more expensive motorcycle offerings for the 2021 model year, which ranges from $ 9,500 to $ 49,000.
“Over time, we are optimistic about the opportunity as we believe that the cost of lithium-ion batteries will continue to decline in the years ahead and that electric vehicles will be heavily subsidized by the new government,” said Nelson. “We anticipate that electric vehicle costs will reach parity with internal combustion-engine vehicles by the middle of this decade as battery costs continue to fall.”
Harley-Davidson’s share price – like many companies in this expanded bull market – is at a 52-week high but remains well below its all-time high.
The company’s cult brand remains attractive, even when financial assets fluctuate.
“Harley-Davidson is the most valuable motorcycle brand in the world,” wrote Craig Kennison, Baird’s senior research analyst and director of research operations, in a recent research note. Harley’s strong brand, size and loyal customers give him an edge over the competition in his opinion. Meanwhile, Harley’s new leadership has made operational changes designed to drive growth in 2021, Kennison said, including streamlining its product portfolio, reducing dealer inventory by 30% and introducing annual cost savings of $ 115 million. “We increasingly like the investment case for Harley-Davidson,” he wrote.
Nelson said there could be further cost reductions. He said Harley should try to further downsize its global footprint to focus on the markets that are most profitable and have the greatest long-term growth potential. However, reducing the overall footprint does not mean that overseas consumers are less of a focus.
“Right now they’re too widespread,” said Nelson. “Between 2006 and 2019, the company increased its exposure outside the US from 22% of total sales to 42%. We believe this percentage must be increased further out of necessity, as we believe the North American market is in a secular decline is understood. “”
Harley’s issue is about return on sales, or motorcycle sales, and Citi’s Collins said in its results and Investor Day in February that managing returns on sales will be a key to maintaining investor confidence. “A lot of people believe in Zeitz, but Zeitz has a high bar,” said Collins. “There is no easy answer. … The top line was awful.”
The biggest problem for Harley is well known: the brand struggled to appeal to younger riders.
Younger consumers have shown an aversion to buying motorcycles and vehicles in general for safety concerns, which Nelson says is due to the increase in ridesharing, financial and urbanization trends, and Harley’s domestic demand has been falling for well over a decade.
“Harley was unstoppable in the 80s and 90s and even most of the 2000s,” said Collins.
The Citi analyst noted that Polaris-owned Harley competitor Indian Motorcycle had successfully gained new audiences, and Zeitz demonstrated his ability to work “marketing magic” while overseeing the turnaround at Puma that had lost consumers to Nike and Adidas. “His job is to put the magic back into Harley so that a younger person might want to buy one. That’s what he’s got his eye on for the next three to five years,” said Collins.
“Harley-Davidson has known for a while it needs to reach younger customers,” said Dennis Chung, production editor at Motorcycle.com. “The problem is, demographics don’t necessarily want the same things in a motorcycle as the older Harley-Davidson basics.”
Much will depend on the next generation of the popular Sportster line of midsize cruisers from Harley-Davidson, Chung said. “Classic Harley design definitely has value, but it needs to be balanced with modern design and technology,” he said.
The Sportster range has been in continuous production since 1957 and is one of the oldest Harley ranges.
The Harley-Davidson Sportster 1200 Custom.
One way Harley-Davidson can respond to a tougher consumer market is to shift the focus from growing market share in absolute terms to increasing brand exclusivity. The Rewire plan was a confirmation from management that covering the globe in search of new sales was not the way to go.
“Instead of trying to increase sales, Harley-Davidson is now trying to make more profit on every sale, even if it means fewer bikes are sold,” said Chung.
Harley-Davidson recently posted a 39% increase in net income for the third quarter of 2020 year over year, despite global motorcycle retail sales declining 8% year over year in the third quarter of 2020.
North American sales rose for the first time in a long time, according to Collins, and there are broader trends that could benefit Harley. Sales of sports and leisure vehicles are growing due to Covid and the tailwind could also spill over to the motorcycle market.
“They are # 1 in the market with a 40% market share and the brand is different from any other,” said Collins.
The European market is now growing and the new Pan America adventure bike should do well in this region.
The decision to cut the product line by around 30% seems like a wise and necessary move due to the overlap.
“Many Harley products are very similar. Eliminating some of the lower-performing products creates a leaner product portfolio that helps reduce costs,” said Chung.
The company dropped a handful of models from its US lineup in 2021 – the FXDR 114, Low Rider, Breakout, Street Bob 107, Deluxe, Street 750, Street Rod, and Roadster.
As the company has fewer models, it sells a range of accessories and customization options. This allows buyers to personalize their bikes in details like color, luggage, seats, stereos, brake upgrades and other areas.
It’s okay to be in a declining market if you can improve the profitability of the products you sell.
Jaime Katz, Morningstar Analyst
According to Collins, Zeitz understands the opportunities in bicycle parts and Harley lifestyle accessories. While these aren’t strategies that can take business to the top level, they are important parts of a larger plan to maximize sales while reducing costs and generating higher profits. He recently invested up to 15% up on Harley’s stock ahead of next month’s Investor and Income Day and wrote in a notice to investors that he continues to be encouraged by the decisions made by the new management.
Even with a reduced portfolio, the manufacturer still offers two dozen different motorcycles, mainly focusing on the cruiser and touring market segments, as well as three three-wheeled motorcycles.
“We believe Covid-19 has given Harley the opportunity to press the reset button on its strategy and refocus efforts on its primary consumer who we believe is key to higher profit margins,” said Jaime Katz, Senior Equity Analyst at Morningstar, in a November report. She praised the Rewire initiative as a means of reconciling restoring the company’s core business and entering new markets. Prioritizing profitability over scaling should also focus Harley on the success of high-margin parts and accessories segments, as well as general merchandise segments.
“It’s okay to be in a shrinking market if you improve the profitability of the products you sell,” Katz told CNBC.