Harley is thrown by bumps in the road
Owning a chromed or custom Harley-Davidson is “not about transportation, it’s about an experience,” says the company’s chief executive, James L. Ziemer.
That’s clear to even the most average of non-motorcycling Joes, who, on any given day, are likely to see T-shirts, leathers, window decals, cigarette lighters, bandannas and other paraphernalia emblazoned with the company’s trademark bar and shield.
But there’s one Harley-Davidson Motor Co. item that hasn’t been selling as well in the U.S. recently: the motorcycle itself.
Sales of the heavyweight bikes were down 10.2% in the first six months of this year, and the Milwaukee company is cutting back production as much as 40% to whittle its inventory.
“For 15 years, Harley-Davidson couldn’t make enough motorcycles for middle-class guys,” said leisure industry analyst Robert J. Simonson of William Blair & Co. “They couldn’t make enough of what was making them a lot of money, so they didn’t design product or market to other groups. Now they need to.”
Many dealers are also feeling the pain, as the economy weakens, credit tightens and the motorcycle market becomes increasingly transportation-oriented. Some are even starting to offer products that would have been sacrilege in better economic times: They’re selling fuel-efficient, foreign-made -- even electric -- scooters on the same floor as Harley’s flag-waving, thunderous internal-combustion cruisers, also known as Hogs.
It is, to be sure, a culture clash, but desperate times are calling for desperate measures at some dealerships, especially in California and Florida, the top two motorcycle markets, and other areas that have been more severely affected by the down economy.
At Glendale Harley-Davidson, sales are off about 20% this year, with high-priced touring models, “usually our lead products,” particularly hard hit, said Emily Vindeni, controller of the shop.
Lately, Vindeni said, the bikes sold aren’t so much for leisure but necessity. People “are not going to spend $15,000 to save gas. They’re going to spend $10,000 or less.”
What is selling at the Glendale shop is Harley’s smallest, lowest-end bike, the Sportster, as well as its entry-level sport bike, the Buell Blast. In the spring, that short list may include Asian scooters.
“We’re looking into that because you’re seeing more and more of them on the road,” Vindeni said. “There are quite a few Harley-Davidson dealerships that have already gotten into that business.”
Even so, Chief Executive Ziemer frowns on the practice of selling inexpensive scooters. It’s not only because the profit margin on a $28,000 motorcycle is much higher than it is for a $4,000 scooter, but also because it dilutes the character of the brand.
“I don’t think that it serves them well,” he said. “They’re selling to a different customer base. If someone’s looking for a very inexpensive product for transportation, that person was not going to buy a Harley-Davidson anyway.”
In spite of the current trend toward smaller two-wheeled vehicles, Ziemer said Harley-Davidson would remain a recreational product.
The drop in domestic sales, which account for 75% of Harley’s revenue, to $1.9 billion in the first half of the year continues a downward trend. Sales in last year’s first six months were 5.7% lower than in the same period the prior year.
The company’s net income slipped 4.5% last year to $993.8 million from $1.04 billion a year earlier and is on a slower pace this year, with $410.4 million earned in the first half.
The shares peaked at $75.50 in November 2006 and have been heading south since. They closed Monday at $41, down $1.80 a share. The stock’s value has slid 12.2% so far this year and 46% from its peak two years ago.
Things could be worse, Ziemer said.
“Right now, I’d say our business is definitely doing better than most discretionary large-ticket items,” he said, pointing to declines of as much as 30% in such other motor sport categories as all-terrain vehicles, boats and RVs.
Sales of motorcycles industrywide roared from 293,000 in 1993 to 1.2 million in 2006. Purchased predominantly for leisure use, motorcycles were ridden for the most part on weekends -- not for the weekday commute to work.
But as gas prices rose and consumers curtailed spending, the market started shifting. Sales of expensive, large-displacement cruisers, the prototypical Hog, have been especially hard hit in the U.S., while sales of fuel-efficient scooters are higher than they’ve been in two decades.
In 1998, cruisers made up 50% of on-highway motorcycle sales, and scooters were just 5%. Last year, cruisers accounted for 37% and scooters were 19%.
That trend doesn’t faze Ziemer. “We’re not going to chase mopeds for the sake of selling units,” he said.
Gasoline, he noted, is an insignificant cost of motorcycle ownership. He also pointed to the fact that motorcycles, even those with large, 96-cubic-inch motors that Harley-Davidson makes, still get about 40 miles per gallon, which is far better than the average passenger car mileage of 27.5.
The primary cost of motorcycle ownership is, of course, the bike itself. And increasingly, potential buyers who want to ride high on a Hog are having a difficult time obtaining the credit to do so.
According to a recent survey, 63% of U.S. Harley dealers reported that their customers had found it more difficult to get financing. In February, only 28% of dealers reported feeling that way, according to the survey by financial research firm Robert W. Baird & Co. About 75% of motorcycle sales are financed, the firm says.
Compounding the problem is the limited supply of bikes. In April, Harley-Davidson decided to cut production of its motorcycles to align supply better with slowing demand. Harley plans to ship 203,500 to 207,500 motorcycles this year -- a drop of more than 40% from its 349,000 sales record in 2006.
Besides the difficult economy, Harley-Davidson faces challenges in international markets and in other demographic areas.
Long associated with the macho of the U.S. male, the brand has found only a small audience among women and minorities, who make up 12% and 7% of sales, respectively.
And as dentists, lawyers and other so-called rich urban bikers adopted Harley as their motorcycle of choice, the median age of a customer has gone up. Twenty years ago, about half of Harley riders were under age 35; today the median age is 48.
The company is responding with more lower-priced and lower-seated models that appeal to women and younger buyers. It markets those models in magazines that target women and in extreme-sports media and venues that appeal to young men.
But many young riders are not buying cruisers, they’re buying sport bikes -- an area Harley-Davidson hasn’t pursued vigorously. Its Buell Motorcycles unit sells a meager 5,000 bikes a year.
In the summer, Harley-Davidson bought premium Italian sport bike manufacturer MV Agusta. Harley would not discuss sales projections for the new unit, but Ziemer said the focus would be increasing MV’s European business first, then tackling the U.S. market.
In the meantime, as Harley-Davidson sales decline at home, the company is ratcheting up its efforts overseas. Typically, about 25% of the company’s sales are international, and it is trying to expand into China and India.
Ziemer is confident the company will do well overseas. Having been around for 105 years, his company takes the long view.
Harley-Davidson, after all, doesn’t just sell motorcycles. As Ziemer said, “Our business is about freedom and independence.”
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