Harley-Davidson’s Lightweight Motorcycle Hopes To Become A Heavyweight

Harley-Davidson (NYSE:HOG), the iconic motorcycle manufacturer, announced earlier this month the launch of its first flagship lightweight bikes in decades. The Street 500 and Street 750, built on the new “Revolution X” platform, are set to arrive in the second quarter of 2014 in the U.S. and in some international markets. As Harley looks to broaden its portfolio and target a wider customer base, we expect these new introductions to impact the annual sales as well as the revenue per motorcycle.

We have a $59 price estimate for Harley-Davidson, which is around 13% lower than the current market price.

Heavyweight Motorcycle Market To Grow In Moderation

Harley’s motorcycles have long been associated with great muscle power, large engines and feisty undertones. The company’s lineup of heavyweight bikes with over 800 cc engine capacity has historically targeted wealthy middle-aged men. During the economic downturn, the domestic heavyweight motorcycle market reeled from a decline in consumer spending, and sales fell by over 35% in 2009.

Even as the markets recovered in the following years with sales reaching close to 300,000 units in 2012, it seems less likely that the peak of 2006 (~555,000 units) will be matched in the near future. ^[1] The high-priced premium heavy bikes have traditionally been purchased by rich men, typically in the age group of 35-50. However, this base demographic of the population is on a decline in the U.S. In addition, the new generation of motorcycle owners are more price sensitive and prefer lightweight motorcycles and scooters. In order to expand its customer base, the company has sought to diversify its reach by launching lighter and affordable bikes.

Lightweight Bikes Target The Common Man

Weighing in at 480 pounds, The “Street” is Harley’s first bike on a new platform in 13 years. The company’s last Harley-brand lightweight motorcycle was the 350 cc Sprint, which was discontinued in 1974. The pair of cruisers, Street 500 and 750 will be assembled in Missouri and also in India, and sold in the U.S., India, Italy, Spain and Portugal by early 2014. These entry-level bikes will be available for around $6,700 and $7,500 respectively, making them the cheapest Harley-Davidson motorcycles on sale. Considerable sales of the Street 500 and 750 would decrease the average revenue per motorcycle for the company.

Harley-Davidson boasts a market share of more than 55% in the U.S. heavyweight segment, and now aims to compete with renowned brands such as Honda, Yamaha and Suzuki in the lightweight division. These inexpensive lightweight bikes aim to leverage the global brand appeal of the company and attract a broader middle-class consumer base, especially in the emerging markets.

International Sales Might Pick Up

The new motorcycles have the potential to drive international sales for Harley-Davidson. The motorcycle giant had previously aimed to improve international retail sales to 40% of its total sales by 2014. However, a weak economic environment in the European markets has prompted the company to change its outlook. Harley’s retail sales fell by 3% in 2012 in the region, after increasing by 13% in 2011. The affordable Street duo – 500 and 750, aim to improve Harley’s performance in Europe.

Harley-Davidson’s completely-knocked-down unit at Bawal in Haryana, India, will export its motorcycles to Italy, Spain and Portugal. The Indian market is the second largest motorcycle market in the world with a great appetite for inexpensive mid-range motorcycles. The Street series has been planned for the stop-and-go traffic with higher ground clearance, narrower chassis and a new suspension system, which also suits the Indian roads. The company aims to reach 4000 cumulative unit sales in India since 2010, at the end of 2013.

In addition to benefiting from the restructuring process, Harley looks to utilize the low labor costs and other cost-cutting operational advantages offered by large scale manufacturing in India. Although lightweight motorcycles tend to have lower margins due to cheaper prices, these cost effective measures should somewhat offset the narrowing of margins.

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1. Harley-Davidson 10-k [↩]