Resurgent Indian Motorcycles Could Hurt Domestic Sales Of Harley-Davidson

by Trefis Team
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Around two-thirds of Harley-Davidson’s (NYSE:HOG) motorcycles are sold in the U.S. itself, making the domestic market central to the automaker’s operations. But with a declining core customer base of middle-aged Caucasian males in the U.S. and stiffer competition from the reinvigorated Indian bikes, Harley-Davidson has had to ramp up its product innovation and marketing in order to maintain its undisputed lead in the country’s heavyweight motorcycle market (601 cc+). The iconic manufacturer of touring and cruiser heavyweight motorcycles rolled out its Project Rushmore bikes in August last year, which turned out to be its biggest product launch in over two decades. In the same month, Polaris Industries, known for snowmobiles and off-road vehicles, resurrected the Indian motorcycles and introduced three models. What Polaris has in common with Harley, and could possibly hurt the latter’s business in the U.S., is its classic American brand appeal and loyal fan following.

We have a $60 price estimate for Harley-Davidson, which is around 3% lower than the current market price.

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The Indian Nabs Market Share From Harley-Davidson

Following the launch of Polaris’ three Indian motorcycles- Chief Vintage, Chief Classic and Chieftain, sales of the company’s motorcycle division surged by a whopping 94 percent to nearly $70 million in the quarter ending December 2013. [1] Polaris also owns the Victory motorcycles, which saw a mid-single digit percent increase in retail sales in North America during this period. The Victory product line competes with Harley on the pricing front with its comparatively cheaper offerings. For example, the 2014 Harley Softail Slim is around 17% more expensive than the 2014 Victory High-Ball. [2] On the other hand, the Indian motorcycles, which were previously priced as high as $37,000, are now available for $18,000-$23,000, competing directly with Harley-Davidson’s cruiser motorcycles.

Bolstered by new product launches by Harley-Davidson and Polaris, the somewhat saturating U.S. heavyweight motorcycle market received an impetus this past year. Retail sales of heavyweight cruiser and touring motorcycles in North America were up low-teens percent year-over-year in the fourth quarter ending December. [3] However, despite witnessing a 4.4% increase in retail sales in the U.S., Harley-Davidson surrendered some of its market share to Polaris in the country. The automaker’s market share stood at 54.9% in the fourth quarter, down from 55.26% in September. [4] [5]

2014 Could Be A Great Year For The Indian Motorcycles

The Indian motorcycles could further cut into Harley-Davidson’s market share this year. According to Robin M. Farley, a UBS Investment Research analyst, some Polaris dealerships reported that ~80% of the Indian motorcycles were sold to previous Harley owners. [6] In addition, the analyst estimates around 15,000 unit sales of these bikes in its first full year in 2014, which means around $300 million in sales. [7] By the end of 2013, Polaris increased the number of dealerships which sold the Indian motorcycles to ~130, up from 23 in the previous year, which could further boost sales due to higher availability.

At present, the Victory motorcycles contribute roughly $200 million to Polaris’ top line. [8] Even if we assume no increase in demand for this product lineup, revenue for Polaris’ motorcycle segment could more than double this year to $500 million from $220 million in 2013.

Heavyweight motorcycles already constitute over 60% of  the U.S. motorcycle market. With a declining demographic of heavyweight motorcycle riders and rising popularity of affordable lighter motorcycles, this segment might see negligible growth in the coming years. This could mean that Polaris’ unit sales and top line growth comes at the expense of Harley-Davidson, especially as the latter aims to ship an ambitious 279,000-284,000 motorcycles this year, up 7%-9% from 2013.

Harley Will Rely On Outreach Customers And Cheaper Bikes

The silver lining for Harley-Davidson is its timely introduction of the cheaper Street motorcycles, and enhanced focus on its outreach customers comprising young adults (ages 18-34), women, Hispanics and African-Americans. The company will launch the Street 750 and Street 500, its lighter bikes built on the new “Revolution X” platform, in the U.S. by the second quarter this year. The Street 750 and 500 will be available for approximately $7,500 and $6,700 respectively, making them the cheapest Harleys on sale. The automaker’s renewed faith in lightweight motorcycles after three decades is in hope to attract a wider consumer base, especially millennial customers that prefer cheaper and lighter bikes.

In addition, Harley-Davidson hopes to meet the deficit created by its declining core customer base with sales to its outreach customers. According to the company, growth rate of outreach consumer sales was two times that of core consumer sales last year. Riding a wave of strong demand for its 2014 Project Rushmore bikes, and heightened buzz surrounding the lightweight Street series, Harley will look to uphold its dominant market lead in the U.S. heavyweight motorcycle industry despite the Polaris threat.

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Notes:
  1. Polaris Q4 2013 earnings presentation“ []
  2. Motorcycle comparison“, motorcycles.findthebest.com []
  3. Polaris Industries 8-K“ []
  4. Harley-Davidson 8-k“ []
  5. Harley-Davidson 10-q“ []
  6. Indian motorcycles back in business with new manufacturer“, October  2013, jsonline.com []
  7. Indian to outsell Victory in 2014, analyst predicts“, January 2014, powersportsbusiness.com []
  8. Polaris: Indian motorcycles should drive strong 2014 market growth“, December 2013, seekingalpha.com []
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