Harley-Davidson’s Success Story In The U.S.

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Harley-Davidson (NYSE:HOG) is America’s largest heavyweight motorcycle manufacturer, holding 55% share of the market, which is expected to grow by 2-2.5% this year. Demand for larger bikes stalled during the recession, bringing down net heavyweight motorcycle sales in the U.S. to approximately 260,000 units in 2010, less than half the volume sales during the peak in 2006. Naturally, Harley also felt the impact of the weaker economic conditions, with U.S. sales for the company falling at a CAGR of 16.7% through 2006-2010. But interestingly, since 2009, Harley has outperformed the country’s heavyweight motorcycle market in terms of volume growth rate. The percentage volume declines in 2009 and 2010 for Harley were lower as compared to the overall market, and the company’s volume growth percentages since industry volumes rebounded in 2011 have been more than the corresponding figures for the market. Harley already holds a massive share in the U.S. heavyweight motorcycle market (601+ cc), and despite the entry of new players in the country such as the resurgent Indian motorcycles, Harley has managed to grow its share each year since 2009.

Harley was only one of two American motorcycle manufacturers to survive the Great Depression, and has outperformed the U.S. heavyweight motorcycle market in the last five years. As economic conditions are expected to strengthen in the U.S. in the near term, and given Harley’s domination in the large bike segment, the company’s volume sales in the U.S., which accounts for two-third’s of its net shipments, could continue to rise going forward.

Is There Room For Growth In The U.S.?

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The U.S. heavyweight motorcycle market is expected to cross 310,000 unit sales this year, up 2.1% year-over-year. However, industry volumes are still much lower than the 543,000 unit sales in 2006, which could mean that there is room for growth, especially as the unemployment rate slides and disposable incomes grow. Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively. [1]  Also, the unemployment rate has dropped to  a six-year low of 5.8% in the U.S.  Given Harley’s iconic brand image and loyal customer following, the company’s volume sales are expected to rise with an increase in the heavyweight motorcycle market size.

However, despite improving macroeconomic conditions, the demand for heavyweight motorcycles in the U.S. might not get back to 2006-2007 levels. The core customer base comprising the baby boomer generation is aging, and millennial customers tend to prefer fuel-efficient, lighter, and cheaper modes of transport, and might be wary of leisure and luxury spending, especially having been through the recession. This could limit growth of the heavyweight motorcycle industry in the U.S. in the coming years. To overcome this, and in order to simultaneously evolve with the shifting market trends, Harley has increased its focus on its outreach customers, comprising young adults (ages 18-34), women, African-Americans, and Hispanics. In 2013, Harley’s volume growth rate for outreach customers in the U.S. was more than twice the growth rate for core customers. This means that even with the growing population of outreach customers in the country, and an aging baby boomer generation, the company’s volumes might still be headed for positive development. The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. [2]

The Street Bikes Target Outreach Customers

The Street 500 and Street 750, built on the new “Revolution X” platform, are the first lightweight motorcycles for Harley-Davidson since the 350 cc Sprint, which was discontinued in 1974. The highly anticipated bikes went on sale in the U.S. in June, and are expected to be crucial as Harley aims to attract millennial customers. After overcoming start-up issues that limited product availability in the second quarter, Street sales grew significantly in the third quarter in the U.S.  Proportionate sales of the Sportster and Street motorcycles increased by nearly four percentage points compared to the previous year to 25.8% of the net retail sales in Q3. Harley expects combined sales of the Street 500 and 750 in the U.S., Spain, Portugal, Italy, and India to range between 7,000-10,000 this year, around 2.5-3% of the net volume mix. Proportionate sales of the Street pair could grow to 4.5-5% of Harley’s net annual volumes next year — the first full year for the Street bikes.

We have focused on the importance of the Street 500 and 750 because these motorcycles are likely to add incremental volumes for Harley, rather than cannibalizing sales of other company models. According to surveys conducted by the company, the Street motorcycles are attracting outreach customers that are new to the Harley-Davidson brand. This bodes well for Harley, which is actively trying to increase its outreach sales.

While considering the U.S. heavyweight motorcycle market, which as aforementioned, is expected to grow to over 310,000 unit sales this year, registration data for motorcycles with engine displacement below 601 cc is excluded. Thus, registration data for the Street 500 and its competitor bikes, roughly including the 251-600 cc segment, is not accounted for. This means that Harley’s market size is in fact not limited to the traditionally assumed U.S. heavyweight motorcycle market. Given Harley’s stronghold in the large bike segment, launch of the new lighter motorcycles, and focus on the growing population of outreach customers, the company is poised for growth in the domestic market.

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Notes:
  1. U.S. GDP growth rate []
  2. U.S. demographic projections []