Lightweight And Electric Motorcycles To Expand Harley-Davidson’s Customer Base

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Harley-Davidson

Harley-Davidson (NYSE:HOG) has already won over the middle-aged Caucasian population in its native market, which forms the bulk of the sales for the motorcycle manufacturer. The company has a strong 55.5% share in the U.S. heavyweight motorcycle market (601+ cc), and the country accounts for nearly two-thirds of its net shipments. Since the effects of the double-dip recession wore off in 2011, Harley has been seeing volume growth each year, after four consecutive years of decline in shipment volumes.

However, things are different now almost a decade after the U.S. heavyweight motorcycle industry was at its peak. The core customer base for Harley comprising Baby Boomers is aging, and millennial customers have looked to hold-off on extravagant purchases, a term which can be associated with heavyweight luxury motorcycles, especially after a prolonged period of slow economic activity. This is one of the reasons why Harley’s volume growth, although positive in each year since 2011, is declining on a year-over-year basis. The U.S. heavyweight motorcycle market grew 2.5% to 313,627 units last year, but this figure is still well below the 550,000+ units sales figure in 2006. Going by current trends, Harley’s motorcycle shipment growth, which slowed to 3.9% in 2014 from 10.7%, 6.2%, and 5.2%, in 2011, 2012, and 2013, respectively, could eventually stagnate. Mindful of this, Harley has looked to tap into international markets, thereby reducing dependence on the domestic market, and launch new products more in tune with the current crop of customers.

Our current price estimate for Harley-Davidson stands at $67 which is roughly 5% above the current market price.

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A prime example of Harley’s commitment to evolving with shifting market trends is the launch of the Street 500 and 750 last year, the company’s first lightweight motorcycles in four decades. The Street pair lured customers who preferred a Harley-branded cheaper and lighter motorcycle, raising overall shipments of these bikes to 9,900 in in 2014. In fact, on the back of incremental Street sales, the proportion of Sportster/Street bikes rose to 21% of the net volume sales, up from 19.3% in 2013. [1] The Street bikes are expected to be crucial to the company’s net shipments this year, and as the Street 500 and 750 will be available in almost each of Harley’s markets this year, the proportionate mix of these bikes in 2015 could more than double from 3.6% in 2014.

Another new product that could propel growth in Harley-Davidson’s volumes going forward is the plug-in electric motorcycle. The new electric motorcycle dubbed LiveWire is strictly a concept as of now, but could go into mass production by next year. The groundwork for this potential model launch is already in full flow. The company handed the LiveWire motorcycles to customers for test-drives or provided the riding experience in simulators last year in the U.S., in order to gauge their response to the new Harley model. The tour in the domestic market included more than 6,800 demo rides, and the company is now looking to “mock test” the LiveWire in Europe and Canada and Asia-Pacific this year, before considering mass production.

There are two reasons why the LiveWire could be important for Harley in the future. Firstly, the high-performance electric motorcycle market is still relatively nascent in North America and Europe, where the demand is expected to rise rapidly going forward. Sales of electric motorcycles and scooters could grow at a CAGR of over 30% through 2023 in these two regions. [2] Although fuel prices have shrunk dramatically in recent months, making the cost of ownership of regular motorcycles cheaper, this might not be a lasting trend. When fuel prices rise again, demand for electric motorcycles could rise at a rapid pace. There could be large potential in the electrical motorcycle market, especially if a major player with an already established brand name competes in this space. Zero Motorcycles, the highest seller of high-power full-sized electric bikes, reported record sales in 2014 (around 2,500 motorcycles), and is expected to further cash-in on growing demand in North America and Europe. Given the market muscle and global reach of Harley-Davidson, the company could in fact stimulate more demand for high-power electric motorcycles going forward.

Secondly, the electric motorcycle will help Harley attract outreach customers, comprising young adults, women, Hispanics, and African-Americans, as well as improve sales in international markets. For the third consecutive year in 2014, Harley grew sales to outreach customers by more than twice the sales-growth to core customers, which however still form a bulk of the company’s U.S. sales. The environmentally-viable and lighter electric motorcycle, LiveWire, could be more suited to the tastes and preferences of the outreach customers, helping Harley further expand its customer base. Initial demos in the domestic market gathered encouraging positive customer responses at large, and with the demos moving to international markets this year, the company will aim to attract more customer attention. Harley’s Europe retail sales rose 6.7% year-over-year in 2014 after two consecutive years of decline, and a new model could further add incremental sales in this region in the coming years.

Why the Street and LiveWire motorcycles are important is that these models are expected to bring-in customers that are new to the Harley brand, thereby increasing the manufacturer’s reach and customer base, rather than self-cannibalizing sales. While the LiveWire is only a concept as of now waiting to be materialized, the Street is very much here and was already a strong driver of shipment sales in Q4 of last year.

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Notes:
  1. Harley-Davidson earnings transcript []
  2. Sales of Electric Motorcycles and Scooters Will Reach 6 Million Annually by 2023 []