Harley-Davidson Is Taking Steps To Reverse Its Declining Sales Trends

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Harley-Davidson

2015 has seen the U.S. dollar grow strong against local currencies in international markets, where macroeconomic volatility has had a harsh impact on business activity. However, this set in motion a domino effect, which, in turn, has had a negative effect on the financials of one of the most beloved and iconic American multinationals, Harley-Davidson (NYSE:HOG). The motorcycle manufacturer has suffered at the hands of stiff competition from European and Japanese competitors, due to their pricing advantage, as the dollar continued to grow strong. Harley, on the other hand, looked to protect its premium brand image and profitability, and maintained high model prices. Millennials are typically more price conscious, and the loss in price competitiveness for Harley shows through its results for the first three quarters.

Nine-month revenue from motorcycles was down 6.2% year-over-year to $3.38 billion, on a 2.3% fall in motorcycle shipments. Approximately two-thirds of the company’s shipments are to the U.S., so the performance in the domestic market is significantly consequential to the overall results. However, what has been a worry for Harley is that shipments were down 2.3% in both the U.S. and international markets, representing how a loss in price competitiveness and volatility in certain crucial markets has had an adverse effect on Harley’s business in most markets. The company prides itself as an iconic and cult brand, with a strong and loyal customer following. But the currency headwinds and tough competition has played spoilsport more recently. Once the Fed decides to raise interest rates, the dollar will become even stronger, meaning that the rough market conditions that exist for Harley today might not just be near term.

In this case, what the motorcycle manufacturer could do is reduce its model prices, and risk its margins. Much of the rest of the industry, such as Polaris, maker of the Indian and Victory motorcycles, has resorted to discounting. However, this has dragged down gross margins for these companies. Although sales of motorcycles were up 154% for Polaris in Q3, gross margins declined by 126 basis points. [1] Harley is looking to protect its profitability, so loosening its grip on model pricing is not in the cards, as yet. Instead, the company is hoping to stir customer demand by pumping more money in product development and marketing, and banking on models such as the Street 500, which are relatively cheaper, to draw-in new customers. Here are a few steps taken by Harley to boost sales:

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— Harley is now planning to increase investment in customer-facing marketing next year by approximately 65% above 2015 levels, and increase investment in new product development by approximately 35% from 2015 levels. [2] In dollar terms, this represents a $70 million increase from 2015 levels in investment by Harley, in a bid to raise brand awareness, grow ridership in the domestic market, and increase reach, and availability.

— The manufacturer is looking to boost sales by making it easier for prospective buyers to learn riding, i.e. helping in growing the sport of motorcycling. Harley has trained more than 220,000 riders worldwide since 2010 through its Harley-Davidson Riding Academy. Dealerships are offering the opportunity to learn to ride on a Street 500, and along with the launch of U.S. Military Rider Training initiative, the company has trained 25% more riders this year, compared to 2014. The goal now is to increase the number of riders trained in a year to over 100,000 globally by the end of the decade, with the majority in the U.S.  Basically, Harley is hoping to increase its sales by helping in creating more demand for heavyweight motorcycles.

— Harley is aiming to increase its reach and availability. In the last quarter alone, the company put up 14 dealerships internationally, a rise of 2% in its overall international dealerships. Over the next five years, Harley is looking to open 150 to 200 new dealerships internationally, representing a 20% to 25% increase in its international dealerships.

It’s common knowledge now that currency headwinds are one of the main villains for American multinationals, but, sitting back and hoping for the storm to pass might be a bad choice, especially when the currency headwind and pricing disadvantages might be here to stay for at least another year. In the past, some customers had to wait to even get their hands on a Harley, as the demand for the iconic bike maker sometimes outweighed the supply. But with fiercer competition from foreign manufacturers, and evolving preferences of customers, Harley has somewhat lost out on the demand for heavyweight motorcycles. The millennial customers are typically more price-conscious, especially after the recession, and they might look to think twice or maybe even put off discretionary expenditures — which includes the heavier and premium motorcycles.

Harley has looked to evolve according to these shifting customer preferences, as seen by last year’s introduction of the Street 500 and 750 — lighter and relatively cheaper bikes that have resonated with customers so far. Sales to the outreach customer base comprising young adults, women, African-Americans, and Hispanics have increased by more than that to the core customer base in the last four years, and are expected to follow that trend this year as well, but their percentage composition still remains much less than that of the core customers. The hole made by the contraction of the large core customer base might just be too big to be filled by the addition of the outreach customers.

Nonetheless, Harley’s goals to further build on an already strong brand, increase penetration in international markets, and raise investment in product development — are all long term. They focus on increasing the company’s sales in the longer term, as opposed to a quarter or two. It will be a slow process, especially as better pricing and currency has Harley at a disadvantage for now, but the company hopes that the steps it is taking, while still protecting its profitability, could help boost sales while keeping its premium brand image intact.

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Notes:
  1. Polaris earnings presentation []
  2. Harley-Davidson earnings transcript []