Reliance On The Slow Domestic Market Is Weighing Down Harley-Davidson’s Performance

by Trefis Team
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Harley-Davidson‘s (NYSE:HOG) reliance on the home market is immense, with the U.S. forming two-thirds the net motorcycle shipments for the company. As can be seen from the line-chart below, Harley’s overall shipment trend has a close relation with its shipments in the U.S. Thus, a decline in the home market has an adverse impact on the company’s results, as was the case during 2009-2011 post recession.

HD IMG 1

Harley’s shipments have plateaued during the last couple of years as shipment-growth in the U.S. has cooled off. The U.S. market for heavyweight motorcycles (601+cc) has not refilled to the prior levels of 2005-2006, and this might be due to the outlook of the newer customer base. Millennials are typically more price-conscious, especially after the recession, and are looking to hold off on making discretionary expenditures, which includes the luxury heavyweight motorcycles. In this case, Harley can bank on its iconic and cult brand, which prides itself on a strong and loyal customer following, to maintain a strong market share in an otherwise slow-growing market. This, in turn, has been made tough in the last couple of years or so by the stiff competition from European and Japanese competitors, due to their pricing advantage, as the dollar continued to grow strong against foreign currencies. Harley, on the other hand, looked to protect its premium brand image and profitability, and maintained high model prices. The loss in price competitiveness for Harley shows through its results for the first three quarters of 2016.

Retail sales of motorcycles dropped 4.7% year-over-year in the U.S. through September, and the overall retails were down 1.9% year-over-year. To avoid inventory build up, Harley expects to ship 264,000-269,000 bikes in 2016, down from the earlier estimate of 269,000-274,000 bikes at the start of the year. This amounts to only -1% to 1% growth over 2015 levels. According to a survey by Robert W. Baird & Co., 35% of Harley dealers in September said that the inventory of motorcycles was too high.

However, on the back of continual lower sales, especially in the home market that is struggling to ramp up sales of heavyweight motorcycles, Harley is looking to reorganize and reduce its workforce to streamline functions, for which it will incur expenses of approximately $20 million to $25 million in Q4. The company previously announced that it was laying off casual workers in its U.S. plants. This step now is in accordance with the trend of softer customer demand, which is expected to lower production levels at the iconic motorcycle maker’s facilities. Through the first nine months of the year, registrations in the U.S. heavyweight motorcycle market declined 5.5%.

The good news for Harley is that it gained market share in the domestic market (Harley’s retails declined 4.7%, while the overall U.S. market fell 5.5%). The U.S. heavyweight motorcycle market (601+ cc) was expected to shrink this year, as it was lapping the positive growth in the year-ago period, driven by the onset of aggressive competitive discounting during the first half, and due to weak anticipated sales in oil-dependent areas. However, the market was down by more than expected, especially in Q2. Harley’s decline was lower than that of the overall market’s, and this reflects the core strength in Harley’s business. The incremental growth in the U.S. last year was due to the aggressive discounting by competitors, and the de-growth this year has also been due to lower sales for the competition.

Given the high reliance of the company on the domestic market and the slow activity in the country’s heavyweight motorcycle market, Harley will look for international growth and cost-cutting to boost its financials.

Have more questions on Harley-Davidson? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Harley-Davidson

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