What Is Harley-Davidson Doing To Reverse The Declining Sales Trend In The Home Market?

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Harley-Davidson

The iconic heavyweight motorcycle manufacturer Harley-Davidson (NYSE:HOG) invokes almost a sense of nostalgia among Americans, who’ve seen the brand survive the Great Depression, as one of only two motorcycle makers to do so, and also recuperate well following the recession, when motorcycle shipments less than halved in 2010 from the peaks seen in 2006. The noisy guzzling Harley bikes were highly popular with the Baby Boomer generation, which formed its biggest customer base. However, this segment is now aging, and the iconic manufacturer is struggling to replace its core customer base.

The U.S. heavyweight motorcycle market hasn’t filled up to the peak levels of 2005-2006, and it might not in the near future as well. This is primarily as the 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. Customer spending also took a hit due to the growing uncertainty regarding the political scenario in the country. So, the challenge for Harley is not just to fend off competition, but also to grow in a slowing market.

Why Harley’s U.S. ambitions are of prime importance to the company is because shipments to the domestic market alone constitute approximately two-thirds the net shipments. Performance in the U.S. has a significant bearing on the overall results of the motorcycle maker. As can be seen from the chart, total shipments for Harley have a strong correlation with the U.S. shipments. Harley’s retail sales declined 1.6% year-over-year in 2016, despite a 2.3% growth in international sales, due to a 3.9% decline in U.S. retail sales.

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HOG Q&A 22

Harley has looked to overturn the trend of declining volume sales in the U.S. through certain measures:

  • Harley is focusing on growing the sport of motorcycling. As the core customer base ages, the company aims to build a new generation of riders, which will help the overall market for heavyweight motorcycles refill. The U.S. heavyweight motorcycle market (601+ cc) declined by 5.2% year-over-year in 2016, hurt by economic uncertainty and despite aggressive discounting by some of the motorcycle manufacturers. The market was expected to shrink last 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. However, the market was down by more than expected, especially in Q2. Harley’s U.S. dealers trained more than 65,000 new riders through the Harley-Davidson Riding Academy last year. The company previously announced its goal of increasing 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 the heavyweight motorcycles category in itself.

  • With the core customer aging, Harley has looked to diversify its customer base over the last few years. The aggressive push to increase its reach to young adults (aged 18 to 34), women, African-Americans and Hispanics — which collectively are termed as Harley’s outreach customers, is paying dividends, with sales to these customers outpacing sales to the core customer base for the fifth consecutive year in 2016. In fact, sales of new Harley-Davidson motorcycles to outreach customers in the U.S. has grown at a CAGR of 5% between 2010-2016, and retail sales to outreach customers now represent 40% of the volume sales, up from 34% in 2010. Despite facing stiff competition from foreign manufacturers, especially the Europeans and the Japanese who have undertaken aggressive discounting of models benefiting from the stronger U.S. dollar, Harley is the leader in motorcycle sales in each outreach category. Why this is a positive sign for the company is because it is in a strong position if and when sales in the overall heavyweight motorcycle market rise, as sales to the outreach segment are expected to drive this growth.
  • Harley is also looking to extract the growth opportunity in the used-bike segment, with which the company is reaching new and returning customers. According to the company’s research, of these customers, those who plan to buy another motorcycle, 9 out of 10 plan to buy another Harley, and 90% of those riders would consider buying new. [1] The company could benefit from the brand loyalty and high repurchase intent of these customers who buy used motorcycles from Harley-Davidson dealerships.

The heavyweight motorcycle market hasn’t refilled to prior levels and Harley is out to change that, with its aim to reach more and more potential customers. This process, however, could be long and drawn out. The company expects global shipments this year to be flat to down compared to 2016 levels, as it looks to clear out inventory before the new model year bikes can be sold. Hence, Harley is expected to have another weak year in 2017, in terms of  volume sales. The question remains whether America’s own, beloved brand, is able to bounce back in the near future through its efforts to grow sales in the domestic market.

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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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Notes:
  1. Harley-Davidson earnings call transcript Q4 2016 []