Archive for the ‘Harley-Davidson’ category

3,10, 70 and 62: All you need to predict Harley’s (and BMW and Polaris) ten-year future

November 12, 2010

As we’ve been discussing in the comments the average age of certain motorcycle manufacturers, clubs and associations and rights groups. According to industry sources it’s about 47 give or take a couple years.  Jim, one of my readers, pointed out, “Mid 40′s is close to the sweet spot for luxury manufacturers in general and what is BMW and HD if not luxury brands?”

This is true…In fact, the peak earning years have been from 35-54. But that is the problem:

Harley-Davidson says its median age was 47 in 2008.[i] That lends the impression that half of all Harley owners are older and half are younger than 47.

As Jim points out, Harley, BMW and Polaris have made billions off of those in the sweet spot for more than a decade. So if 47 really is the median age for Harley owners (and somewhere in the ballpark for BMW and Victory (made by Polaris) owners and motorcycling was something like RVs or luxury cars all would be very well. But it’s not–especially because of 3, 10, 70 and 62:

3: For most of the past 100 years, motorcycling has been about 2% of all road vehicles.  But then, beginning in the early 1990s,  76-78 million Boomers came into the sweet spot years–their 40s. This generation was better off financially than any generation before them and it appeared as though a greater than average number of people decided to ride motorcycles–particularly  customs/cruisers and tourers–Harley and Polaris’ stock-in-trade.

As these Boomers moved through the 1990s, motorcycle sales grew every year by at least 10% over the previous year and, at the end 3% of all registered vehicles on the road were motorcycles.

In 2006, motorcycle sales peaked–and the last of the Boomers turned 42–and turned 46 this year–just about Harley’s median age, but also moving towards the end of the sweet spot years.

So let’s go back to Harley’s “median.” The median means half the ages are older and half younger and can appear that there’s equal numbers of people with each age on both sides of the median. But that’s not the way it works–more owners share some ages than others.

Since we know–by H-D’s own account–that it’s had a very difficult time attracting younger riders, it’s very unlikely (as in snowball’s chance) that half of all Harley owners are younger than 47. There’s good reason to suspect less than one-third of Harley owners are under 47:

According to a January, 2008 Reuters article by Emily Kaiser “Economy faces bigger bust without Boomers” pointed out, two-thirds of all Boomers were already 50 and older. The heavy concentration of Boomer Harley owners and the Motor Company’s inability to attract a strong young market suggests that a significant portion of Harley riders may already be closer to age spots than the sweet spot and a great many of them moving out of the sweet spot even without the recession.  In fact, chances are they’re even older than analysts have suspected.

Even if there had not been a recession–nor lingering Recession Fear–sales will fall off quickly as the Hog passes out of the python–in fact, ten years from now perhaps two-thirds of current Harley owners will be over 60 and well out of the sweet spot.

That elevated 3% is merely a bubble and the overall market for motorcycles will shrink as the smaller Gen X and Millenials grow into their generations’ sweet spots. Iow, the motorcycle market will not recover in the next ten years because there’s simply not a big enough general society base to support it–unlike the Boomers.

And, specifically, it won’t recover for the luxury brands unless, of course, Harley, BMW and Polaris find a way to attract large numbers of 35 and under riders. Yet Harley–for one–has spent nothing on R&D and has cut marketing to almost nothing. Selling Buell and MV Augusta also showed a horrendous lack of vision or understanding of the modern motorcycle market.

And that brings us to the next number–

10: Industry research has found the average rider buys a new motorcycle about every ten years.  This is the pattern the recession most affected. Though the effect on motorcycle purchases is unknown,  study done in 2009 found that 59 percent of new car buyers planned to keep their cars more than four years. That number was up from 45 percent just one year previous–a 14% change. Since motorcycles are a discretionary purchase, it’s likely the percentage is much higher.

The question is–how long will the Boomer Harley owners delay to buy? Because they are growing older, after all. In 2010 the first Boomers turned 64, and that brings us to the next and most important number:

70: The age at which most motorcyclists retire or severely limit their riding. And this is what makes motorcycling a special case compared to, say, an automobile. For example, the average (not median) age for a Mercedes-Benz is 63.6 years-old and about 45% of RV owners are over 55. Iow, unlike many other high-ticket items, motorcycling has a shorter shelf life.

62: Industry research has found  riders buy their last new bike around age 62. This fits then both with the perhaps unconscious belief they will quit riding at about 70 years old and with the 10-year rule. Two things about this:

The purchase window is smaller than many might suspect since it has a relatively young 62 year term limit.  If two-thirds of Harley’s market is over 50 and they buy their last bike before they’re 63, there isn’t much time left to sell a lot of bikes.

That is if they even get to that last bike purchase. If they have delayed or will delay buying the second-to-last bike because of the recession or Recession Fear too long, they may not buy another new bike when they retire–if they retire after the hit to their investments and home prices. Iow, sales may slump even farther because of the recession and its aftermath.

This suggests that over the next 10 years, Harley may not only lose up to tw0-thirds of its base, it may continue to lose last bike sales if riders 55-57 continue to delay purchasing that 10 year motorcycle now. Short of reinvention and new market appeal, it’s almost certain that sales of customs/cruisers and tourers will continue to plummet regardless of the overall American economy.

Nor does hope rest on the perhaps one-third of Harley owners who are under 47. According to an 11/09/2010  article on AOL’s DailyFinance “Baby Boomers Are No Longer Luxury Retailing’s Future“, “Even as generation X hits the peak earning ages of 35 to 54, the cohort is too small to support the [luxury] market on its own.” According to Unity Marketing president Pam Danzinger. “Gen X-ers are merely a hiccup. . .we have to wait for the millennials,” says Danziger. Those 25- to 34-year-olds have the appetite for luxury, but not the cash — at least not yet.”

As we see in the chart, Gen X is significantly smaller than the Boomers–and the Millenials, which are also smaller than the Boomers.

But not only do Gen X and Millenials prefer sport bikes, they don’t value status symbols or conspicuous consumption as their Harley/Polaris/BMW elders, according to Danzinger.

“Danziger calls the new luxury shopper a “tempered pragmatist,” who gets power from being a smart consumer and focuses on superior quality and performance. That means retailers will have to adjust their value message to give consumers a reason to pay the prices they ask, she says, adding: “We have to stop selling the sizzle and go back to selling the steak.”

Marketing to Gen X and Millenials will require a great deal more than revamping HOG rallies and livening up club meetings. The young already have an extensive, intimate and immediate social network through social media, the internet and informal bike nights, track days and so forth. The new motorcycling is heavily supported through images in both advertising/marketing and entertainment even in peripheral ways.  For example, FedEx co-markets with Ducati in a current commercial and the cable television show, Covert Affairs, features an animation of a rider on a sport-type motorcyclist even though no character rode any bike in the first season.

But it will require more than marketing–it’s just as much style that’s required. BMW has been trying to adapt its line to appeal to Gen X and the Millenials for several years. Only time will tell if they can take the frugality chic lessons the recession offers and continue to rebrand itself. However Polaris and Harley have shown no inkling that they are even aware that motorcycling is moving on without them.

With only about ten years left, there isn’t much time for Harley and Polaris to find a way to reinvent their brands into something that has more steak than sizzle.

P. S. Just to mention the little fry–custom builders better figure out how to make marvels out of sport bikes if they want to survive as well.

The recession has only hastened the sea change in motorcycling; it did not create it. The under 40 rider has a different sensibility and sense of style, different priorities. They are tempered pragmatists that don’t buy into the drink-n-ride sociability, don’t see helmets and gear as social commentary.


Without reinvention, Harley-Davidson is a dying brand

November 3, 2010

In the early 1980s Harley was in a very similar position as they are today: The economy was in a recession, motorcycle sales had plummeted and Harley was in dire straits. In 1981 thirteen senior executives bought out Harley-Davidson’s owner AMF and, like today, engaged in massive restructuring. But that wasn’t enough to turn sales around.

That’s because restructuring addresses the business of running the corporation but can’t create consumer demand: money saved is not money earned. As in the 1980s, so in 2010—sales did not pick up and, in fact, plummeted.

Back in the 1980s, Harley got the federal government to institute a punishing tariff on foreign motorcycles. But that alone wasn’t enough to up sales either. Tariffs  can shift existing demand to the favored corporations, but only if the protected industry is not too inferior to the penalized foreign ones. And, at the time of the takeover, Harleys were perceived to be inferior by a great many motorcyclists because of its terrible reputation for mechanical problems.

So much so that the brand was the butt of jokes such as “Why are so many Harleys still on the road? Because the tow trucks haven’t arrived yet.” That reputation affected consumer demand beyond the effect of the recession.

Over the next several years, Harley embarked on a series of dramatic technological advancements—the 1340cc V²® Evolution engine and a superior powertrain as well as rubber-mounting among other innovations. They also fixed perennial problems like oil leaks—and sales increased so much so that Harley petitioned the feds to allow  the tariff to lapse two years early. But without that tech fix, the tariff would’ve had little effect.

Iow, consumers didn’t care how the company was run; they cared about how the motorcycle ran. And that’s what separates yesterday from tomorrow when it comes to H-D’s current troubles: the bike is reliable (enough) nor are there any cutting-edge technological advancements that the core is demanding. Iow, there’s no ready way this time to improve the product to increase demand.

Style also works against Harley’s resurgence now: In the mid-1980s, Harley also introduced a new model, the Softail, which was very much like earlier Harley models, and then the Heritage Softail. which recalled the famous Indian motorcycles—particularly the Chief.

That typifies Harley design since then: In the 1990s, the Motor Company took a cautious step toward modernizing design by producing the V-Rod.

When that failed to attract many riders, they slightly change it to the Street Rod, which also failed to make a significant impact. Harley swiftly returned to their endless variations on past glories. Witness how Harley’s website describes two of the three latest models:

the 2009 two-wheeler “the history-inspired Cross Bones, a bobbed factory custom,” and the 2010 XL Forty-Eight that recalls “the raw, custom Sportsters of earlier days.”

Iow, Harley’s design is, in a good friend’s words, “putting their boots on backwards to stumble forward into the past.”

And that’s just what Harley’s base wants—more of the same with just enough little changes that one year can be distinguished from another—by the faithful and few others.  Baby Boomers identified with Harley’s iconic American corporate mythology, and the rugged individualist  achieving the American Dream mythology the motorcycle symbolized.

Fear of alienating the base has prevented the Motor Company from reinventing the brand to appeal to a changing society.  For example, many dealers refused to carry Buell motorcycles because even though Harley owned Buell, it was not a Harley. Harley fanatics have a strong, inflexible image of what the brand is—and isn’t. And it isn’t a bike that looks un-American since the “sport” look is associated with the bikes made in Japan or Europe.

In this way, the famous Harley brand image is both the best and worst thing that happened to Harley. It was responsible for the phenomenal success of the corporation but keeps it frozen in a time that’s increasingly irrelevant to not only younger generations but older men and women (and minorities).

Consider it this way: Not everyone likes a cola. What if Coca-cola only could produce variations of Coke? By diversifying with Sprite, Barqs, Canada Dry, Crush, Dasani, Minute Maid, Nestea and Gold Peak iced teas and four  hundred other varieties of beverage (including Barcardi mixers), there’s something for everyone. And Coke fanatics don’t mind, nor do stores that carry Coke. This provides multiple revenue streams, protection against market swings (like the growing aversion fad for carbonated soft drinks) and more.

But for some strange reason, Harley is not Coca-cola: In the 1960s when Honda Super Cub were selling like crazy, H-D’s foray into selling scooters failed. That same year it founded Aermacchi Harley-Davidson to produce small single cylinder motorcycles in Europe. Fail. The three-wheel Servi-Car. Fail. H-D snowmobiles. Fail. Making engines for lawnmowers. Fail. The move into RVs with Holiday Rambler Corporation. Fail. Buell. Fail. MV Augusta. Fail.

For almost 50 years every single attempt to diversify[i] has been unsuccessful no matter who ran the corporation. Since Harley’s major competitors, Honda, Suzuki, Kawasaki, Yamaha, Polaris and BMW, all have successfully diversified—and drawn their bases to their other products—this is a singular mystery. But it’s one analysts should consider: What happens if Harley loses its base?

Or rather, when Harley loses its base. The average Harley rider is now closer to 50 than 40—and 40 is considered old by younger people. This has a double whammy for the Motor Company:

The visuals are negative—the more older riders seen on the roads on Harleys, the more Harley is seen as the Geezer Ride. That will not appeal to younger riders nor to those new motorcyclists over 40 who want to ride to feel younger—not older.

But it has another effect: Several years ago, BMW—who shares the well-off, white collar worker demographic with Harley—found out that riders buy their last new motorcycle in their early 60’s.[ii] Iow, a great many of the Harley Faithful have bought their last bike or are about to—and worse still, every year more of them are passing that “last bike” milestone. Since the last Boomers turned forty in the late 1990s, it’s a trend that will accelerate as the bulk of the Boomers hit 60-years old in a couple years. Iow, even if H-D miraculously attracts a great number of young people in the next few years shipments may only stay even with 2007 results and not grow. And that’s something analysts should consider: very soon, it will take a phenomenal number of new customers to produce modest growth.

But to attract young people the Motor Company has to overcome the Geezer Factor and make its hallmark yesteryear styling relevant to a society that values speed, flexibility, daring and ability to adapt quickly—none of which are associated with their products. Buell–despite it having the “old-fashioned” Harley engine–did appeal to younger riders and those who wanted to be thought of as younger. But Harley treated Buell as if it was a sideline like the pathetic Topper scooter or lamentable snowmobile rather than the path to a vibrantly growing future.

Iow, the kind of turnaround the Motor Company experienced in the 1980s is highly unlikely in the second decade of the new millennium.  Unless Harley finds a way to brilliantly reinvent their line, Harley-Davidson literally may be a dying brand.


[i] Except into making motorcycle loans and selling them to Wall Street investors.

[ii] BMW promptly began designing motorcycles that would (and have) appealed to younger riders. Harley, has failed not only with a younger design in their main product line but with the more youthful Buell style.

Harley’s 3Q results disguise the bigger problem

October 24, 2010

Harley-Davidson posted its third quarter report on the 19th and USA shipments were down 9.4% over the same quarter last year.

Harley didn’t mention that shipments year-to-date are down over 11% from year-to-date last year—which was, of course, the worst year of the Great Recession.

But Harley has fallen much farther than that in ways that have nothing to do with the recession. When YTD 2010 is compared with YTD 2006 shipments are down over 35%:

However, Wall Street was very impressed that Harley roughly tripled its profits over the previous quarter. How can that be when sales sagged like the turkey necks on its aging demographic? Primarily it was thanks to its Financial Services division. The Motor Company attributed the increase in 26% profitability to lower cost of funds and fewer loans going into default.

As this article rom Bloomberg.com stated, “Motorcycle demand is slumping, and that slump has yet to show signs of abating,” Brent Miller, an analyst with Gradient Analytics in Scottsdale, Arizona, said in an interview. “That’s a bit concerning. How long can a company continue to count on its financial services arm to fill in that gap of dragging demand?”

As I’ve said before—at some point a motorcycle manufacturer has to start selling motorcycles if its going to stay in business—or stay as a publicly traded company. 4Q 2010 is not going to be when it happens—the 4Q is traditionally the lowest quarter for shipments because demand drops severely and especially in snowbelt states. Harley is planning on 20% of its year-long sales to occur in the 4Q or an additional 40,000 some motorcycles at the minimum. That’s far lower than 4Q sales prior to 2009, however it is likely to be thousands more than they will ship this year.

And this is where Harley’s aging demographics and recession-fear (because it has technically ended) directly impact H-D growth for several years:

Harley has bragged for years that they were in the dream-selling business and that truism came back to bite them hard—and perhaps in the jugular—because of who exactly was buying that dream.

According to Harley, 88% of their customers are male, nearly 2/3rds of its customers are between 36-54, have a median income of over $84,000 and 3/4ths of them have at least one year of college. And most of them are married. And, as Harley alludes to in its annual reports, Harley’s base is overwhelmingly white. That—along with age—might affect Harley’s future profitability in ways no one anticipated:

The Harley and its lifestyle was not just a statement about who the rider saw himself as (or wanted others to see him as) but it was also the prestige brand—the high price (and previously the difficulty obtaining a Harley) also said something about his solid finances (or how he wanted others to see him.

In this way a Harley was the visible, tangible indicator the owner belonged to a specific kind of elite—those for whom the American Dream had become American Reality: they had the wife/family; house; comfortable lifestyle; and a future (or actual) retirement that would comfortably provide for themselves and their families. The Harley, then, was the embodiment of the American Dream: the rugged individual  who conquered the New Frontier and rightfully enjoyed the fruits of his (white collar)  labors.

As HDFS’s 30% subprime loans revealed and crushing default rate in 2008-2009 that was often more dream than reality.

However, Harley’s base was not the group that primarily suffered job loss or salary/hour adjustment. According to Pew Research, younger people and minorities have suffered the majority of job loss or salary/job adjustment Though white men certainly lost jobs, Harley’s core weren’t primarily hit by unemployment.

But, as many of my readers know, it’s not who is laid off that matters as much as the uncertainty that remains in the workplace afterwards. Those who still have jobs struggle with both gratitude they escaped the axe and worry they’re next.

However, the Pew Research Center found, “Middle-aged adults have gotten the worst of the downturn in house values, household finances and retirement accounts. Men have lost many more jobs than women.”

Iow, Harley’s core market has been hit hardest in the areas that make the buying decision difference—even if they still have a job.

And even though the market is now over the 11,000 mark and even though 401ks and mutual funds are generally recovering, the housing and job market haven’t—and neither has the kind of people that fit into Harley’s core:

According to the Pew Research wealthier, white, middle-aged and older Republicans and Independents with higher incomes think their personal financial situation will get worse—and that their financial health won’t recover for three to six years. And, of among all respondents, 39% believe the damage caused by the recession on the U.S. economy is permanent.

High negativity and low trust could keep customers who could afford Harley’s high prices away from the showroom long after the economy and housing improves and unemployment drops. And that would be bad news for Harley—and, as we’ll see, in more than one way.

Otoh, younger, less-affluent minorities with Democratic leanings are optimistic about their personal finances improving, believe things are getting better and the majority of respondents believe America will recover from the recession. And that optimistic profile matches the consumer who chooses sport and adventure motorcycles—or, to put it another way, the kind of motorcycles Harley-Davidson doesn’t manufacture.

They are ready, as Kawasaki says, to “Let the Good Times Roll” again. The kind of motorcycles these young optimists prefer are generally less expensive than Harleys. Iow, even with lower-paying jobs and an economy that’s not recovering fast enough for the pessimist Harley core these younger positive thinkers can afford to buy now. As a result, it’s very likely that Harley’s competitors will benefit low price and high customer optimism while Harley will continue to suffer for more than a year.

Beyond that, there’s two other possible effects that makes it even less likely Harley will recover and more likely it will become a niche manufacturer for ten or more years. That’s the next entry.

Is Harley cruising for a bruising?

September 27, 2010

In 2009, Harley-Davidson embarked on an aggressive restructuring plan to avoid bankruptcy and retain investors: It shed Buell and MV Augusta; shut down factories; sold off machinery; reneged on promises to develop land and add jobs in a quid pro quo deal involving the museum; cut 2,000 jobs; forced the workers to pay more of their health insurance costs; and turned union jobs into fairly low-paid temp jobs.

The Motor Company’s threat to pull manufacturing from Wisconsin resulted in 25 million in tax credits even as the company throws hundreds onto the unemployment rolls—benefits that come out of taxpayer dollars.

Even though the Motor Company admitted enormous restructuring costs, it presented the 2Q results in an extremely favorable light—look, despite everything, the company rebounded from enormous losses and made a little profit.  And it’s leaner—and meaner—coming out of it.

Some analysts, though, question whether it’s a sound health and if the company will rebound in the future. Some are even recommending short selling the stock:

Seth Jackson, in a Motley Fool article, “Show Me the Money, Harley-Davidson” published after the second quarter results came out found the cash flow was disturbing: “When I say “questionable cash flow sources,” I mean line items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That’s not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, I feel obliged to crack open the filings and dig even deeper, to make sure I’m in touch with its true cash profitability.”

Questionable cash sources, he points out, comprises 28% of the cash flow from operations for Harley-Davidson. “Harley has one of the messier cash flow statements out there, full of swings from “retained securitization interests” and other wonders of modern finance.”

In comparison, H-D’s nearest competitors FCF range from 13% (Polaris) to a negative 8% for BMW group. Iow, H-D’s FCF is over twice as much, which isn’t necessarily bad but it’s not necessarily good.

Then there’s the kind of savings that come from restructuring. The Motor Company says it “saved” $135 million to $155 million from the restructuring activities it’s undertaken beginning in 2009. Harley wants us to believe savings could go up to $240 million to $260 million a year.

Jeffery B. Middleswart, President and Director of Research at Behind The Numbers, says restructuring charges tell him a company made a mistake, especially when they come up often.

“They are telling you they screwed something up,” he said.

While huge savings in one year look impressive on a balance sheet, they generally aren’t duplicated again. There’s only so many times they can  borrow $600 million from investors, disassemble plants or throw hundreds into unemployment to look good for Wall Street mavens.

More to the point, Harley’s 2Q profit didn’t come from selling motorcycles—it came from selling off assets, laying off workers and borrowed money—specifically, it came from cleaning up some of the mess in the Financial Services subsidiary. The business of HDFS is primarily motorcycle loans. Making loans is not making motorcycles.

Ultimately, though, a motorcycle manufacturer has to sell bikes if it’s to stay in business. And they aren’t selling many—and the less motorcycles it makes, the less loans.

And such drastic measures surely convey that Harley-Davidson doesn’t believe it will be needing those factories or workers for a long time. And that speaks volumes about the kind of company H-D believes it will be in the future—one that won’t be selling a lot of motorcycles soon.

It’s also going to have $5 billion in net debt after the loans and restructuring costs.

It will take a lot of savings from restructuring and a hell of a lot of bikes sold to pay that back.

Another spot of concern is the increase in short selling of Harley stock. As another Motley Fool article, “Don’t Short These Stocks” by Jordan DiPietro pointed out that “droves” of investors are shorting Harley stock.

Short Selling is the act of borrowing stock to sell with the expectation of price dropping and the intent of buying the stock back to replace at a cheaper price.”

Short interest as a percentage of float, which is a great yardstick for how heavily shorted a stock actually is, typically remains below 5% — anything above that usually indicates a red flag.”

Harley’s short interest percentage of float was 10.7%–or twice what’s considered typical.

Iow, many investors believe Harley isn’t on the road to recovery for many of the reasons we’ve discussed—an aging demographic that’s uncertain about the security of their investments and pensions or are unemployed, massive net debt, questionable cash flow and a profit that came from financing bikes rather than making them.

Beyond all we’ve already talked about, there’s an odd little coincidence that suggests they might be right:

According to an article on the website Seeking Alpha, “Harley-Davidson: Looking for a Good Short? Shed Some Fat”,

The financial services company, BMO Capital Markets, (http://www.bmocm.com/) found that S& P’s Case-Shiller index of house prices correlated with Harley’s stock prices than any other measure such as “the unemployment rate, interest rates, gross domestic product and consumer sentiment scores…to explain the stock’s movements.”

Both existing and new home sales plummeted in July—but home prices were increasing slightly. Still, “While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.”

Existing home sales rose slightly in August, but were still down not only from June but from August 2009. New home sales were static from July. Case-Shiller results will be announced this coming week.

Harley stock price rose slightly after the unions caved in Wisconsin—this strengthens the correlation with Case-Shiller house prices though one has nothing to do with the other.

However, home sales—either new or existing—speaks of a widespread economic health. And if people can afford to buy a house, they might afford an over-priced motorcycle. It could be that  home sales are bellwether of motorcycle sales, it’s very likely that Harley shipments were soft in the third quarter. We’ll find out on October 19 when the Motor Company releases its third quarter results.

How healthy is Harley-Davidson as the end of the 3rd quarter approaches?

September 20, 2010

Many stock market analysts believe motorcycles are a sign of consumer confidence. If that belief is true, then the economy is slightly improving:

Harley’s second quarter shipments were slightly up from first quarter 2010, and, as Harley announced in its 2Q earning report, at the end of the 2Q income was 71.2 million compared to 19.8 million at the same point last year. It seems things are looking up in the Beer and Bike city and thus for the nation.

And, despite all this, more analysts say hold—even sell—than buy. So why aren’t they all woo, woo, go Harley? Let’s look deeper at Harley’s self-proclaimed road to renewing health:

Shipments up but not over 2009

Harley counts a shipment as a sale—that means the motorcycle is sold to the dealer. It doesn’t mean it’s sold to the consumer. It also cut shipments back severely over 2009 and lowered inventory.

Harley’s Stock Price and Shipments at the end of the 2 quarter for each year:

In its second quarter report, Harley announced shipments were down 8.4% from the same quarter in 2009. Of course, that was in the throes of the Great Recession and an abysmal year for the Motor Company. If shipments are still down from that, it’s not

H-D would have to meet their goal of selling 53,000-58,000 motorcycles in the 3Q in order to hit their goal of shipping 201,000–212,000 motorcycles by the end of 2010. That’s still 5%–10% down from 2009, which was significantly lower than 2008.

The growth in shipments over 1Q is good—but distracts from the real picture: shipments are worse than at the height of the Great Recession.

Dealer sales are down A report commissioned by analysts show that 66% of the dealers surveyed at the end of the second quarter said their sales fell by 20% in the 2Q.

If product is choking showroom floors and dealers are choking on the interest payments from that unsold stock, third quarter orders are likely to be lower especially since there’s nothing particularly new or exciting in the 2011 models to driver consumers to buy. This makes it harder for Harley to make their shipment goal.

According to Matt Andrejczak in a July 30, 2010 MarketWatch article, “How short-selling sleuths spot accounting gimmicks on financial reports”,“Typically, inventories should rise at about the same pace as sales. If a company’s inventories are growing faster than sales or expected sales growth, it’s a clue that products aren’t moving. In that case, gross margins could get squeezed.”

Harley is aware of that—and set what TPTB thought were modest shipment goals. Dealers, clearly, thought they could sell what they bought but were wrong and inventories have grown, in many cases faster than sales.

Needless to say, paring shipments further is likely to end in more layoffs, which doesn’t help the nation’s recovery (or the workers, obviously).

But high unemployment is a major reason why dealer sales are down—H-D’s core demographic has been hit hard by both job loss and uncertainty that their savings and investments are secure. And Harleys are high-end discretionary products.

Until Harley’s base is securely employed, sales will continue to lag. But the slower the recovery goes, the slower sales and the slower Harley recovers. Hello, vicious circle. And this is true of a great many companies and entities in the USA that are busy cutting benefits and wages: they feed into the very process that undermines their future profitability.

Dealers have unhappy choices to deal with their inventory: They can—and would—cut orders for new product, which exacerbates the problems H-D already faces. They can cut prices, which also cuts into gross margin profits. It could also damage the brand—it’s no longer a prestige product if it’s on the sale rack.

Market saturation Harley’s problems are exacerbated by market saturation (both here and in Canada). More and more analysts are realizing the Motor Company’s inability to attract women, minorities and younger men and caution that it will affect the corporation’s recovery. Nor is Harley making significant inroads in other countries.

These domestic and international failures are the result of the same branding that made the company such a success. It’s an image that’s dated, narrow and even a joke among the very people the company needs to attract. Moreso, the essential elements of motorcycling—individuality, daring, independence—have been successfully incorporated by Harley’s competitors in their sport, tourer, adventure models in ways that appeal to the very groups Harley has been unable to attract.

Bottom line: when times were good, the leadership failed to find a creative way to translate the brand for a new generation and new concerns. It dwelt in the past even as it aggressively pursued questionable business practices (such as the subprime loan fiasco). Unless a marketing miracle occurs, Harley’s market share will continue to shrink.

This suggests that, unless something dramatically positive happens in the economy in the next few weeks, both sales to consumers and shipments to dealers will be down in the 3Q. And that would mean that Harley may not make its already depressed and modest shipment goal this year. And that does not bode well for the Motor Company.

Both sluggish sales and market saturation affects the other two main streams of revenues: Motorclothes/accessories and Harley-Davidson Financial Services. How it affects the first, the Motorclothes division, is obvious—the second deserves a bit of explanation.

Harley-Davidson Financial Services At the height of the recession almost 30% of Harley’s Financial Services loans were subprime and the Financial Services subsidiary lost about 60 million. This is where the 600 million dollar loan from Buffet and Davis Selected Advisers, L.P. went. A change in the subprime loan policy, the restructuring and infusion of cash has made the subsidiary profitable in the 2Q. For now. And, of course, since Harley loans the dealers money to buy its motorcycles Harley makes money from the interest on shipments dealers paid for but can’t sell.

The bottom line is: Demand for loans is contingent on demand for bikes and it’s going to be years before Harley gets back to even 2007 shipments.  HDFS’ recovery looks good on paper but under the surface lurks the hefty 15% interest on that 600 million loan that and the debt itself that is due in just three years.

Ultimately though, a motorcycle manufacturer has to sell motorcycles to be successful or even to stay in business. It’s still behind

As “Harley-Davidson: Easy Riding on Less Bad Results” published on July 20, 2010, stated,  “At Ockham, we would not recommend buying Harley’s stock following today’s earnings report because “less bad” just is not good enough.”

In the next entry we’ll look at some troubling signs some analysts have found when they looked behind the numbers of the 2Q report. And what they worried about in July is likely to be even more true as the end of the 3Q approaches.

Harley-Davidson plays hardball in Wisconsin: capitulate or we leave

September 13, 2010

No matter what marque a motorcyclist rides if they hear “Milwaukee, Wisconsin”, “Harley-Davidson” is the first thing comes to mind (or right behind beer). But now, barely two years after opening its self-referential museum in Milwaukee, Harley is threatening to move its manufacturing out of state.

It’s already shut the plant in Wauwatosa—and, of course, the Buell operations in East Troy closed down earlier this year. But Harley’s not doing well (more on that in the next entry) and desperate times call for desperate measures.

According to company spokesperson, Bob Klein, the Motor Company would rather stay there but is looking at other locations. Kansas City—who hoped to benefit from the troubles in York a few years ago—hopes to benefit from the Dairy state turning sour for Harley.

It all depends on the unions, according to Harley. All the workers have to do is agree to freeze their pay, cut hundreds of jobs, turn hundreds more into non-union jobs—many of which would be temporary jobs with no benefits. The three unions have encouraged their workers to accept the bad deal to keep the Motor Company in the state.

While Harley’s threat may sound drastic, a little history is in order to see this threat in its proper perspective:

In 2005, Harley-Davidson paid 1.5% of pre-tax profits in Wisconsin income tax resulting in almost $23 million in state taxes. In a series of political maneuvers and tacit threats to leave and promises to stay, employ and grow, H-D (and other big corporations) won tax rate breaks that had the Motor Company paying a mere $1 million in 2008 or less than 0.1% of profits.

In 2006, when Harley was riding high on the HOG, the Motor Company threatened to move manufacturing out of state unless the Wisconsin unions agreed to drastic cuts in wages and benefits. And, after some empty saber rattling, the union capitulated.

In 2007, union workers in Pennsylvania went on strike for two weeks before basically capitulating to Harley’s contract that lowered wages and benefits.

During these same years when its revenue soared and state taxes plummeted and unions rolled over, Harley also received not just federal credit for research and development but a Wisconsin state Transportation Economic Assistance grant of over a quarter of a million dollars to the Harley plant in Tomahawk, WI. According to a case study by the Federal Highway Administration

“The goal of the TEA Program is to attract and retain non-speculative business firms and create or retain jobs in the State.”

Iow, Harley took a quarter of a million of taxpayer dollars to create or retain jobs in Tomahawk in 2009 and plans to not only cut them in 2010 but move out of state.

In 2009, the Motor Company cut 370 union jobs and about 300 administrative jobs with most occurring at the facility in Springettsbury Twp in York County, PA.

Early in 2009, Harley announced it was laying off 12% of its workforce amounting to 1,100 jobs. Later in 2009, Harley threatened to build a new plant in Shelbyville, Ky and close the plant in York—and in November, 2009 the union in Pennsylvania agreed to cut jobs and benefits to keep the plant open—and the state of Pennsylvania gave the Motor Company around $15 million to stay in the state.  Though Shelbyville lost that time, it is coyly silent on whether it’s in the running for the Wisconsin operations this time.

Back at corporate headquarters—still in 2009, Harley Corporate complained bitterly that they had to pay 22.5 million in bookkeeping charges to determine how much the company would owe in the future because Wisconsin closed a corporate tax loophole. Iow, they complained about paying less than they used to for an entire year. For more on this, read here:

Oh, it seemed justified in 2009—Harley suffered in the Great Recession with plummeting motorcycle sales and egregious problems with credit defaults and the inability to securitize those consumer loans. Altogether the Motor Company lost $55 million.

But it’s an ill wind that blows no good and Harley used the recession to do some massive house-cleaning:  Buying the MV Augusta—who had gone through several owners all unable to make the company profitable was one of the most colossally stupid corporate decisions it had made in decades. The recession gave a easy reason to sell it.

Somehow it attracted the interest and investment of the legendary Warren Buffet—and, of course, it used the Great Recession to strongarm Pennsylvania with the very same threat it is now using in Wisconsin. Hey, if it worked once, why not do it again.

By the time the lay-offs are done, the full-time permanent workforce York, PA will have been cut by more than half from 1,950 to 700-800 employees. Not to mention the huge cuts in the labor force elsewhere—and upcoming in Wisconsin if the workers accept the over-the-barrel deal the Motor Company offers.

But every cloud has a silver lining—Pennsylvania hopes that if Harley shuts its factories in Wisconsin and moves the work to Kansas City that some of the work done now in KC will move to York—making that $15 million investment and the sacrifices of the York unions worthwhile.

Of course that’s what Wisconsin thought when it gave Harley the TEA grant and those unions took a haircut years ago. Now Harley wants the workers to shave their heads. And, if the union workers bend over again tomorrow to keep Harley there—well…just how long do you think it will be before Harley is threatening again.

Which is a word to the wise in KC—when their union negotiations come up, how much do you want to bet that Harley threatens to move out of Missouri to Wisconsin and/or Pennsylvania or Kentucky or somewhere else unless those unions, too, accept Harley’s terms?

Of course, Harley—though shipments are down almost 26% over 2008—had made a profit at the end of the second quarter (more on this tomorrow) even though shipments are only marginally up over the same quarter a year ago.

Iow, workers’ sacrifices will pave the way to Harley not just surviving the recession but doing so profitably. (Of course, we don’t know what the 3 and 4 quarter results will be).

And before you give me any “unions are the curse of America” argument or the recession argument consider this: According to a op-ed piece, “Are Harley cuts a case of need or greed?” by Jack Norman published in the Milwaukee Journal-Sentinel yesterday, draconic cost-cutting is limited to the worker:

In 2009 when the USA was in the worst recession since the Great Depression and motorcycle sales had plummeted, the CEO salary (split between Zeimer and Wendell in 2009) was $1,105,169 with another $8,864,919 in extras.

External board members (not already on Harley’s payroll) collected $80,000 fee in 2009, plus $50,000 worth of stock. And things aren’t so bad at Harley that board members gave up their $1,500 annual allowance for clothes and accessories.

This at the same time as thousands (at the least) of their core demographic struggled to make their make their monthly payments or had to sell their bikes or had them repossessed. And more than 3,000 workers will have lost their jobs in the past two years.

But, hey, that’s the Great American Way, right? Except Harley has taken tens of millions from taxpayers—much of it based on promises to create or retain jobs.

In fact, Harley’s hand is always out either begging for bucks from taxpayers or strong-arming the American worker….it’s such a great example of the American free market, isn’t it?

The American worker who has been Harley’s base and yet, because of corporate shenanigans like Harley’s or Wall Streets have lost their jobs or forced to accept equally bad deals to keep a job while the CEOS suffer not at all. Really, does it deserve its fans that bleed black and orange?

Harley’s lost generations: Failure to reinvent loses the After Boomers

November 19, 2009

The After Boomers—Gens X and the older Ys grew up with the Teenage Mutant Ninja Turtles and Knight Rider and Star Trek and X-Men on TV and Star Wars and Matrix in theaters. They began by playing Sonic the Hedgehog and ended by playing Grand Theft Auto, Gran Tourismo and Wii Sports. Athletes and Rock Stars were their heroes. While their parents listened to hard rock, they listen to rap. The Boomers had Easy Rider where the (extensively customized) Harley is ridden by the hero. The After Boomers had Biker Boyz where the Harleys are ridden by the villains and The Long Way Round where the heroes rode BMWs.

Same Themes

Rap and hip hop seems a world apart from heavy metal—but Buddy Holly rocked his generation—and Swing rocked that generation.

In current affairs, instead of JFK’s assassination, this group had 9/11. Instead of Vietnam, they have Iraq. Instead of the Cold War, they have terrorism and terrorists give the entertainment media the same class of “bad guys” as the old Soviet regime.

The way motorcycles are used in movies including the two mentioned above are not essentially different than the way their parents and grandparents saw motorcycles in movies: There’s still the lone hero fighting against a world organized against him in which s/he alone had to solve the problems and achieve glory. For example: the Mission Impossible movies (and MI II had that prolonged motorcycle chase/battle); the Matrix trilogy with its use of motorcycles;  and Laura Croft riding a motorcycle through her house fighting the bad guys. And it’s still about freedom and finding yourself and being comfortable being unlike others: Boomers had the ultimate road movie—Easy Rider. But The Long Way Round is a road movie as documentary with two young men taking that search globally with a lot more acceptance and a lot less drama.

Iow, it’s the old “the more things change, the more they remain the same”. The same kind of influences and forces that make motorcycling naturally attractive to a given percentage of people in each generation are still present today as it was in the past. This suggests that there is a substantial number of After Boomers that are primed to ride at some point in that life cycle discussed in the last entry.

But Different

But what did change changed everything: Instead of The Donna Reed Show and The Mary Tyler Moore Show, Wonder Woman and Supergirl culminating with the television series Charlie’s Angels, this time there was a plethora of women starting with Cagney and Lacey and women like Laura Croft and Xena and Trinity of Matrix fame—and Charlie’s Angels again. The After Boomers grew up with women—as well as men—being the lone hero.  African-Americans had plenty of highly visible role models who were the lone hero in pursuit of personal freedom as well—and some of them like—Kobe Bryant and Michael Jordan—rode motorcycles.

And while their parents suffered the loss of production jobs and outsourcing, these generations grew up in a service industry where globalization was the norm and their homes are filled with products with foreign brand names made overseas by multinational companies.

Fast, flexible, speed is valued—and expected: In other more essential ways when it comes to motorcycles, it’s a different—digital, wireless—age. Now communication is instantaneous and global—internet, cell phones, texting, wii—all these things emphasized speed, responsiveness, dexterity and flexibility. And that’s the same theme in both movies and television—and in business and current affairs.

And that underscored what they learned from video games—even ones like Sonic the Hedgehog and Mario Brothers as children: the prize goes to the aggressive, the one who can decide and act with speed and daring and take risks. Iow, the qualities Forbes associated with the Harley had spread to even childhood games.

Risk Perception: At the same time understanding of risk had changed in two polar opposite ways:

This is the bicycle helmet generation: Boomer parents were schooled to believe danger is everywhere and real or perceived risks were to be both avoided and protected against. After Boomers, as a general rule, been sheltered from risk and even discomfort. For example, they’re been strapped into infant seats, youth seats then seat belts from birth.[i] They’ve been  driven to school to avoid taking the bus; few play outside unsupervised and they’ve been taught to look at strangers with fear. And when it comes to educational and other achievements, failure is negated and everything is awarded.

On the other hand, video games teach them to take extraordinary risks to win—but the risks are unreal. They erase failure with a reset button and get ahead by finding shortcuts. And while the “risks” seem to be enormous—extreme violence and speed—there are no real consequences to them; they emerge unscathed no matter what they do.

As a general rule, then, After Boomers have been protected from the consequences of their choices and actions by their parents and the culture while being encouraged to take extraordinary risks that have no real consequences.

Primed to ride—but not Harleys

Iow, the stage is set for a future boom cycle in several essential ways while attitudes towards risk and consequence have changed in negative ways.[ii]

The only problem is that it wasn’t Harleys that were the iron stars in these movies or on television or video games. Instead it’s the sport bike that’s lionized—and it was men and women on sport bikes that these After Boomers saw doing courageous man-of-action things at speed.

Otoh, cruisers and street bikes were ridden by villains—and the one percenter image was still regularly employed. Or they were ridden by middle-aged (staid) (white) men—the most recent example being the oncologist on Brothers and Sisters who’s idea of risk is to date Sally Field’s much older character. Iow, Harley’s entertainment media presence is either the outlaw or the RUB.

Sport bikes, then, are associated with the young, lone hero out to change the world and the cruiser/street bike with the middle-aged, upper-income male—one who is almost always white.

Take a look at the Motorcycle Riding Celebrities list and the sea change in celebrity riding Harleys is overwhelming: Celebrities like Schwarzenegger, Axel Rose, Billy Ray Cyrus and David Hasselhoff do have H-Ds. But more high-profile celebs like George Clooney own an H-D but own one or more other marques.

However, more and more contemporary celebrities don’t own a Harley at all. Like Bono on a Ducati, Jessica Alba on a Kawasaki, Michael Jordan on a BMW, Sheryl Crowe on a KTM. Angelina Jolie, Brad Pitt and Ewan McGregor are like many younger celebrities and are multi-brand owners: M-V Augusta, BMW, Triumph, Honda, Suzuki or Ducati. The range of marques is quite impressive—as is the absence of Harleys for younger owners.

In fact, it’s startling how old most of the H-D celebrity owners on the list are—and it’s also surprising how many Harley celebs are now in the  “Huh, I thought they were dead” list or “People You Expect to See on Dancing With the Stars” list.

Whether H-D didn’t pursue a product placement strategy or whether it did and were turned down, the net result is that Harleys are associated with a kind of bike that the young associate with the old and irrelevant. Nor did Harley get hot young game designers to create an exciting video game. In no way did Harley engage young men—and women—in the ways that they found exciting and fresh.

No dirt bike Since dirt biking as children and teens is one of the ways new riders enter into street riding either as young adults or as middle-aged people, marques that have dirt bikes built brand memory—and perhaps brand loyalty—in Gen X and Y. Harley did not develop a dirt bike and surrendered a rich branding opportunity. Perhaps it was twice-burned, quadruple shy after its lamentable efforts to expand into snowmobiles and lawnmowers, but it was a regrettable marketing mistake.

Harley is the motorcycle Oldsmobile A few years ago Oldsmobile found itself in the same position as H-D: the young avoided the make like the plague. In an attempt to counter that, Oldsmobile ran a series of commercials that bluntly said it “wasn’t your father’s car” anymore. And that’s the problem with Harleys: a great many After Boomers identify the marque with their parents. In urban areas, at least, it just ain’t cool for someone under 30 to ride a Harley.

Fashion forward rather than fashion backward Nor does the classic cruiser/street/custom style of motorcycle appeal to most After Boomers. Harley specializes in motorcycles that do not look significantly different than those of decades ago. Otoh, sport bikes are much closer stylistically to what’s contemporary in electronics. Harleys, otoh, are so last decade and of a piece with a camera that uses actual film, or phones with a corded handset, desktop computers and land lines.

The After Boomers’ image of Harley is neatly summed up in the South Park episode “The F Word”.

Where the word “fag” is redefined to stand for Harley riders: “Fag. n. 1. An extremely annoying, inconsiderate person most commonly associated with Harley riders. 2. A person who owns or frequently rides a Harley.”

And that’s really bad news for Harley’s short and long-term prospects. As I wrote about in a prior entry, brands have life cycles and unless brand managers can reinvent it for a new age, it suffers.[iii]

Harley thought the V-Rod and then the Street Rod was reinventing the brand—but the styling was still too much like Old Harley. Harley completely missed why even middle-aged women want to ride and how to attract them let alone offer a compelling image to younger women. And it failed to offer a way for other minorities to feel comfortable in what appeared to be a very white—and very exclusive—world of fellowship.

Research also indicates that brands do have generational baggage.[iv] As a Seeking Alpha entry said, “…in the U.S. the number of consumers will continue to grow until at least 2025 thanks to Generation Y…. We believe this supports our view that the U.S. economy is not ending, but changing. Companies that became fat and happy catering to Boomer demand from 1980 to 2000 need to understand that in many cases this demand is no longer there. Why? Because the generational landscape has changed and will continue to change between now and 2025.”

The writer went on to say, “We strongly suspect that those companies that are aware of this shift in demand, and are catering to it, will become the next “Stock Market Darlings.” As opposed to those whose executives are scratching their heads and wondering where their customers (the Boomers) have gone. Currently, for example, “Value” teenage retailers are enjoying the increasing demand of the price-conscious Generation Y, who are flocking to their stores, while car manufactures keep trying to design, or in most cases re-design, the perfect car for the disappearing Boomer.”

Substitute Harley for “car manufacturers” and perfect motorcycle for “perfect car” and that describes Harley for the past decade and in the future. And Seeking Alpha agreed:  “And among those which seem to be unaware of any generational shifting in the U.S. consumer base would have to include: General Motors Inc.,Harley Davidson Motorcycles Inc. (HOG), Wal Mart (WMT) and Wendys/Arby’s Group Inc. (WEN).”

Whether it was fear of losing the base or being unimaginative, Harley-Davidson has failed the challenge for the past decade by delivering basically the same bikes year after year while ignoring what was exciting and attracting After Boomers. It did not reinvent the brand—and unless it finds a way to do so, it has doomed itself to an increasingly shrinking market until someone in Milwaukee figures out how to do so—or years down the road, consumers find a way to reinvent this particular style of motorcycle.

Otoh, it did have Buell—while it had the negative of being “half a Harley” with its engine, it had innovative and cutting edge technology and styling. It is a sport bike and it had the right kind of styling—and as reported before—it was growing even as Harley shipments were shrinking. So Harley’s best chance of capturing After Boomers has been “discontinued” in one of the most blundering, short-sighted and idiotic management decisions in USA corporation history.

It is doubtful, then, given all the reasons above, that Harley will bounce back once the recession is over. While the Motor Company was already facing the difficulty of producing too expensive motorcycles when the majority of new riders would be in their cheap bike stage, the definitive H-D styling is unappealing as is the lifestyle of the H-D rider. In every way, then, the next 20 years of riders will not find Harley’s a natural choice in their natural riding life cycle. Unless Harley finds a way to reinvent itself and make the iconic brand speak in fresh exciting ways to these digital, wireless, social networking generations.


[i] And since they grew up with car seats, seat belts and bicycle helmets, motorcycle helmets don’t have the same meaning it does to the 40+ cruiser rider. It is likely that the future boom riders, like the current crop of sport/sport-tourer/adventure riders, will wear helmets. Which is not to say the death toll will rise any less precipitously nor as high next boom cycle.

 

[ii] Except Gen X and Yers, having been strapped in since birth and used to wearing helmets may be more likely to choose to wear motorcycle helmets.

[iii] Holt, Douglas B. How Brands Become Icons. Harvard Business School Press. Boston, MA. 2004.

[iv] “The Future of U.S. Consumer Spending: It’s a Generational Thing”, Seeking Alpha. Posted, October 22, 2009. http://seekingalpha.com/article/168342-the-future-of-u-s-consumer-spending-it-s-a-generational-thing?source=yahoo.