Harley-Davidson just released the Q1 2019 figures (it is quoted at NYSE) and we have been really surprised to read the report, as they have affirmed to have beaten their expectations, while reporting sales down 12.3% and net income down 26.8%. The question is: which damn expectations they had?
Few steps back
Harley Davidson was founded in 1903 in Milwaukee, by 22 year-old man, William S. Harley and by his childhood friend Arthur Davidson. By 1920, Harley-Davidson was the largest motorcycle manufacturer in the world, with 28.189 machines produced and dealers in 67 countries.
In the long life of the company a dark period was between the 1969 and the 1981 when it was under the control of American Machine and Foundry (AMF). The re-launch started in the 1981 when AMF sold the company to a group of 13 investors led by Vaughn Beals and Willie G. Davidson for $80 million and the production was transformed using the just-in-time system, while the company was helped in the domestic market by high tariff raised against Japanese brands.
In the following years the company was transformed from an old fashion slow motorcycles producer to the American icon and the use of old style engines and traditional components changed from a weakness – compared to Japanese top of art technologies – to the strength, becoming a real business case in the global marketing. More than a bike, Harley-Davidson become a seller of a life style and become one of the most powerful icon of American freedom concept all around the World.
The first stone of this global brand strategy was based in 1983, creating the Harley Owners Group (HOG) to build on the loyalty of Harley-Davidson enthusiasts as a means to promote a lifestyle alongside its products. The HOG also opened new revenue streams for the company, with the production of tie-in merchandise offered to club members, numbering more than one million.
The iper customization and the sales of an entire world of accessories helped to develop revenues and margin around each single Harley bike travelling on the road and the traditional sound of the pot-pot old Harley engines was registered as a trademark, rather than be considered – as it was – an old style and obsolete technology.
The triumph of the myth was on June 1, 2008 when the Harley-Davidson Museum was inaugurated in a 12.000 m2 space and after over US$ 75 million investment.
However, in that day the crisis was already like a ghost behind the lights of the success. Indeed, the progressive aging of Harley customers did not find a solution while the new generation bikers grew up more under the myth of speed and technology and the American company started to lose terrain in the domestic market, while the grew of middle-high class people in new countries, helped to partially balance the domestic sales lost with export.
Production & Distribution
Harley-Davidson manufactures its motorcycles at three US factories in York, Pennsylvania, Milwaukee, Wisconsin and Kansas City.
Since 1998 the first Harley-Davidson factory outside the US was opened in Manaus, Brazil, taking advantage of the free economic zone there. The location was positioned to sell motorcycles in the Latin America market, which actually represents the 4.5% of global Harley-Davidson sales (including Mexico, supplied from US).
In August 2009, Harley-Davidson announced plans to enter the market in India, and started selling motorcycles there in 2010. The company established a subsidiary, Harley-Davidson India, in Gurgaon, near Delhi, in 2011, and created an Indian dealer network. Actually India represents only 0.9% of global company sales. FRom India vehicles are exported in China and in the large ASEAN region.
A key success of the development of Harley-Davidson brand strategy was the creation of Stores. Actually in the World there are 1.498 Harley-Davidson stores across the world, 698 are in the United States, followed by Europe’s with over 500 and then Asia with 276.
Sales declines & Financials continue to deteriorate
According to data released by the company, in the first quarter 2019 the motorcycle shipments fell 7.9% to 58,891. The performance was slightly ahead of expectations, so the decline wasn’t a shock, but that shows how low expectations have gone. Over the past five years, revenue is down 11.2% and net income has dropped a crazy 43.5%.
As net income and cash flow have fallen, debt has been rising at Harley-Davidson. At the end of the first quarter, the company had $7.1 billion in debt, and that’s not what investors should want to see from a company with less cash to work with.
Harley-Davidson is facing challenges on multiple fronts. Fewer people are riding motorcycles in the Harley-Davidson segment, which is a drag on sales, but the long-term problem is that new riders aren’t replacing an aging generation. And there’s no easy way to attract them to the business. The hardest problem for Harley-Davidson is generational.
The brand has always been a status symbol for riders, and it could charge a premium for motorcycles as a result. But millennials don’t value the motorcycle status symbol and are moving toward areas where motorcycles make little sense. Country bars where motorcycles were prevalent have been replaced by urban hotspots where Uber and Lyft drivers drop off riders who may not own their own vehicles at all.