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With half the US market and a third of the global one, Harley-Davidson is the largest manufacturer of heavyweight motorcycles in the world by market share, capturing half the US market and a third of the global market. The company markets products under the Harley-Davidson, Buell, and MV Augusta brands. As a luxury good, Harley competes primarily on design and quality, rather than price, which keeps margins high; gross margin during 2008 was 34.5%.[1]
Harley's past growth and continued success is closely tied to its customers brand loyalty; Harley is arguably the only company whose customers have been known to regularly tattoo its trademark on their bodies. Harley future success will depend upon the company's ability to duplicate this unique culture internationally to fuel growth. International sales grew 10% in 2008 while North American sales fell 11%.[1]
[edit] History
With the first Harley (or, as a Harley bike is often known, “Hog”) produced in 1903, the company began a storied history extending over a century. In just a few decades, the company emerged as the largest motorcycle manufacturer in the world, before stumbling like most companies through the Depression. Harley nonetheless survived, and soon supplied products to the U.S. Army during World War II. Harley-Davidson was sold to investors for $80 million in 1981, before it was taken public in 1986. It has since enjoyed a period of tremendous growth, achieving annualized gains of over 30% for investors since its IPO. Through the long history of the company, the Harley-Davidson brand name has been extraordinarily well-recognized within the industry.
[edit] Business Drivers
[edit] Motorcycle sales trends
Motorcycle sales account for nearly 80% of the company’s revenue.[2] For 2008, Harley Davidson offered 31 different models on 5 basic frames with prices ranging from $6,695 to $23,270.[3] Buell, targeted to slightly younger buyers, offered 10 models priced between $8,895 and $12,995.[4] The company’s products are marketed to a specific group of buyers and are generally considered luxury goods that do not compete on price (average price of a Hog is around $13k). A variety of factors or trends can drive the business.
[edit] Demographics tailwind
The average buyer of a Harley motorcycle is a married man in his forties with an average income of $84,300.[6] Two thirds of Harley buyers are between 35 and 54 years old, with 12% being female.[7] This indicates that the vast majority of customers are essentially middle-aged, middle to upper class males. It comes as no surprise, then, that demographic trends, like an aging baby-boomer population, have likely impacted the company’s recent growth and will have an effect on the company going forward. Because the baby-boomer generation was of Harley "buying age" in the past two decades, the company has benefited from a demographic tailwind since going public. However, this is a double edged sword since Harley's association with older riders has often caused younger riders to embrace other kinds of motorcycles. To retain its long term brand appeal, HOG will need to find ways of enticing younger buyers without alienating its core consumers.[8]
[edit] Rising discretionary income
Because Harley’s products are luxury goods generally purchased as recreational vehicles, the discretionary income (or income available for spending after necessities have been purchased) of the company’s customer base can have a material effect on the company’s sales. The company has arguably succeeded in the United States largely because the per capita discretionary income is substantially higher than in many other countries. Harley-Davidson depends upon this relatively wealthy customer base to drive sales of its motorcycles.
[edit] Immunity to rising oil prices
HOG revenues are not highly dependent upon oil prices. Ironically, although Harleys are considerably more fuel efficient than cars or light trucks, there is little evidence that US drivers are substituting motorcycles for other kinds of vehicles.[9] Although Harleys continue to be largely recreational vehicles not typically used as a primary method of transport, dealers report that many buyers fallaciously justify buying a $15,000 motorcycle because of higher gas prices.[10]
[edit] Product Quality and Culture
Harley devotees normally choose to purchase a Hog because of trusted product quality and the classic style of the motorcycle. Harley-Davidson enjoys the benefit of a culture having been formed around its product, which has proven more of a long-lasting advantage than a fad or trend. The company believes that one of its strongest assets is its Harley Owners Group (H.O.G.), which boasts over one million members worldwide.[11] Customers tend to be fiercely loyal to the brand, and psychological switching costs are high for Harley owners. Research conducted by the company over the past twenty years has consistently shown that "retail purchasers of new Harley-Davidson motorcycles in the United States have a repurchase intent at or in excess of 80%."[12] Management also reported that previous Harley owners accounted for 52% of new bikes purchased during 2007.[13] Maintaining these statistics is crucial to the success of the company, which depends upon strong consumer loyalty to drive revenue and demand for its motorcycles.
Furthermore, nearly 20% of the company’s sales are derived from non-motorcycle, product sales, including parts and accessories (15.3% of sales), which can include replacement motorcycle parts and cosmetic accessories, and merchandise (4.6% of sales), which can range from clothing to collectibles.[14] The company’s customer culture helps drive this revenue segment, since many customers fully immerse themselves in the Harley owner culture by purchasing accessories and merchandise.
[edit] Strong international growth
While around 75% of the company’s sales still occur in the United States, its international segments are growing quickly, and the company is pursuing opportunities for gaining market share abroad. This can prove important to the company as market share has begun to stabilize in the US due to saturation of this market. International sales grew by double digit percentage points in 2007, with motorcycle sales volume up 13.7% causing revenues to grow 27%.[16] Sales grew most rapidly in Europe.
In July 2008, HOG announced plans to acquire MV Augusta, a premier Italian sport motorcycle producer, for $109 million.[17] This acquisition is important because it will give Harley-Davidson greater access to the dynamic European motorcycle market, while at the same time increasing the company's exposure to younger buyers who have little interest in classically styled heavyweight motorcycles.
The company maintains distribution capabilities in Europe, Asia/Pacific, Latin America, and Canada. And recently, the company has begun to sell its products in China (HOG opened its third dealership in China during Q3 2008[18])– a large, though potentially risky, market for the company. The Chinese per capita income is significantly lower than the United States’ and the level of discretionary income--along with the number of people in China who have discretionary income--is substantially smaller but growing. However, this may be offset by the rate of growth of the Chinese economy, and the sheer volume of potential customers. Other challenges of operating abroad include the fact that Harley’s brand name is less well-recognized outside of the United States.
[edit] Harley-Davidson Financial Services
HDFS provides insurance and financing for motorcycle buyers and the company’s independent distributors and dealers in the U.S., Europe, and Canada.[19] During 2007, HDFS financed 55% of Harley sales in the U.S.[20] About 11% of the company’s operating profit comes from HDFS. Financing activities are not recognized as revenue, but rather as a line item on the company’s financial statements.
[edit] Interest Rates exposure
The high-end recreational vehicle industry is cyclical in nature, so high interest rates may slightly hamper sales since Harley’s customers often finance their purchases with a loan. High interest rates typically hamper consumer spending on goods like recreational vehicles, which are not necessities. Furthermore, interest rates can more dramatically affect HDFS’ income, which depends on the interest rates paid on the loans issued to customers.
[edit] Steel Prices sensitivity
Around 60% of Harley-Davidson’s cost of goods sold is hot-rolled coiled steel, exposing the company to the risk of input price fluctuations. Prices for this major input have risen from a low of $205/ton in 2001 to around $1093/ton in August 2008.[21] Nonetheless, as HOG's gross margins have increased over the page five years the company has successfully passed these increases onto consumers.
[edit] Comparison to Competitors
[edit] Major Competitors
Harley-Davidson maintains a large margin in its dominance in the US Heavyweight Motorcycle market as compared to its major competitors.
| US Market Share | 2007 | 2006 | 2005 | 2004 | 2003 | |
|---|---|---|---|---|---|---|
| Harley-Davidson | 49.4% | 50% | 49.6% | 50.2% | 50.3% | |
| Honda | 14.2 | 15.1 | 16.6 | 18.7 | 18.4 | |
| Suzuki | 12.5 | 12.9 | 12.4 | 10.2 | 9.8 | |
| Yamaha | 9.2 | 8.6 | 8.9 | 8.7 | 8.5 | |
| Kawasaki | 7.2 | 6.8 | 6.5 | 6.4 | 6.7 | |
While the United States is HOG's most important market, the company sells motorcycles in many other markets worldwide. The two most important are Europe, where the company has grown market share from 9.8% in 2005 to 10.7% in 2007, and Canada where HOG had a 39.0% market share for 2007, up from 32.7% in 2005.[23] Worldwide, Harley has a dominant worldwide market share of 33% in what is a growing industry.
[edit] Operating Metrics
Several operating metrics are useful in understanding the company’s position vis-à-vis its largest competitor. Honda’s figures are for its motorcycle business only.
| Operating Metrics | Harley-Davidson | Honda | |
|---|---|---|---|
| Units Sold (thou) | 361 | 103 | |
| Units Sold per Employee | 35.4 | 3.6 | |
| Revenue per Employee (USD) | 637,881 | 356,746 | |
| Operating Margin(%) | 27.5 | 9.2 | |
| CapEx as % of Sales | 3.8% | 4.2% | |
[edit] Financial Resources
While the company’s competitors, notably Honda Motor Company (HMC) and Suzuki, do not have as dominant a market position, they often have greater financial resources. This is largely because companies like Honda have more diverse product lines (like cars), and are greater in size than Harley-Davidson, a far more specialized company. For example, motorcycle sales at the company’s largest competitor, Honda, hover around 12% of total revenue.
[edit] Difference in Product Lines
Harley-Davidson is the premier manufacturer of heavyweight motorcycles. As compared to lightweight motorcycles, the products typically appeal to very different cross sections of the population, with the lightweight market catering more to younger buyers seeking speed, agility, and affordability in a motorcycle and the heavyweight market to older buyers seeking style, quality, and, sometimes, status. Because heavyweight bikes are perceived as a luxury good, they offer greater margins for the manufacturer.[24] Thus, Harley’s true competitors are other heavyweight manufacturers, though the company competes to some degree with any motorcycle manufacturer. Heavyweight motorcycles accounted for 54% of the U.S. motorcycle market in 2007.[25]
[edit] Notes
- ↑ 1.0 1.1 HOG 2008 10K
- ↑ Harley Davidson 2007 Annual Report, page 4
- ↑ Harley Davidson 2007 Annual Report, page 4
- ↑ Harley Davidson 2007 Annual Report, page 4
- ↑ 2006 HOG Annual Report
- ↑ Harley Davidson 2007 Annual Report, page 4
- ↑ Harley Davidson 2007 Annual Report, page 4
- ↑ LA Times: Harley Aims V-Rod at Young Riders
- ↑ 75-120 MPG Motivates Many To Trade Cars For Scooters
- ↑ 75-120 MPG Motivates Many To Trade Cars For Scooters
- ↑ Wikipedia:Harley Owners Group
- ↑ Harley Davidson 2007 Annual Report, page 5
- ↑ Harley Davidson 2007 Annual Report, page 5
- ↑ Harley Davidson 2007 Annual Report, page 5
- ↑ Harley Davidson 2007 Annual Report, page 35
- ↑ Harley Davidson 2007 Annual Report, page 7 and 32
- ↑ Seekingalpha: Earnings Preview - Harley-Davidson
- ↑ Harley Davidson Q3 2008 Earnings Call
- ↑ Harley Davidson 2007 Annual Report, page 8
- ↑ Harley Davidson 2007 Annual Report, page 8
- ↑ Steelonthenet: MEPS STEEL PRODUCT PRICE LEVELS ACROSS 2007 - 2008
- ↑ 2007 Harley Davidson 10K, page 9
- ↑ 2007 Harley Davidson 10K, page 10
- ↑ Harley Davidson 2007 Annual Report, page 8
- ↑ Harley Davidson 2007 Annual Report, page 8
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