Harley-Davidson (see chart here) has had one heck of a 20 years. If you put $100 in Harley stock in 1986, it would be worth $23,000 today. Profits have gone from $4.3million to $1billion in 2007. As boomers got older and richer they gained disposable income, and many spent a lot on Harley motorcycles.
In 2001 through 2005 Harley had to increase production every year. But last week Harley announced it’s revenue was declining 13%, and thus it is laying off 700 of its 9,000 employees and looking to possibly idle a plant (read article here). Of course management says this is just a short-term phenomenon created by the lack of easy credit and impending recession. Investors should just wait and things will work out. With the company value down about 50% since early 2007, leadership claims Harley will return to provide great investor returns. That would be an investment mistake.
While revenue has gone up, so has the average age of a Harley buyer (read background on Harley here). From age 35 in 1987, the typical Harley buyer today is 47 (read info on aging buyers here and here see chart on average age of buyers here). The typical customer earned $38,000 in 1987. By 1997 (almost a decade ago) the average income had risen to $83,000 (read income information here). By dealer statements, the bet is that today the average income is over $100,000. The reality is that Harley’s customers are slowly marching into retirement. These stats bode for a lot of troubles – retirement is not the best age for selling motorcycles. Just how old and wealthy can Harley hope to attract buyers? It’s not like Harley is selling a Rolls Royce.
For 25 years Harley has built its brand reputation for one type of motorcycle. Officianados will point out there are actually 4 kinds of Harley’s – but to most people all Harleys are variations on a simple theme of big V-Twin motorcycles that are – well – loud. For most motorcycle riders, Harleys are also incredibly expensive. Go to the #1 producer of motorcycles, Honda, and you can purchase a bike almost identical to a Harley for $8,000 to $12,000 – but most Harley’s cost north of $20,000 – some as high as $40,000! That sort of branding led to some incredible pricing which has created great profits. But it also priced out of the market more than 85% of all potential customers.
So what are 25-35 year old customers buying? Not Harleys. And as they age, why would Harley expect them to convert? Did boomers grow up and want to buy their dad’s Oldsmobile – or did they choose to purchase Mercedes and BMWs? So it is with younger buyers today. They are buying Hondas, Suzukis, Kawasakis and Yamahas – and they have no plans to ever buy a Harley. Harley’s CEO has felt he had to protect what Harley historically stood for, at the expense of attracting younger – and more – buyers. He chose to "milk" the brand of its value, and now that brand is about to see the udder go dry. Sure, there are a lot of older guys out there with Harley logos tattoed on their bodies – a testament to a great historical brand – but that’s not what’s getting tattooed on young people today. And Harley’s are not what they are riding when they make those first couple of motorcycle purchases.
The odds are not good that Harley will come roaring back with more volume, higher prices and more profits in 2 or 3 years as the recession wanes. They’ve had a great run, but their customers are aging, just like the technology in most of their products. Their product line is limited, their dealers are dedicated to rather out-of-date brand nostalgia, and their technology is frankly quite aged. Yes, Harley has done some things to attract new buyers, like launching its V-Rod with an engine designed by Porsche, but the company never Disrupted itself and the V-Rod has been an after-thought that has not built a following and has not kept up with competitive motorcycles in its class. There’s been no White Space in Harley, instead only efforts to Defend & Extend the old brand and products. That worked well for a long time – but all Success Formulas have a half-life. For Harley, this downturn will most likely be a permanent ratcheting down of volume – meaning negative growth. And for investors that is definitely not good news.