Harley Davidson – Caught in a trap .

Of course I am aware of rumors of a potential leverage buyout of Harley-Davidson (HOG) reportedly by private-equity firm Kohlberg Kravis Roberts (KKR). True or not, we will know very soon. But in any case, we can wonder about what can be the new strategy for the Milwaukee factory. Will a better economy stop the Harley-Davidson motorcycle sales decline? Maybe slow it down if many get back a  job or feel confident they will keep it. But in my opinion, it’s not enough because Harley problems, although hidden, like those of many other companies, were present before the economy turned sour. I know that many of you think that the strategy of lower prices is the magic pill. Is it? Let’s look at the past.

In the 70’s Harley-Davidson problems were created by a deterioration of the brand image due to poor quality & reliability of its motorcycles, absence of innovation and very poor customer service. The big 3 Japanese brands, Honda, Yamaha, Suzuki offered much better quality for much lower prices. Harley-Davidson’s market share shrank from 39% in 1979 to 23% in 1983. Harley legendary image could do nothing to protect the brand. The company could either lower its bike prices to maintain its market share or hold prices but continue to give away market shares. Because of fixed costs, neither of these strategies could work without destroying the balance sheets. Like today, future was grim.

In 1981, after a management buyout of owner AMF, Harley’s leadership turned the company around by re-branding the company around the mix iconic/rebel image. Although there was some progress in reliability, it’s this new fabricated image who attracted new buyers, making the Japanese motorcycles advantage in reliability less important. It was the marketing demonstration that quality/reliability of a motorcycle may be for some less important than its image, in this case riding the symbol of the “American Outlaw”. Later, Harley-Davidson evolved this image from outlaw to rebel, from adventurous gentle bad boy to self-expression then to weekend warrior, continuously re-shaping and coloring its image to stay in tune with a growing population of former and new bikers turned white collar baby boomers.

To acquire these successive “biker personalities” while on your motorcycle you needed to buy not only the bike but the gear, the tees, the bandanas, the leather jackets and stock on some “collectibles” to clearly state who you were to family and friends. The fact that Harley was not able to produce fast enough in the 90’s, making buyers wait 6 months or more to get their motorcycles arrive on the dealer floor amplified the desirability of the brand. Harley boom peaked 2 more times during the 95th and 100th Harley Anniversaries. in 2003 the company announced its absolute best revenues of $4.6 billion, 13% more than the year before. It didn’t matter that a Harley-Davidson bike offer more than its direct competition. Image was (almost) everything and bikers were paying big bucks for it (market studies at that time said that a potential buyer was ready to pay up to 35% more to get a Harley versus a comparable model from the competition…). So, Harley-Davidson spent hundred of millions working and re-working its image. Custom builders, through their works, reinforced these successive images for the benefit of Harley capital image…

Baby Boomers got older. Some went to the comfortable touring motorcycle, spending much less in genuine or after-market custom and/or performance parts. Others went for the 3rd wheel or abandoned motorcycling for reason of poor health or age. More gray beards on the road amplified the perception by young Americans that Harleys are for their parents, not for them. Then the economic recession hit hard American families. The fear of depression remained the main topic of these last 4 years. Signs of recovery are still weak. Baby boomers are older and started to retire fearing for their last years financial well being. Young graduates and junior executives are looking for first jobs. Harley-Davidson, as painful as it may be for too many long time employees, is doing the right thing by trying to get lean & mean by closing unefficients plants . But it will never be to the point of being able to produce bikes in America at a lower cost than its competitors, or Harley will go very fast in the red.

Harley is pursuing the right strategy in organizing “Women Garage Parties”, but its big twins line-up and macho image has already intimidated too many women who, since many years, have already opted for competitors. Harley trying to “talk” to youngsters with blacked-out Sportsters and trying to seduce minorities is also the right approach. Problem is that Harley’s iconic status and image of these last 20 years is now irrelevant to these targets. If people have no discretionary money to spend, if young people refuse to consider the Harley brand because considered old, if women are already faithful to other brands, and if the Harley past iconic image can’t no more justify the price paid for their motorcycles, what is the solution? I am not sure that anyone in Milwaukee knows for sure.

During these last 3 years Harley has multiplied its incentives and dealers have discounted to the point of no profit just to maintain their sales objectives, keep cash flow positive to prevent going out of business. Sounds to me like a desperate temporarily strategy because Harley is structured such a way that there is no more room for discounts. Trying to preserve market share with lower prices has run its course. Harley-Davidson is caught naked without a strategy to attract generations X & Y. Harley sales have always been supported by image, much less by products and never by lower prices because it can’t compete on this criteria. But which image when you have to address so many different markets with different profiles with a potential clientele in majority new to motorcycles or very recent bikers? And this without alienating your core clientele and altering your iconic American image. Interesting marketing problem, isn’t? Harley-Davidson is caught in a trap. How to escape it? Many top Harley-Davidson executives are subscribed and read my Blog. Share your ideas with them…

By Cyril Huze.

http://www.cyrilhuzeblog.com/2010/03/18/harley-davidson-caught-in-a-trap/