Harley-Davidson has no idea how much money, if any, it will save by killing Buell. Discussing the decision, Harley CFO John Olin says, "We have not quantified the benefits of increased focus on Harley-Davidson brand as a result of discontinuing Buell nor included any potential savings in our restructuring estimates." So how does the company plan to dig itself out of its current financial hole (net income has fallen 71.4 percent so far this year compared to the same period during the already abysmal 2008)? By building more large-capacity tourers and cruisers and offering more performance add-ons and accessories, that's how. Oh, and they'll be shutting down Sportster production for the rest of the year too.
Speaking to financial media during a press conference yesterday, Olin continued, "During the third quarter US Harley-Davidson motorcycle retail sales decreased 24.3% while the US 651 plus CC motorcycle market dropped 35.9%. Our market share was up 8.4 percentage points to 53.8% in the quarter versus last year. In international markets we saw a sequential improvement with sales being down 13.1% in the third quarter versus down 18.2% last quarter.
"Buell revenue was $134.9 million in 2008 and $59.4 million in 2009 year-to-date. Capital expenditures related to Buell were $6.6 million in 2008 and $3.8 million September year-to-date."
So if Harley has 53.8% of the market, why all the talk of financial doom and gloom? Describing the cause, Olin says, "On a year-to-date basis, has incurred $110.8 million loss...HDFS continues to be adversely impacted by the current economic environment."
Many observers have suggested that Harley could, like GM and Chrysler, turn to the federal government for a financial bailout. It turns out it already has, borrowing $700 million over three years at 1.2% under the Federal Reserve's TALF mortgage-backed securities program. That brings the total that Harley has borrowed in order to see it through this crisis to $1.9 billion, with roughly half that amount costing them 15% interest.
But don't worry, Harley has a clear strategy to change the way it does business and return to profitability. "We are intent on extending the Harley-Davidson brand by leveraging our unique strengths," says CEO Keith Wandell. "What do we mean by extending the brand and leveraging our unique strengths? Well, the Harley-Davidson brand is one of the most powerful brands in the world but we also have great conviction that there is much more that we can do to tap in to the power of that brand and expand it even further."
We asked a former Wall Street banker with significant experience financing large motorcycle companies, what he thought of Harley's strategy. "'Leveraging the brand' is utterly ridiculous. People have the brand tattooed on their fucking flesh, how much more leveraged are you gonna get?" He then moves on to compare Harley to GM, saying, "Selling a division and shuttering another are two first steps, but GM could always sell Hummer, stop making Escalades and make more small fuel efficient cars and hybrids. What the fuck is Harley going to do? Start making Hondas?"
When Wandell goes into specifics, he reveals that nothing that radical is on the cards, "We are focusing on leveraging our leadership of the custom cruiser and touring segments playing to our natural advantages with the objective of out growing our competitors in each of these segments everywhere in the world. We will continue to own and to define the customization and personalization which is another one of Harley-Davidson's unique strengths. and general merchandise represent more than 23% of our revenue year-to-date reflecting the importance of custom personalized experiences.
"We will build off our unique expertise to develop relevant products that attract even more young adults, women and other new customers in to the Harley-Davidson brand. We will expand the brand through related products and services like Screaming Eagle performance parts or finding new ways to enhance the HOG experience and broaden it to more riders or creating apparel collections designed specifically for the needs and preferences of outreach segments."
Elsewhere, it's suggested that the Iron 883—essentially a Sportster with matte black paint—represents a successful model for reaching the under 35 demographic, yet Sportster production will be put on hold during Q4, 2009.
Wandell continues, "We know from our research that the Harley-Davidson brand is as strong and well accepted among young adults in the US and internationally as it is among our current core customers. With our product plan we are confident that we will continue to expand the appeal of Harley-Davidson motorcycles to the under 35 age group. We also know Harley-Davidson has strong relevance as a lifestyle brand beyond the dedicated motorcyclist. Some people may never ride a bike yet are strong enthusiasts."
He's convinced that the company's current product mix already does an excellent job of reaching young people and has no plans to look for new ways to pursue them.
Cutting through the bullshit, it seems you can boil Harley's plan down to this: cut costs by streamlining production and lowering output, thereby alleviating dealers of stock they can't sell, then hope that the loans carry the company through to a projected return of middle-class solvency and credit availability.
All this sounds startlingly similar to the business practices that got Harley into so much trouble in the first place. It'll continue to rely on the same demographic buying the same motorcycles and, since a large proportion of those customers don't have enough money to buy either the bikes or the accessories, it'll continue to give loans to people that can't afford to repay them. It'll make those loans using money that it has, in turn, borrowed, often at a higher interest rate than what's being charged to customers. The company has presented no short-term plans to pursue the design of motorcycles with appeal outside its existing customer base and is therefore hoping the customers of other brands change their preference rather than finding new ways to appeal to new customers. As Boomers age beyond their riding years and see their purchasing power massively reduced by the end of cheap credit, Harley is failing to understand either the need or the means to reach a younger or wider audience. Relying on the market for motorcycles to return to its pre-recession levels without taking active steps to see it do so seems a remarkably naive way to do business. Harley is now effectively a passive passenger riding the economy's roller coaster. If the economy goes up, a lot, it might be OK. If the economy goes down or remains stagnant, it may find itself unable to repay that $1.9 billion and be forced to seek protection from its creditors.
Is it now conceivable that Harley could, at some point in the future, face a similar fate to Buell or at least find itself up for sale? Unless there's a considerable change in strategy, yes.
Transcript via Seeking Alpha