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Flogging the Hog

March 29, 2009

Harley was discussed in the New York Times last Sunday and have responded with an advertisement/retort in this Sunday’s edition.

Here is the original article and an observation by Hell for Leather. 

Harley, You’re Not Getting Any Younger

Daniel Rosenbaum for The New York Times

Sales have plunged at Spuck Bennett’s Harley dealerships. “We’re just trying to survive,” he says.

SPUCK BENNETT’S dealership just outside Ocean City, Md., is cluttered with 65 shiny Harley-Davidson motorcycles, including the chrome Sportster and the sleek V-Rod. Last year, Mr. Bennett, 79, sold 200 bikes, down from 280 the year before. This year, sales have slowed to a crawl.

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Harley-Davidson

The V-Rod, a cruiser that costs about $17,000, is aimed at younger riders, who have been more likely to embrace rival bike makers like Yamaha. More Photos »

“I haven’t seen anything like this in the 33 years I’ve owned a dealership,” he says. “We’re just trying to survive.” He has cut expenses by trimming hours and overtime, and laid off 7 of his 49 employees.

After riding high for two decades, the company that makes the hulky bikes that devoted riders affectionately call Hogs is sputtering. Harley’s core customers are graying baby boomers, whose savings, in many cases, have gone up in smoke in the market downturn. Few are in the mood to shell out up to $20,000 or more for something that is basically a big toy, and the company, in turn, has not captured much of the younger market.

And though Harley’s woes pale in comparison to what the automakers face — Harley’s revenue dipped 2 percent last year while Detroit was crashing — overproduction and loose lending practices have burdened the company’s finances.

In a pattern similar to that of the housing bust, Harley goosed sales by luring many buyers with no-money-down loans. A subsidiary created about 15 years ago, Harley-Davidson Financial Services, made those loans and packaged them into securities to sell to investors. As the credit market skidded, so did this subsidiary.

As much as one-fourth of the $2.8 billion in loans issued by Harley-Davidson Financial Services last year were subprime, with interest rates as high as 18 percent. As the downturn took hold, some borrowers started defaulting on loans and investors stopped buying the securities, forcing Harley to write down $80 million of debt last year, analysts said. Although it recently tightened lending standards, the company is still chasing buyers by offering credit.

“It’s an unsustainable strategy to continue financing this way,” says Robin Farley, an analyst with UBS. “In the last few months, they’ve been running into a liquidity wall.”

Tom Bergmann, Harley-Davidson’s chief financial officer, defends the company’s lending practices. “It’s not easy in this environment,” he said. “We have to give loans to customers, but only to those worthy, and we’ve been disciplined and prudent in granting credit to our customers.”

In large part because of loan problems, though, profits at Harley fell 30 percent last year, to $654.7 million on revenue of $5.6 billion. Operating income of the financial subsidiary fell 61 percent, to $83 million.

CONCERNS about Harley’s future grew after the departures of its two top executives were announced. In December, Jim Ziemer, 59, said he planned to retire as C.E.O. this year. In early January, the company announced that Saiyid Naqvi, the head of the finance unit, was resigning after less than two years at Harley. Since September, Harley’s stock has plunged 70 percent, to under $13, compared with a 36 percent decline for the Standard & Poor’s 500.

Like many cash-tight companies, Harley, based in Milwaukee, is finding that borrowing is difficult — and expensive. In early February, Harley announced that Berkshire Hathaway, Warren E. Buffett’s company, would buy $300 million of its unsecured debt. (Harley reported total debt of $3.9 billion last year, more than double what it held in 2007.) In exchange for his good name and millions, Mr. Buffett demanded 15 percent interest from Harley on his investment (similar to deals he received from Goldman Sachs and General Electric when he invested in those companies last fall).

Harley’s largest investor, Davis Selected Advisers, matched Mr. Buffett’s deal, pumping $300 million more into the company, also at 15 percent interest.

But even $600 million isn’t enough to enable the financial arm to continue making loans through year-end. Company executives announced that the finance unit needed a total of $1 billion for loans. While that’s one-third lower than last year, the executives are bracing for plummeting sales and continued frozen securities markets.

Congress included the motorcycle industry in a Treasury Department program intended to unclog financial markets by lending to investors buying securities backed by mortgages and other types of loans. It was uncertain, however, how much Harley would receive — and when — making this an unreliable source of capital. And while Mr. Bergmann said he had met with several banks since doing the Berkshire and Davis deals, he had not yet announced any new loans.

Harley’s road has perhaps never looked so hazardous.

If the company can’t obtain new sources of money to offer loans to customers, they will have to try to borrow elsewhere. But in this credit crisis, qualifying for a loan isn’t easy. A lack of credit would probably depress bike sales even further, which in turn would make it harder for Harley to repay Berkshire and Davis.

“If the securities market continues like it is, then Harley faces very serious issues,” says James Hardiman, senior research analyst at FTN Midwest, a brokerage firm in Cleveland. “Harley has been able to find different sources of funds, but the securities market is the only way they can unload the debt from their books.”

Mr. Ziemer, Harley’s chief, says: “We have a strong business that’s anchored by an iconic brand. But as we look at 2009, it’ll be a challenging year for the business.”

HARLEY has lived through troubled times before. The company is 106 years old, after surviving the Great Depression and a major blow in the 1970s when sales grew sharply for cheaper bikes from Japanese makers like Honda and Kawasaki. The company even flirted with bankruptcy in 1985 as its foreign rivals soared.

But Harley persevered by capitalizing on its revered brand, made famous in movies like “Easy Rider,” and more recently by appealing to boomers’ desire to recapture their youth.

When customers buy a Harley, they’re instantly a member of a family of zealous fans — guys with tattoos and unruly hair as well as lawyers and doctors. (The average household income of today’s rider is about $87,000.)

The company’s Harley Owners Group program, founded in 1983, has more than one million members who come together for rallies and rides, swapping their favorite touring stories and chatting about new product lines.

“Harley brings together all walks of life,” says Mark-Hans Richer, Harley’s chief marketing officer. “You’ll find a neurosurgeon talking and riding with a janitor. It’s a family.”

By building such a powerful brand with offbeat, behind-the-scenes efforts — little advertising, lots of accessories and minor visible changes to bikes over the decades — Harley has become a case study for academics, marketing gurus and other corporations. But Harley’s longtime strategy of marketing to the boomers, which was a blazing success, is now backfiring.

Its core customers have grayed, and they are buying new bikes less often. The average age of a Harley rider is 49, up from 42 five years ago. But company executives don’t seem outwardly worried by the lackluster growth among those 35 and younger, even as it takes steps to turn them into Harley owners.

They say they’re confident that the baby-boom generation has 15 more years of riding life. “They’re not about to stop riding because they’re getting older,” Mr. Richer says. “It would be dumb to walk away from our core customer, the most lucrative customer.”

As Harley keeps most of its focus on its aging consumers, rivals like BMW, Honda and Yamaha are attracting younger customers who seem less interested in cruising on what their old man rides. United States sales of light sport bikes, intended for the younger crowd, have increased more than 50 percent in the last five years, and the Japanese makers have popular cruisers of their own. Harley has roughly 30 percent of the overall United States motorcycle market, but it accounts for half of the heavyweight bikes sold in America.

To attract new customers, Harley created the Rider’s Edge program in 2000, offering training for inexperienced riders through more than 160 dealers in 42 states. Last year, about 35,000 people took the course.

In an effort to make inroads with bikers in their 20s and 30s, Harley poured money into developing the V-Rod, a high-powered cruiser that starts at about $15,000. The company says the V-Rod is successful, but even so, the sport market represents only 12 percent of Harley’s sales, analysts say.

“Harley understands the baby-boomer consumer incredibly well, in a holistic sense,” says Gregory Carpenter, a marketing professor at the Kellogg School of Management at Northwestern. “But to grow and thrive, they must create a deep emotional connection with younger consumers.”

A DECADE ago, Harley executives made a decision that, along with the loan push, now appears to be a major contributor to its current problems. Determined to appease consumers who were stuck on two-year waiting lists, the company ramped up production. Last year, Harley built more than 303,000 bikes, up from 159,000 in 2000.

Some dealers also took advantage of heightened demand for Harleys to charge more, a move that may have done long-lasting harm. “Dealers were charging more than the suggested manufacturer price and it made Harley look greedy and jeopardized our brand that we spent a long time building,” Mr. Ziemer said.

Now, with so many Hogs in the marketplace, Harley has an issue involving its brand.

“Traditionally, Harley-Davidson had a very loyal consumer,” says Anthony Gikas, senior research analyst at Piper Jaffray. “But those riders lost interest in the brand because everyone has a Harley bike. It’s not a club anymore.”

To offset weakening sales, Harley is paring production this year, to about 270,000 bikes, and is shuttering two plants. In addition, the company will cut 1,100 of 9,000 jobs over the next two years.

To curb additional loan defaults, Harley adopted stricter credit standards in November, requiring buyers to put down 20 percent.

Motorcycle consultants and analysts argue that Harley should take more drastic steps, including beefing up efforts to court younger riders.

Making major changes isn’t easy, especially for a brand with an image so deeply ingrained in pop culture. Harley executives say they are committed to regaining their momentum.

“We’re encouraging our designers to think out of the box,” Mr. Ziemer said. “We have to be quicker, more responsive to what our customers want. And we will.”

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Harley_NY_Times.jpgThe advertisement above is scheduled to run in tomorrow’s edition of The New York Times in response to a business feature from last Sunday that revealed an increasingly desperate financial situation at Harley-Davidson. Rather than addressing the concerns raised by The Times, this ad instead attempts to create some bizarre riposte centered around patriotism, anti-establishment rebellion, class solidarity and plain old optimism; culminating in an appeal for readers to buy the company’s motorcycles. If this is the best Harley can do to reassure employees, dealers, investors and customers in the face of financial disaster, then we’re very worried.

Jim Ziemer, Harley’s president and CEO, revealed the ad in the following email to employees:

Dear fellow employees,

As you may know, The New York Times wrote a decidedly one-sided and naïve story on the state of our business this past Sunday. Unsurprisingly, Harley-Davidson employees, dealers and customers disagreed.  So, we decided to show how we all feel about this story and created an ad that we are running this Sunday in the same business section of The New York Times.

You can see the ad below.  It reminds me of how proud I am to work with such a passionate and dedicated group of people. There’s no question that 2009 will be a challenging year for our business.  But, there’s also no question that Harley-Davidson is addressing the challenges. We have the right strategy, the right dealers, the right employees and the right attitude and spirit to emerge from the recession stronger than ever.

Thank you for all you do to support one of the world’s most respected and strongest brands, Harley-Davidson.

Let’s Ride.

Ziemer plans to retire later this year.

The article Ziemer refers to, “Harley, You’re Not Getting Any Younger,” describes the two-pronged impact on the motorcycle maker caused by the Financiapocalypse; not only are sales down, but Harley’s sub-prime loan practice has left it nearly devoid of operating capital.

According to The Times, Harley needs $1 billion just to continue to give customers loans through the end of this year. To this date, it’s only managed to raise $600 million by borrowing two equal-sized sums from Warren Buffett’s company, Berkshire Hathaway and Davis Selected Advisers. Harley is paying 15 percent interest on both loans. If it’s unable to continue offering loans to its customers, sales are expected to decrease at an even more rapid rate than they already are.

The Times goes on to describe Harley’s focus on making products for and marketing to Baby Boomers over a younger audience as “backfiring.” The company was banking on Boomers providing a valuable market for at least the next 15 years, but as 401Ks and other investments have dried up, so has that age group’s ability and willingness to purchases new motorcycles. The average age of Harley customers has increased from 42 to 49 years old in the last five years. Even though it makes 50 percent of all heavyweight motorcycles sold in the US, Harley faces much stiffer competition for sales from foreign brands — which have done a significantly better, if still somewhat questionable, job of appealing to younger people — among the Boomer’s offspring.

“We’re encouraging our designers to think out of the box,” Ziemer told The Times. “We have to be quicker, more responsive to what our customers want. And we will.”

The paper goes on to identify a decrease in customer loyalty as Harleys flood the marketplace and an inability to offload bad loans as further problems facing the company. Stock in Harley-Davidson has fallen 70 percent since last September, comparing unfavorably to a 36 percent decline during the same time for the S&P 500 index.

The story also contains anecdotal evidence of Harley dealers struggling to survive in this climate.

Neither tomorrow’s ad nor Ziemer’s email does much to address the issues raised in this “decidedly one-sided and naïve story.” Instead, it relies on the same marketing and attitude that the article says isn’t working to make an irrational case for sales. If we were an employee, dealer, investor or customer, we’d want Ziemer to provide clear and direct answers to the following questions:

What steps is Harley-Davidson taking to design motorcycles for and market to a new audience?

How does it plan to address the shortfall between current investments and the need for more capital to continue current loan practices in the short term?

What long-term sales models is it developing to replace the current practice of financing customer purchases?

Ziemer mentions “out of the box” and “more responsive” designs. What are the details of those? When can we expect them?

If market conditions worsen, which it looks like they will, how does Harley plan to repay Berkshire Hathaway and Davis Selected Advisers?

How does Harley intend to support dealers saddled with bikes they can’t sell?

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2 Comments leave one →
  1. April 5, 2009 1:42 am

    Hello. Great job. I did not expect this on a Wednesday. This is a great story. Thanks!

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