Is Harley-Davidson Losing Market Share On Purpose? 18 comments
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We discussed here how Harley-Davidson (NYSE: HOG) has appeared to have overcome its issue of bloated dealer inventories, but what about their apparent drop in US market share? Here's a look at Harley's market share (based on bike's sold) for the last several years, along with the first six months of this year:
It makes sense that the whole industry should shrink, considering the economy, but is there something else going on here? Why is Harley disproportionately affected?
The answer lies in the company's conference call. Every quarter, each company on the NYSE holds a conference call where the public can ask management specific questions. Often, these calls can be long and drawn out, including items such as disclaimers on forward-looking statements, to management rehashing headline numbers that are already provided on the press release. Therefore, my preferred method of getting the info without wasting time is to grab the conference call transcript at Seeking Alpha. For example, a transcript of Harley Davidson's latest conference call can be found there.
On the conference call we get some color on the market share situation. While we know from before that management has decided to cut production in order to maintain certain price levels for bikes, the competition has been aggressively trying to move product. They have cut prices and offered financing in order to clear their inventory. Rather than follow suit, management at Harley believes they are taking the better long term approach for their premium product, as evidenced by this quote during the call from CEO Jim Ziemer:
"Managing the business for the long term is part and parcel of maintaining a premium brand experience. We have strong fundamentals and are fortunate to be dealing with the current climate from a sound financial position. [The] economic downturn in the US will end and when it does Harley-Davidson intends to be well positioned to capture future growth opportunities."
Whether this was the right decision is open to debate, but clearly HOG is focused on maintaining its image as a premium product, and is willing to forego a few extra bucks to do so.
Disclosure: Author has a long position in HOG
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This article has 18 comments:
Perhaps the loss of market share is due to HOG's inability to package and sell receivables from their credit subsidiary. Given the dramatic slowdown in securitizations, shouldn't we be worried about HOG's near term future?
Thoughts?
Second, I think this message is self-serving to the extent HOG ever really made it. They now have to hold many of their loans on their own books. I think they don't want to take on the risk. Or maybe they can't find many willing buyers even if they drop the price.
Remember the channel-stuffing problems?
The people buying Harleys now are the wealthy. Even if you drop the price $1-3K, the non-wealthy that need to mortgage their house to buy a Harley will not do it.
I guess what I'm saying is the demand curve is shaped differently for HOG. Dropping the price down a notch would still keep it in the stratusphere for most.
Hi Mallarde, Harley defines its market as engine displacements of 1250cc and up, so that's the market share I'm referring to. You are right, this doesn't include all bikes. Regarding the drop in units, I would agree with you that part of this is the fact that they probably don't want to take on risky loans, but its clear they have cut production, whereas they could have taken on the strategy of keeping production where it was and taking on these riskier loans to move product.
r---------------------...
Market share is an irrelevant figure for them, IMO. Their market share is tiny. But they are a status-symbol. They are not trying to corner any market. If anything, a low market share would benefit them more because that means room to grow -- more people to overspend on outdated tech.
On Aug 15 09:00 PM Saj wrote:
> Hi Craigla, the dealer financing is probably not a huge problem,
> as the financing is secured against new bikes on the floor, and those
> can be re-allocated among dealers. Consumer financing is where you
> are seeing more stringent requirements now and where recovery prices
> are below the value of the loans in some cases. It certainly is a
> concern that they are holding these loans on the balance sheet. They
> *could* sell them though, but they don't feel they're getting a price
> in the credit markets worthy of the sale, which is why they keep
> them. I do worry about these bloated, somewhat uncertain assets though.
>
>
> Hi Mallarde, Harley defines its market as engine displacements of
> 1250cc and up, so that's the market share I'm referring to. You are
> right, this doesn't include all bikes. Regarding the drop in units,
> I would agree with you that part of this is the fact that they probably
> don't want to take on risky loans, but its clear they have cut production,
> whereas they could have taken on the strategy of keeping production
> where it was and taking on these riskier loans to move product.
If you remove HOG from the industry data you get the rest of the industry,
Market - HOG = Rest of Industry
If you look at the rest of the industry YTD it is up .08% versus last year where HOG is -10%. If you do the same calculation for this quarter's sales only you get HOG down ~-9% versus the rest of the industry up ~8%.
Personally, I believe the difference this year versus last was HOG's big price cut / sales push last year in the 2nd quarter. Of course, HOG now believes they can stablize or raise prices and not be hurt on the sales end. The market share slide in heavyweights and difference in sales between HOG and rest of the industry begs to differ.
Thanks for pointing that out. On Harley's conference call, the growth in the rest of the industry was attributed to the competition cutting prices and offering generous financing.
The fact that price cuts and generous financing by both HOG and the rest of the industry should be fairly indicative of where the consumer is at this point. Consumers are not affording HOG the premium to the market that it once enjoyed. My belief is that the consumer that bought HOG's 10 years ago (and where most of the aura of the stock comes from), is not the HOG buyer today.
In 1997, the median buyer age was ~43.6 years of age (I make a correction of 1 year for the change in surveyors in 1999) with an inflation adjusted 2007 average annual salary of ~101K. In 2007, the median buyer age has increased to 48 with an annual salary of 84.7K. Amazingly, 1st time Harley buyers have remained remarkably consistent averaging roughly 50% each year.
What this tells me is that HOG buyer is now older, with less disposable income (15% less), and is still targeting customers in the same generation. Where most products track an age (dirt bike rider median ages have been amazingly consistent over time), HOG tracks a generation. The birth year of the median HOG purchaser has only increased from ~1953 to 1959 in the last 20 years. The problem with all this is that HOG purcharsers are trending into ages where income begins to decline and customers become more price senstive. While many believe the current price sensitivity is due in large part to the economic enviroment I think has more to do with the customer base.
If I am correct and its the customer base and not the economic environment then HOG's long term prognosis is not good. Will HOG go bankrupt tomorrow, no. The company is incredibly consistent and has building motorcycles and running the company down to a science. But it will never be the highflyer it once was because it has never stemed the long-term change in customer demographics.
I am not the first to make this observation, but your tracking-a-generation comment reminds me of it. People do not ride motos forever. It sucks, but most people either choose to stop riding or must stop riding. Others ride more manageable motos.
HOG needs to start designing bikes for a younger generation. To the younger generation, all this chrome on top of chrome on top of chrome does not a motorcycle maketh.
Now HOG has started with bikes like the V-rod. But you can't get young people buying your bikes when you sell them for $20K!!!
My guess is that HOG's management is not as smart or shrewd as people think. They only know how to leverage a preexisting brand image. Real genius would figure out how the brand will survive past the Dennis Hopper generation. Maybe they should consult Steve Jobs on company reinvention.
On Aug 20 11:18 AM Grant Case wrote:
> Saj,
>
> The fact that price cuts and generous financing by both HOG and the
> rest of the industry should be fairly indicative of where the consumer
> is at this point. Consumers are not affording HOG the premium to
> the market that it once enjoyed. My belief is that the consumer that
> bought HOG's 10 years ago (and where most of the aura of the stock
> comes from), is not the HOG buyer today.
>
> In 1997, the median buyer age was ~43.6 years of age (I make a correction
> of 1 year for the change in surveyors in 1999) with an inflation
> adjusted 2007 average annual salary of ~101K. In 2007, the median
> buyer age has increased to 48 with an annual salary of 84.7K. Amazingly,
> 1st time Harley buyers have remained remarkably consistent averaging
> roughly 50% each year.
>
> What this tells me is that HOG buyer is now older, with less disposable
> income (15% less), and is still targeting customers in the same generation.
> Where most products track an age (dirt bike rider median ages have
> been amazingly consistent over time), HOG tracks a generation. The
> birth year of the median HOG purchaser has only increased from ~1953
> to 1959 in the last 20 years. The problem with all this is that HOG
> purcharsers are trending into ages where income begins to decline
> and customers become more price senstive. While many believe the
> current price sensitivity is due in large part to the economic enviroment
> I think has more to do with the customer base.
>
> If I am correct and its the customer base and not the economic environment
> then HOG's long term prognosis is not good. Will HOG go bankrupt
> tomorrow, no. The company is incredibly consistent and has building
> motorcycles and running the company down to a science. But it will
> never be the highflyer it once was because it has never stemed the
> long-term change in customer demographics.
HOG management stated that it lost domestic market share in the second quarter as a result of the company not using financing gimmicks and other dealer sales incentives to move product off the showroom floor, as the author states. However, for competitors such as the Japanese manufacturers, these means of turning over dealer inventory in advance of the new model year are the rule, not the exception. In the past, Harley buyers never would have considered purchasing another make, regardless of what deals were offered by HOG’s competitors.
Also, HOG management did not mention the stimulus checks. How much did that (hopefully) one-time political stunt prop up flagging domestic sales?
Harley beat analyst estimates in the second quarter by shipping high-dealer invoice product while low-price models such as Dynas and Sportsters were selling through at retail. The result was a loss in market share. For example, had Harley shipped an additional 6,000 Sportsters in the second quarter in lieu of other models (and assuming they also sold through), HOG’s first half market share would have been slightly higher than 46%. During the first half of 2007, HOG shipped 36,317 Sportsters, while during the first half of 2008, HOG shipped 29,517 Sportsters.
Also, as pointed out by the author in the comments section, HOG management indicated that the company is not accessing the securitization market for its loans because it does not like the credit spreads available. Conversely, it is likely that some of widening of these spreads is the result of HDFS’ annualized credit loss rate increasing 31% from 1.63% during the first half of 2007 to 2.14% during the first half of 2008.
Lastly, during the conference call, HOG’s CEO mentioned more than once that Harley is managed for the long run. I interpreted that as management speak for “business stinks today but we’ll live to cash out our restricted stock awards another day.”
On Aug 20 02:39 PM Joseph Wagda wrote:
> HOG’s market share as a percentage of the U.S. heavyweight (650+
> cc) motorcycle market for the first half of the calendar year has
> trended downward from 47.9% in 2006 to 47.3% in 2007 to 44.4% in
> 2008. Historically, HOG market share has been higher in the second
> half than the first half.
>
> HOG management stated that it lost domestic market share in the second
> quarter as a result of the company not using financing gimmicks and
> other dealer sales incentives to move product off the showroom floor,
> as the author states. However, for competitors such as the Japanese
> manufacturers, these means of turning over dealer inventory in advance
> of the new model year are the rule, not the exception. In the past,
> Harley buyers never would have considered purchasing another make,
> regardless of what deals were offered by HOG’s competitors.
>
>
> Also, HOG management did not mention the stimulus checks. How much
> did that (hopefully) one-time political stunt prop up flagging domestic
> sales?
>
> Harley beat analyst estimates in the second quarter by shipping high-dealer
> invoice product while low-price models such as Dynas and Sportsters
> were selling through at retail. The result was a loss in market
> share. For example, had Harley shipped an additional 6,000 Sportsters
> in the second quarter in lieu of other models (and assuming they
> also sold through), HOG’s first half market share would have been
> slightly higher than 46%. During the first half of 2007, HOG shipped
> 36,317 Sportsters, while during the first half of 2008, HOG shipped
> 29,517 Sportsters.
>
> Also, as pointed out by the author in the comments section, HOG management
> indicated that the company is not accessing the securitization market
> for its loans because it does not like the credit spreads available.
> Conversely, it is likely that some of widening of these spreads is
> the result of HDFS’ annualized credit loss rate increasing 31% from
> 1.63% during the first half of 2007 to 2.14% during the first half
> of 2008.
>
> Lastly, during the conference call, HOG’s CEO mentioned more than
> once that Harley is managed for the long run. I interpreted that
> as management speak for “business stinks today but we’ll live to
> cash out our restricted stock awards another day.”
You are right that HOG buyers are getting older. As a result, Harley has been heavily shifting marketing spend towards younger riders (a couple of examples I've noticed personally is they advertise on digg and Ultimate Fighting), but of course there is no guarantee that they will be successful.
But I think it's important to consider the price of this company. Surely there is a price for which you would buy this company (e.g. if the whole company was on sale for $1, would you buy it?). To me, the stock price has taken into account all the negativity you mentioned and then some.
Hi Joseph,
If you look at Harley's margins, you can see that they have a lot of room to cut prices and still make a profit. But rather than produce bikes to capacity, they've actually cut production to maintain price levels. This causes each bike to cost more to produce (fixed costs spread over few bikes). Therefore, what the CEO means by operating for the long term has to do with brand positioning. They'd rather remain a premium product priced at a level that many can't afford, rather than grabbing short term profits now (by filling production capacity and selling more bikes for cheaper) but losing that premium status.
The numbers are from the market numbers that HOG reports come from the Motorcycle Industry Council and are updated every quarter and only include the 650+ heavyweights and by this measure HOG hovers around 47.2% market share in this segment.
As for why market share is important. Each full year market share point (~5,000 bikes) is worth between 10 - 12 cents to EPS for HOG on the shipments side (my own calculation based on a formula I use to project HOG EPS from shipments).
I do not believe that figure. I simply don't. Unless "heavyweights" is a term that means "cruiser bike."
WTF is a "heavyweight"?
And I have no idea what you mean when you say a point of market share equals 10-12 cents per share. Says who? Says you? No, B.S.
So by your logic, if HOG sells the same number of bikes in 2009 but Honda comes out with a new line-up and expands the market so that HOG's share falls from 9% to 8% of bikes over 650cc, HOG's shareholders lose money. No they don't!
HOG is a niche market, notwithstanding how much people talk about them. In California, they are a very small portion of the bikes on the road. That is because most people here have bikes to ride them, not to look at them.
On Aug 20 11:49 PM Grant Case wrote:
> Mallarde,
>
> The numbers are from the market numbers that HOG reports come from
> the Motorcycle Industry Council and are updated every quarter and
> only include the 650+ heavyweights and by this measure HOG hovers
> around 47.2% market share in this segment.
>
> As for why market share is important. Each full year market share
> point (~5,000 bikes) is worth between 10 - 12 cents to EPS for HOG
> on the shipments side (my own calculation based on a formula I use
> to project HOG EPS from shipments).
>
If you don't believe the market share numbers Grant and I are referring to, I encourage you to look it up rather than simply believing it's wrong. Let us know if you interpret the stats you find differently than we do.
On Aug 20 05:48 PM mallarde wrote:
> I just can't believe that HOG has anything close to 45% of street
> bikes over 650cc in the U.S. The market segment has to be broken
> down into "cruiser" bikes or something. Either way, I don't think
> market share means all that much -- good or bad.
If you are a long shareholder and Harley-Davidson really does hold 45% market share, then I would be very concerned about buyers deciding to no longer pay Harley-Davidson a 300% premium for its motorcycles.
On Sep 18 02:15 AM CWebb wrote:
> Have you looked around you lately when you're out driving? Here
> in California I see probably 10 HOGS for every other road bike out
> there. It looks to me like all the other varieties of street bikes
> are seriously losing market share. I have a hard time believing that
> HOG has "only" 45%!