We recently told you about Harley-Davidson’s (Harley) new “Rewire” program that Harley CEO Jochen Zeitz thinks is necessary to revive the brand. Now more details are emerging about what the plan is and how it will be carried out.
Preparing to reopen
According to the Wall Street Journal, Harley is reopening its factories this week. But there’s about to be a big change in manufacturing. Motorcycle production will resume at a lower rate. As a result, the MoCo will send a narrower range of bikes to dealers and divert from its far more expansive and expensive plan to bring new models to the market.
The U.S. motorcycle manufacturer closed most of its U.S. assembly plants in March. In line with the shutdown or shortly thereafter, most of its dealers closed their doors as part of the effort to reduce the spread of the COVID-19.
Startlingly, just as many of its 698 U.S. dealers are planning to re-open, Harley’s Director of Product Sales, Beth Truett sent a message to the struggling dealers. Her memo said that about 70% of them likely wouldn’t receive any additional new motorcycles this year!
The Wall Street Journal was able to view the memo and quoted it as saying:
“We are using this time to course correct and rewire the company in pursuit of making Harley-Davidson one of the most desirable brands in the world.”
“…one of the most desirable brands in the world.” What the code of these words mean is that Harley is going to make fewer machines possibly at a higher price and call them desirable and exclusive.
The Rewire program is a gigantic strategy reversal for Harley. And apparently, the company’s new CEO Jochen Zeitz thinks that this kind of pivot is what will work amidst an uncertain economic recovery.
Harley’s former CEO Matt Levatich had a vastly different plan. His plan sought to increase Harley’s market and market share by not only catering to the company’s core baby boomer customers. His plan called for bringing dozens of new models to the brand by 2027 to lure new riders to the Harley fold. The new machines included bikes for kids, GenZ and Millennials.
More Roads To Harley-Davidson
Levatich knew that his core customers, the baby boomers were aging out of riding. His “More Roads To Harley-Davidson” plan focused on growing the number of riders and then attracting them to the Harley brand.
But the “More Roads To Harley-Davidson” was a long term plan, not a quick fix. During the plan’s implementation, Harley’s sales continued to lag and some shareholders became anxious and vocal. Poor sales reduce share prices and the shareholder’s core mission is to see a stock’s price grow. Ultimately, a shareholder group called Impala Asset Management grew weary of the stock’s dismal performance and threatened a proxy battle. They felt Harley needed better management and a new direction. Although it’s not clear that this move is what caused Levatich to step down, it is widely thought that shareholder discord was the final nail in Levatich’s coffin.
So now that Harley has embarked on a new course, the question is whether it can succeed. Further, the question is not only whether it will succeed, but what it means for the brand’s long term growth? I for one wonder whether making the brand “…one of the most desirable brands in the world.” is a formula for growth in an already shrinking population of riders.
Desirability usually goes hand in hand with exclusivity. And, it seems that Zeitz wants to move the MoCo in that direction by building fewer bikes. But will people pay a premium price for exclusivity? Yes, certainly. But in the mass-market motorcycle industry where the number of riders continues to shrink, is Zeitz’s plan of making Harley “one of the most desirable brands in the world” a plan for growth or a slow ride to becoming a small and expensive boutique brand?
The Indian factor
Harley only has one competitor directly in its lane and it is Indian Motorcycle. Lately, Indian has been taking market share from Harley, and even posted sales growth in Q1 of 2020 where Harley posted significant losses. Some say that Indian’s growth came at the expense of the brand selling its machines at very low prices. They point to Indian’s Q1 negative profitability as the reason they were able to post increased sales. While that is a fair point, the fact is that Indian has been and continues to eat into Harley’s market share.
There’s no reason to believe that that trend won’t continue since Indian has rolled out new machines that have become very popular. Its new FTR and Indian Challenger models have by many accounts been selling very well. Their Scout Bobber Sixty retails at just $8,999 marking an inexpensive and “stylish” way to join the brand. All in all, Indian’s strategy shows that they are thinking outside of the heavy cruiser box and are looking at alternate ways to attract customers. And that strategy seems to be working.
Sticking with what they know
It’s difficult to see how Zeitz’s plan will do anything but grasp at the remaining baby boomers for sales. Zeitz has said that it is delaying the rollout of two significantly anticipated models, the adventure-oriented Pan America and the smaller and lighter and less expensive Bronx.
During its earnings call last month, Zeitz also said that expanding the motorcycle lineup and chasing new markets diverted attention from Harley’s more profitable models and made factories too complex. He also said that the rewiring of production is warranted by deteriorating demand for motorcycles.
With that news, the Pan America and the Bronx have both been delayed from this year’s planned summer release, until next year. They will instead debut sometime early in 2021 before the peak spring buying season begins.
What’s the long term plan?
Zeitz seemingly thinks Harley has been distracted by other markets and he needs to concentrate on keeping his existing core riders riding Harleys. But is that a good plan? As Harley’s baby boomer riders age out of riding who’s going to replace them? And more importantly, what’s going to entice them to join the Harley brand.
Paying more attention to its most profitable models at the expense of new ones may increase short term profit, but what happens in the not so long term? Harley’s core riders are aging out of riding and Indian is already demonstrating that it can erode Harley’s market share.
With new models delayed and a fixation on the most profitable (i.e. expensive) bikes, Harley continues to unilaterally narrow its focus and its own product lineup by limiting production. Harley says it is trying to appeal to customers of premium-priced brands with limited availability. Backing up that strategy is Ms. Truet’s previously mentioned memo to dealers. It reportedly said:
“Our strategy to limit motorcycle product in the showroom is purposefully designed to drive exclusivity.”
While that formula might work with sports cars and high-end baubles, Harley is forgetting one very important thing. That thing is excitement, the “sizzle” that gets people’s attention. People have to be excited about the product before they will plonk down their hard-earned bucks.
Sure if there are fewer of an item, it could become more desirable. But just because there are fewer of an item doesn’t make it desirable. There needs to be some excitement, some significant desire to own it. How does Zeitz’s Rewire plan create that desirability? Harley really hasn’t introduced much in the line of new models or products aside from upgrades to its existing fleet of bikes.
Harley did introduce one new machine. The electric-powered LiveWire. Unfortunately, it came in overpriced and with less range performance than much of the competition. With its ~$30,000, price tag, and shortish range, the bike wasn’t DOA, it was stillborn.
Even worse, the two new models that could have created some buzz have just been shelved until next year. So just how is Harley going to create that excitement and make its models more desirable?
I just can’t see how Harley’s latest strategy can work. There’s nothing new or exciting about its current machines. The two models that could create some buzz are now about a year away. The economic future is uncertain and wagering a company by concentrating on a small and eroding market just doesn’t seem to make sense.
Even if Zietz is 100% successful and he wins 100% of heavyweight cruiser sales, is that a good thing? When total profit dollars are considered, 100% of a tiny number is not as good as 60% of a very large number. So if Zeitz’s Rewire plan is successful, Harley could become pretty profitable on a percentage basis. But the pile of profit dollars the company brings in will be much smaller due to the lower sales volume. That just seems like a slow ride to a final destination.
What happens if Rewire fails?
What’s Harley’s final destination? Bankruptcy? Not likely. If Harley’s profits are good and even if it has shrinking sales, it could become a takeover target. Why?
The Harley brand is known the world over and it has a very pronounced American “cachet”. That makes the brand interesting to not just American companies, but also to international companies wanting a quick entry into the American market or the Harley-Davidson mythos.
Both India and China have companies more than large enough to make a move on Harley. And, they have very sizable bike riding populations to target. If acquired by a “foreign” company, the new company wouldn’t even have to stay in the big cruiser business. They could just draw on Harley’s brand history to sell smaller and less expensive machines.
Plan for acquisition?
Could Zeitz’s real plan be to have Harley acquired? Is Zeitz’s plan just putting lipstick on the pig (pun intended)? There’s nothing pointing to it directly, but his plan to limit production (i.e. reduce costs) can drive profit percentage upward. If he can succeed by concentrating on his core customers with a smaller product line, and reduce the company’s overhead and manufacturing costs with that smaller lineup, profit percentage can start to look pretty good. And that could make Harley attractive at a relative bargain-basement price.
Right now, some of his activist investors like Impala Asset Management aren’t very happy with Harley’s stock price or financial performance. If Zeitz can quickly get that profit percentage up, he just may be able to salvage some of the lost share value. He likely won’t recoup all of it, but lower costs usually mean a higher profit percentage. Under an acquisition scenario, Harley’s investors won’t likely see Harley’s financial performance heydays, but they stand a chance of recouping some of their potential losses.
Oh, and what ultimately happened to PUMA under Zeitz’s leadership? They were acquired by luxury goods conglomerate Kering. Interesting.
It’s still early and Zeitz hasn’t disclosed all the details to his Rewire plan. Obviously, he knows something about business with his turnaround of the nearly bankrupt PUMA. But selling sportswear is not the same thing as selling motorcycles. Still, he’s been on the Board of Harley since 2007. Surely he must have learned a thing or two about motorcycles during his tenure as a Board member. It will be interesting to see what new details emerge about Harley’s Rewire plan.
What do you think?
What do you think about Zeitz’s Rewire plan for Harley? Will it work? Is it a growth plan or an acquisition strategy? Or is it something else. Let us know in the comments below.