Harley just keeps on cruising

Harley-Davidson's latest line of motorcycles still retains many of the classic design elements found in this iconic 1971 FX Super Glide.
Harley-Davidson's latest line of motorcycles still retains many of the classic design elements found in this iconic 1971 FX Super Glide.Harley-davidson / Harley-Davidson
/ Source: Business Week

For years, doomsayers have been predicting that a demographic time bomb would blow up Harley-Davidson Inc. The median age of a Harley buyer has leapt from 35 in 1987 to nearly 47 today. Whatever youthful countercultural mystique Harley may have once enjoyed, it is now a middle-aged nostalgia brand.

While the clock is still ticking, the explosion has yet to come--thanks in large part to fanatical riders like Jose Escalante. The 45-year-old roofing and landscaping company owner from El Paso has bought a dozen Harleys over the years and still owns four of them. He picked up a 2006 Screamin' Eagle Ultra Classic just last April, but was so psyched about the powerful new engine and transmission the bikemaker added to its line this past summer that he shelled out $36,000 in September for the 2007 model of the big touring hog. "When I get on the bike, all of a sudden I'm thinking about the road and nothing else," says Escalante. "It shifts you from one life to another.”

Such devotion goes far to explain why Harley can turn comparatively small product improvements--more modest than take place in, say, the car industry--into sustained growth. As soon as the new, bigger Twin Cam engine and six-speed transmission were announced in July, orders started pouring into dealers, many from longtime fans like Escalante who just had to have the newest bikes. Over the last two years, customers have warmed to 10 new models, out of 38 Harley models in all, and to regular tweaks all across the line. Third-quarter results, announced Oct. 12, roared past analysts' estimates, with net income climbing 18%, to $312.7 million, on a 14.3% year-over-year rise in sales, to $1.64 billion. Annual sales could top $6 billion next year, says William Blair & Co. analyst Robert Simonson.

It's a vindication for Chief Executive James L. Ziemer. He inherited the reins from Jeffrey L. Bleustein, a legend who built the modern Harley-Davidson over 30 years and remains the chairman. But in Ziemer's first quarter in the corner office, Harley announced production cuts. The stock plunged 21%, to 45, and critics immediately said the demographics had finally caught up to the company. Just 18 months later, the stock (retickered HOG in August of this year) hit an all-time high of 70.

Harley is also riding high with foreign fans, who see its image as all-American in the best possible sense, meaning powerful and free. Fast-growing overseas markets like China and Japan account for more than $1 billion a year in sales, or 22.5% of all bikes sold--up from 20% last year. Retail sales of Harley bikes outside the U.S. have climbed some 16% since the beginning of the year. Even in Japan, home of Honda Motor Co., Suzuki Motor Corp., and other big rivals, Harley owns the No. 1 spot for heavyweight bikes, claiming 26% of the market. Additionally, Harley sells more of its performance-oriented V-Rods and Buell models abroad than at home, especially in Europe. Simonson, the William Blair analyst, says rising foreign sales "could become an offset" if domestic growth slows.

Loyalty in spades
That's one reason why Harley executives see no reason to battle the youth-conscious imports head-to-head. The type of customer who chases the latest race-winning, forward-pitched sport bike is hardly brand-loyal, says Ziemer. He says 15% of Harley buyers now are under 35 and the median buyer age dropped about two and a half months last year, to 46.7. The proof of Harley's appeal: Half the company's sales are to new customers, while the other half go to committed Harley riders whose loyalty won't fade. "You're not going to change the bike you ride when you've got its name tattooed on your shoulder," says Ziemer.

Still, the skeptics are out there. The negative view is on Harley's future, not its past or present. And the outfit has done little to shake its image with twentysomethings as Granddad's bike. "They haven't kept up with the younger riders," says Piper Jaffray Cosanalyst Anthony Gikas, a 44-year-old who owns two Harleys himself. Riders in their 20s, he adds, crave fast sport bikes--Ducatis and Kawasakis--and disdain the Harley brand.

Motorcycle experts debate over whether Harley should stick to its mainstays--the big loud machines that make for smooth rides on long stretches--or bring out sporty, less pricey Harleys for the younger, hipper crowd. Harley has experimented with lower-priced sport bikes in its Buell line, but they're nowhere near as stylish and popular as Japanese and European rivals. Suzuki this year will sell some 67,500 sport bikes in the U.S.--including about 27,000 with engines in the same class as Buell's--but Harley will sell fewer than 5,600 Buells domestically, including 4,190 sport bikes, says industry analyst Don J. Brown of DJB Associates.

While the Japanese bikemakers quickly make changes to suit customers' shifting tastes, the 103-year-old Harley is much more conservative. Of course, it's easy to understand Harley's reluctance to mess with its iconic image. Observes Kent Grayson, an associate professor of marketing at Northwestern University's Kellogg School of Management: "It's more than a brand. It's a culture."