Harley-Davidson Believes the Strong Dollar Is Killing Its Business

Source: Harley-Davidson

Earlier this month, Harley-Davidson announced that sales had been lower than expected in the first quarter and that it was lowering its forecasts for 2015 from 287,000 to 281,000. Following this announcement, shares dropped 9% and only improved slightly over the course of the week. According to the company, the problem is that the dollar is simply too strong.

A strong dollar means relatively weaker foreign currencies, allowing competitors like Honda and Suzuki to lower prices and offer cash incentives while still maintaining profitability. Both companies currently offer $1,000 cash back on certain models, and while Honda is offering extremely low financing, Suzuki has gone even further and cut the prices on 13 of its models.

While the motorcycle market was devastated in the wake of the financial crisis and ensuing recession, motorcycle sales have steadily increased ever since. Harley-Davidson expected its sales to rise between 4% and 6% this year, but the company now expects to only see a 2% to 4% increase. Its share of the U.S. motorcycle market is also shrinking, down 5 percentage points this quarter.

According to Harley-Davidson Chief Financial Officer John Olin, the discounts and incentives on foreign motorcycles are going to continue for a while, blaming what he believes to be excess inventory. “We are not going to discount,” he said.

But one of Harley-Davidson’s chief American competitors, Polaris Industries, looks to be doing quite well. It’s not specifically an apples-to-apples comparison, as Polaris produces vehicles like snowmobiles and all-terrain vehicles. That said, its two motorcycle brands, Victory and Indian, both saw strong sales increases.

Commenting on the news, Scott Wine, CEO and chairman of Polaris, said: “We suspected 2015 would have its share of challenges and the first quarter confirmed our suspicions. Nevertheless, we continue to see another year of solid growth and market share gains, which gives us confidence in achieving our sales and earnings guidance for the full year.”

Source: Harley-Davidson

While the strong dollar and subsequent discounts from foreign manufacturers have likely had some effect on Harley-Davidson’s sales, the fact that Indian and Victory are still projected to hit their targets makes it look like that isn’t the whole story. Polaris hasn’t had to play the discount game with its motorcycles, and yet they’re still selling at least as well as expected. Digging deeper into Harley-Davidson’s product mix shows that there’s more to the story than a strong dollar.

While its overall sales were down, touring bike and street bike sales were up. Custom sales, however, were much lower. In fact, sales of customs have been sliding for five quarters in a row. Customs not only make up a smaller percentage of overall sales than they used to, but sales of customs are lower, too.

For Harley-Davidson, that’s a major problem, because customs are far and away the most profitable bikes it sells. For years, the company made a fortune selling extremely expensive, customized motorcycles to diehard fans who were willing to pay exorbitant sums of money to have bikes that were perfectly tailored to every single one of their wants, needs, and desires.

Even with higher sales from other types of bikes, without continued high sales on customs, Harley-Davidson’s profitability took a hit. The number of buyers who have large amounts of money budgeted to spend on a custom bike is likely lower than they were five years ago, but even worse for Harley-Davidson, the ones who do still exist are likely buying their bikes from other companies like Victory.

As many companies learn, over time, consumer tastes change, and what used to work and be very profitable doesn’t always stay profitable. If Harley-Davidson wants to gain back sales and profits, it’s going to have to adapt. The all-electric Livewire concept is a really cool step in the right direction, but putting it into production is unlikely to solve the cash flow problem that its customs business left behind. How Harley-Davidson will solve that problem isn’t clear, but whatever it comes up with is sure to be interesting.

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