Jochen Zeitz started riding motorcycles when he was 16. The chairman and chief executive officer of Harley-Davidson Inc. stopped in his 20s before starting again in his 30s.
“It’s a life stage that you have to age into to be ready to ride a Harley, to have the time and the money to actually do that, and that’s a huge asset for us,” Zeitz said at a recent Harley investor day.
In the 1990s and 2000s, baby boomers helped push Harley-Davidson to new heights. In recent years, many observers have wondered if the company could withstand its core customers aging out of the sport of motorcycling and if it could attract new rides.
But attracting an 18-year-old to buy a Harley is not the goal Zeitz has in mind.
“That’s really not focusing on the right thing,” he said.
Harley’s estimates suggest that from 2015 to 2021, around 800,000 Harley riders aged out of motorcycling, while around 2 million left but could return in the future. Those losses were offset by around 3 million new and returning riders, pushing the number of Harley riders from 2.9 million to 3.1 million.
“The key focus needs to be getting to those customers who want to start riding again,” Zeitz said.
From 2021 to 2030, Harley estimates it will be able to add 5.7 million new and returning riders, offsetting 1.8 million riders aging out of motorcycling and 3.2 million leaving with the potential to return.
The result would be 3.7 million Harley riders in 2030, an almost 20% increase from current levels.
Reaching those levels is part of the stage-two version of “The Hardwire” plan, a strategic vision for the company through 2025. The updated version of the plan, released at the investor day, sets more ambitious targets for the company’s growth.
The original plan called for mid-single digit growth in revenue at Harley-Davidson Motor Company and LiveWire, Harley’s electric motorcycle brand. The new plans call for growth of 9% to 11%, which would return Harley’s motorcycle business to sales levels it saw in 2018 but not quite to the levels of 2015 and 2016.
Harley is in the process of spinning LiveWire off into its own public company through a sale to a special purpose acquisition corporation, or SPAC. Harley will remain the majority owner of the new LiveWire.
In 2018, operating margins came in at 8.5% for the Milwaukee-based motorcycle maker. The latest Hardwire plan calls for the combined Harley-Davidson and LiveWire to reach an operating margin of 12% by 2025, moving closer to 2017’s 12.5% and still trailing the 14.7% from 2016.
Profitability has been a point of emphasis for Zeitz and his team since taking over in early 2020. Harley cut $135 million from its operating expenses, cut its product lineup by 40% and exited 40 markets globally.
Harley’s latest plans call for $400 million in cost productivity by 2025, including optimization of its manufacturing footprint, investment in automation, reduced reliance on expedited freight, realigning the supply base and material cost optimization.
“The next big opportunity for cost takeout is across the supply chain,” said Gina Goetter, chief financial officer of Harley, adding the company is looking at its manufacturing “to optimize delivery times and improve profitability in all of the markets in which (it) competes.”
Goetter said the reassessment of manufacturing would inform Harley’s investments at plants in Pennsylvania and Thailand and allow the company to expand margins, stay ahead of inflation and invest in its business.
Harley has already been investing, introducing a new engine platform, Revolution Max, which allowed it to enter new categories like adventure touring and launch new sportster models.
“We’re beginning to make people think a little bit differently about who the Harley-Davidson customer is and what a Harley-Davidson product is, and I think that’s a really good thing,” Brad Richards, vice president of design at Harley, said during the investor day.
The efforts have been paying off. Motorcycle segment revenues were nearly back to 2019 levels last year, even as the company shipped 25,000 fewer units. Operating margin for the segment was up from 6.3% in 2019 to 9%.
Now the company is stepping up with the latest Hardwire plans, even amidst challenges like inflation, supply chain constraints, rising interest rates and economic uncertainty.
“Now is the moment to elevate our ambition beyond the current environment,” Zeitz said.
Part of the reason Harley is planning to invest $300 million in the coming years in its core product categories is it is expecting continued growth for internal combustion engine motorcycles through at least 2030. The company’s estimates suggest demand for the touring category – its most iconic and profitable offering – will grow in-line with the market, and sales in North America – where Harley is strongest – will outpace growth in the rest of the world.
At the same time, Zeitz and his team are also counting on products beyond motorcycles to help deliver the revenue targets they’ve set, including a strong parts and accessories business and an emphasis on licensing and apparel.
“We have not really looked at licensing as a business opportunity that goes beyond generating royalties but actually helping to build the desirability of the brand,” said Zeitz, who was previously chairman and CEO of Puma.
“Think sunglasses, as an example, think footwear, think bags, and all of that has never really been managed as a business,” he added. “Now, that’s obviously my background, and I’m like, ‘Wow, that’s quite extraordinary that a brand like Harley-Davidson gives away the keys to its house to actually control and manage with a competent team what this business should be.’”
Zeitz lamented that in the past Harley had three different t-shirt licensees competing for space at dealers, licensees were left to decide where they would sell products and there was no concerted channel strategy.
Moving forward, Zeitz is planning for a tiered approach to channels that will include dealers, experience centers, e-commerce and potential retail partners.
“I’m not thinking department stores, I’m thinking those who can really live up to the values and the positioning of the brand that could carry selective product of ours,” he said.
The company will also offer both performance gear for riders and lifestyle apparel for both riders and fans of the brand.
“The first t-shirt that you buy is the first step into the motorcycle,” Zeitz said.
The brand positioning Harley is focused on is desirability.
“Done right, Harley-Davidson desirability preserves the value of our customer’s purchases, builds our brand beyond our riders, ensures loyalty and drives engagement,” Zeitz said, adding the company has an opportunity to expand sales to non-riders. “There is a large community out there who have a passion for the Harley-Davidson brand despite not being riders.”
Emphasizing desirability also shows up in dealerships, where Harley has made a concerted effort to limit inventory. Worldwide, the company’s dealers ended the first quarter with 28,000 motorcycles in inventory, down from 74,000 at the same time in 2019.
The result is touring motorcycles selling within 2% of Harley’s suggested retail price, compared to 5%-10% below in 2019.
Challenges with the supply of electronic components hampered production in the first quarter and executives have said inventories would likely increase some from current levels. Since the investor day, Harley announced a two-week production suspension after a supplier identified issues with a part, likely making it difficult to immediately raise inventory levels.
“It will probably be much closer to where we are now than where we were in 2019,” Edel O’Sullivan, chief commercial officer at Harley, said of inventory levels during the investor day.
Harley’s plans also include $2 billion in investments by dealership owners into dealerships over the next decade to upgrade and modernize facilities, strengthen the representation of Harley’s brand, welcome riders and non-riders, and provide a more digital integrated sales process.
There will also be some “optimization” of Harley’s dealer network while still maintaining market coverage, O’Sullivan said.
“It’s not only the number of dealers, but we’re also looking very closely at the format of those dealers,” she said, noting not all dealers need to be the same size.
Zeitz said there could be a tiering of the dealer network with some locations focused on service, while others emphasize experience.
“It’s not just about selling motorcycles,” he said.