By the Staff of Clutch and Chrome
 

It's been written about and discussed countless times, whether in the pages of financial magazines or at a bar by two seasoned riders prompted by the sight of a checkbook rider pulling up on his late model chrome creation. The growth in motorcycle ownership from baby-boomers rediscovering riding during their 'empty-nest' stage of life, experienced when the children have left home to attend college.

At the beginning of April 2006, Harley-Davidson reported record first quarter revenues of $1.29 billion (U.S.), 4 per cent higher than a year earlier. Net income hit $234.6 million, a year-over-year hike of more than 3 per cent.

This news has historical irony, remembering the company was a mere two days from filing for Chapter 11 bankruptcy protection in the mid-1980s, Harley has since posted 20 consecutive years of record revenues and earnings growth. Last year, sales reached $5.34 billion, a 6.5 per cent rise over 2004, with net earnings reaching $960 million, up nearly 8 per cent. Equally impressive, earnings over the past 20 years have grown faster than revenue, indicating operating efficiency.

To put this performance into every day terms, if an investor had sunk $100 into Harley at the end of 1986, she would have earned more than $16,000 at the end of last year.

So, how exactly did Harley achieve such impressive growth — and will it be able to continue doing so?

All about the branding
"This is the story of the power of branding," says Tim Calkins, marketing professor at Northwestern University's Kellogg School of Management. "In the world of branding, they've uncovered what works. "Harley's always stood for rebellion, danger, bad behavior and edgy."

Even with technically superior motorcycles on the market, consumers choose Harley because of its brand and what it means to be associated with it.

This "bad boy" image started when fighter pilots returning from World War II started the Hell's Angels and required all members to ride a Harley. It was reinforced when a young Elvis Presley posed with a Harley in 1956 and movies such as The Wild One, Captain America and Easy Rider featured rebels riding motorcycles.

In the past few decades, Harley has won over a new audience: professional baby boomers with disposable income.

But the Harley reputation was built and nurtured in a largely voluntary way by end users, rather than created by marketing or advertising, says Susan Fournier, marketing professor at Boston University, who has written a Harvard Business School Case on the company.

"They hardly advertise (compared with other major brands like) Coke and Pepsi, but instead have let the brand emerge naturally."

The Harley Owners Group (HOG), for example, is a company-sponsored club established in 1983 to help bolster customer, and in turn, brand loyalty. Today, it boasts more than a million members globally.

Harley has also succeeded because it is an "extremely disciplined company," says Harold Lenfesty, a 27-year veteran of Harley, who left the company in 1997 after serving as president and CEO of Harley-Davidson Canada and group managing director for Europe.

"They have very good controls, corporate governance ... remarkable business planning and objectives."

In the early 1990s, he recalls, targets were set for Harley's 100th anniversary in 2003, such as annual sales of more than 200,000 motorcycles. Harley reached those goals by "giving people latitude to be creative and do what they needed to do to achieve those goals," he says. "It was an incubator for ideas."

In the beginning
The birthplace of Harley-Davidson was a 10-by-15-foot shed in Milwaukee where two friends, Arthur Davidson and William S. Harley, built a three-horsepower, single-cylinder-engine motorcycle in 1903. Two other Davidson brothers joined the company and by 1920 Harley-Davidson had become the largest motorcycle manufacturer in the world, with sales in more than 67 countries.

Even though domestic competition all but disappeared when its main U.S. rival, Indian Motorcycle ceased production in 1953, Harley began to stagnate and lose market share to Japanese upstarts, such as Honda and Yamaha. The company was plagued by outdated technology, quality issues and for once in it's history, lacked innovation. Foreign manufacturers had no such problems in these areas.

Harley went public in 1965, but that wasn't enough to save the ailing company. In 1969 it was sold to conglomerate American Machine Foundry.

Then in 1981, under the rally cry 'the eagle soars alone,' 13 managers, including Willie G. Davidson, grandson of co-founder William Davidson, bought the company from AMF for $80 million.

"A lot of people looking at us from the outside thought we were nuts," the grandson told the Star in 2002. "With the glut of competitive motorcycles, and our involvement with less-than-high product quality, many people wrote us off."

In 1983, the company successfully lobbied the U.S. government to issue a five-year tariff on 700-cc Japanese motorcycles, making Harleys more competitive. Then, two years ahead of schedule, the newly confident Harley asked the government to end the tariff.

Despite that, Harley financier Citicorp called in Harley's loan due Jan. 2, 1986. Then, as bankruptcy proceedings were about to get under way, Heller Financial Inc. took over the loan, financing it with an initial public offering in 1986. Harley hasn't looked back since.

As it rides into the future, experts feel Harley has to acknowledge that its traditional market of male baby boomers is both aging and saturated, requiring the company to find new customers and create new products. With appreciation of it's marketplace, Harley has begun targeting women who not only currently make up about 11 per cent of owners, but represents a fast-growing demographic. In 1985, there were 600 female Harley owners. By 2005, there were more than 30,000.

"In the last 10 years, we've really recognized that they're an audience, and we've done a lot more research in understanding the women's market," Joanne Bischmann, vice-president of marketing told the Wall Street Journal in February. "A rider is a rider is a rider.

"What we also found," she adds, "was they didn't want a special product, they didn't want a pink motorcycle, for example, but they did want a product that fit them better."

In this vein Harley have redesigned some of their models with seats closer to the ground to accommodate smaller inside leg measurements and built lighter motorcycles. The company is also hoping to increase market share by running ad campaigns in magazines, such as Jane, Allure, Vanity Fair and Glamour. Further efforts to attract women wee made by enhancing its website and offering programs such as Rider's Edge, where new motorcyclists can learn how to ride.

Its not just about the women
Other initiatives include global expansion. Harley currently generates 20 per cent of its sales outside the United States with Canada accounting for about 4 per cent. International sales last year rose by 15 per cent, with growth experienced in all major markets. Last year, Harley opened its first dealership in Russia since the 1917 Bolshevik Revolution and earlier this month, it opened its first sales office in China.

With the days of pre-ordering a motorcycle and waiting up to a year for its delivery only a story told at bike nights and motorcycle rally's prospective buyers not only have choice with Harley Davidson, but the ever growing selection with quality products from Yamaha (Star), Suzuki, Honda and the newcomer, Victory Motorcycles. Its no surprise then to see television advertisements for Harley Davidson, although they are few and far between.

Brand expansion has also proven successful. In 2005, 80 per cent of revenue came from motorcycle sales, with the rest coming from parts, accessories, apparel and collectibles.

But not all of its expansion efforts have been positive. The Harley-Davidson cake-decorating kit, for instance, was voted one of the two worst brand extensions last year in a poll of nearly 500 marketing experts sponsored by Tipping Sprung marketing consultancy and Brandweek magazine. Branded products from key-chains to car decals now have their own section in Target. More and more dealerships seem to be appearing throughout the country, some only ten miles apart.

"You have to wonder if you push the brand too much, it won't grow," says Kellogg's Calkins. "That's why 20 years (of growth) can be a curse because there's always pressure to grow."
Because Harley has close ties to both its dealers and customers, the company is better positioned than most to hear and respond when it's pushing its brand too much, says Calkins.

Customers, for example, let it be known they prefer an old-fashioned carburetor to fuel injection. You can be sure the company won't lose sight of the importance of listening and being in touch with customers any time soon.