Harley-Davidson Tries to Rejuvenate Its Business

In a Facebook video, the screen is filled with a sea of 20-something men and women cruising on sleek black motorbikes, all of them Harley-Davidson’s Sportster Iron 883s. It’s part of a marketing campaign to generate buzz around the newest Sportster. “That’s hot!” one woman declares on Harley-Davidson’s Facebook page, where other minidocumentaries promoting the bike are posted.

Back at Harley’s Milwaukee headquarters, one can only hope for heat. Priced at roughly $8,000, the Sportster is positioned to help one of the world’s most iconic brands survive the gravest economic crisis in decades. But it must also help Harley-Davidson move beyond its aging baby-boomer base. (See pictures of Harley-Davidson’s evolution.)

It’s been a grueling few weeks for American companies, but particularly so for Harley-Davidson, purveyor of bikes that easily top $30,000. Last month, the company reported that its fourth-quarter global sales fell 13.1%. Last year, its profits sank nearly 30%. And it’s been a wipeout for investors: Harley-Davidson’s stock price has plunged nearly 70%, to $11.96 a share in mid-February, from $37.34 a share one year ago. Americans haven’t lost reverence for Harley-Davidson, but a key problem is that people are simply less willing to spend money on luxury items. Overall motorbike sales fell 7.2% last year, according to the Motorcycle Industry Council, an Irvine, Calif., trade group. (See pictures of the world’s most expensive motorcycles.)

America’s leading motorcycle manufacturer is enduring its bleakest period since the 1980s, when it nearly went bankrupt. “Clearly it’s a challenging environment, and we’re doing all the right things in this environment to position our premium brand in this marketplace to make sure we’re even stronger when we’re out of this cycle,” says Tom Bergmann, Harley-Davidson’s chief financial officer.

Harley-Davidson has been through a few cycles. It was founded in Milwaukee in 1903, and within a decade built itself into a global business. It survived the Great Depression by selling to police departments. In 1957, it introduced the Sportster, a sleeker, less expensive alternative to the company’s popular touring bikes and a response to a wave of British imports. The Sportster’s relatively small size made it appealing to women. But by the 1970s, motorcycling had become a marginalized sport. Its renaissance came in the late 1980s, driven largely by baby boomers’ new affluence. From 1992 to 2007, new-bike sales soared from 278,000 to 1.1 million annually. Harley-Davidson rode much of that wave, chiefly with touring bikes like the brawny Ultra Classic Electra Glide (starting price: $35,499, with a 110-cu.-in. Screamin’ Eagle engine and a six-speed transmission). Its patrons grew older and wealthier, but its efforts to cultivate a large base of female and younger riders have been marginally successful. (See the top 10 female sports heroes.)

Acknowledging the challenge of selling premium motorcycles in this economic environment, Harley-Davidson recently introduced a print ad aiming to play on the Sportster Iron 883’s relatively low price. The message: “About six bucks a day. Cheaper than your smokes, a six-pack, a lap dance, a bar tab, another tattoo, a parking ticket …” The Sportster line is expected to account for a larger share of Harley-Davidson’s sales this year — though still less than 25% of the total. (The company notes that there is still a waiting list for the new $29,000 Tri-Glide Ultra Classic despite the grim economy.)

Guiding Harley-Davidson’s marketing strategy is Mark-Hans Richer, 44, who was hired as chief marketing officer in July 2007 after leading marketing efforts at General Motors’ Pontiac unit. One of Richer’s first moves was to hire a director of product development for “outreach customers” — young people, women and those in non-U.S. markets. Richer’s team quickly discovered that young people aren’t into the heavy chrome found on many Harley-Davidsons — hence the emphasis on the primarily black Sportster Iron 883, which was already in development.

See pictures of expensive things that money can buy.

See 25 people to blame for the financial crisis.

“It reflects individuality and a laid-back cool at the same time,” Richer says. The black parts didn’t necessarily lower the bike’s costs. The developers stood firm on using premium materials, like metal fenders and side covers, rather than the plastic found on comparable bikes. “A lot of our competitors think there’s only one way to get through this economy — to go down the price ladder,” observes Richer. “But we refuse to play by that book. We have no interest in hurting the long-term value of our brand or our bikes.” (See pictures of Evel Knievel, motorcycle stuntman.)

The company’s long-term viability will require a focus on more than just pricing. Harley-Davidson must reconsider its dependence on its popular touring bikes — which one industry analyst, Tony Gikas, of Piper Jaffray in Minneapolis, says “look like geezer bikes.” To some degree, Harley-Davidson can’t dramatically alter the bikes’ looks, lest it alienate its core patrons. Nevertheless, Gikas says, “You don’t find too many 21- and 22-year-old guys with their girlfriends riding around on Harleys. Or wanting to.”

In recent years, many young people have been drawn to sport bikes by Honda, Ducati, Kawasaki and Suzuki. Harley-Davidson also owns a line of products under the Buell brand. But it may make sense to transport some of those products to a new sport-bike line bearing the Harley-Davidson brand, pricing them at roughly the same point as its Sportster line, or less.

Responding to the economic crisis, last month Harley said it would cut production of new bikes this year between 10% and 13%. But analysts like Ed Aaron, of RBC Capital Markets in Denver, say that’s hardly enough and that the company’s sales projections are overly optimistic. In an interview last week, Bergmann, Harley-Davidson’s CFO, said that given the company’s plans to shed more than 10% of its workforce and close some factories, “I actually think we’re going at it the right way. I think Wall Street will eventually appreciate how we’re managing to be proactive throughout this.” Even Warren Buffett’s move to invest about $300 million in the company failed to inspire much confidence from Wall Street.

Further complicating matters: James Ziemer, a nearly four-decade company veteran who was named CEO in 2005 after having served as CFO, announced plans to leave the post. Bergmann, the current CFO, is considered a candidate to replace him. But the company is likely to choose an outsider with a stronger marketing background to assume the post with a fresh set of eyes to guide Harley-Davidson through its current crisis. (See the 50 worst cars of all time.)

The angst is also rising for Harley-Davidson dealers like Emily Vindeni, of Glendale, Calif. In a typical month, Vindeni sells about 70 bikes at her shop. In January, however, she sold 42. Vindeni recently cut her staff by 10 people, to 65. She’s reduced her inventory and lowered prices on some items. The Sportster is usually one of the slowest-selling models, “the ones we’re trying to get rid of at the end of the year,” she says. But soon after arriving at her showroom, the Sportster Iron 883 sold out. “They’ve been saying for a long time that it’s important to capture the younger generation, but it never seemed to happen,” says Vindeni. But the new Sportster, she says, “may help. Even young people dream of owning a Harley.”

See the 50 best inventions of 2008.

See pictures of the remains of Detroit.