American Motorcycle Dealer AMD 236 March 2019 - Page 4

Hello Darkness, Harley’s New Friend? ast year I called out Rich Duprey, the brains behind respected Wall Street blog ‘The Motley Fool’ (“Who’s the Fool?” - AMD January 2018). I disagreed with Duprey for calling for a change of Harley’s CEO. Blaming the CEO for all the firm’s ills was inappropriate and the timing of such calls, as it turns out just five months before Harley went public with its ‘More Roads’ strategy, was foolhardy. It was clear that Harley was finally about to transition from having a plan to have a plan into the golden sunlit uplands of actually, you know, having a plan. So, while I would also disagree with Duprey’s recent remarks about the ‘Livewire’, I do wholeheartedly agree with what he has said about how Harley has turned its dealer policy upside down, and especially where inviting private equity into dealer ownership is concerned. In drawing attention to the change Harley has made in now allowing Private Equity (PE) firms to own its dealerships, and saying that “Harley is not the same business it was,” he is spot on. Duprey went on to say that “it’s a longstanding Harley-Davidson policy that private equity firms can’t own a Harley motorcycle shop. The bike maker has always encouraged a family style of ownership and demanded its owners be on site to deliver one-on-one customer service. The company’s dealer policy manual specifically states, ‘a dealer owner(s) sets the tone for the entire dealership, and we believe it is critical to the Harley- Davidson experience that there is an individual owner who is onsite and actively involved in the dealership operations’. That meant dealers were focused on growing sales and winning customer loyalty so they return for maintenance and repairs and to buy gear. “For that reason, dealers couldn’t own more than six dealerships, so they weren’t spread too thin. And if they wanted to buy another dealership, they had to be in the top 33% for dealership performance to be considered.” The difference between owners and investors is that whereas owners are driven by increasing sales, investors are driven by increasing profits. The two are not necessarily the same and can even be mutually exclusive. Yes, of course, all dealerships need to make money, and should make money, but the ability to do so, the extent to which it can be done consistently, is subject to so many cyclical variables that are beyond the store owner’s control. he dealership owner’s endgame is more riders/customers, because he or she is in it for the long haul; the investors endgame is his or her exit strategy - getting out with the investment being worth acceptably more in the timeframe concerned than it was at the start of the process, that is the PE ‘product’, pure and simple. To paraphrase Paul Simon, a company that sees the ‘Sound of Silence’ and embracing PE as its short-term fix is in danger of making friends with darkness. When Harley first went public with the ‘Livewire’ project (2014- in search of E-bike brand acceptance and a crowd sourced future strategy), Scott Wine, CEO of Polaris, was asked if, despite their Brammo partial acquisition and subsequent promising Pike’s Peak and IOM Derring Do, Harley had caught Polaris asleep at the wheel? His response was insightful. He stated that it was simply hard to see profits from E-bikes at that time and the lack (to date) of such an initiative (under the Indian brand or otherwise) for a product for that ‘space’ remains telling. And this from a L company whose mainstream powersports dealer network could be an immensely effective tool for such a product. To put E-bikes in context, the 28 markets and 380m plus riding age consumers that (currently!) make up the European Union (which is widely accepted to be at least a decade ahead of the USA in terms of its E-bike and Urban Mobility market acceptance) was only worth 7,378 units in 2018. ‘More Roads’ stated that Harley would “inspire new riders by extending heavyweight leadership and unlocking new markets and segments.” Well, Livewire will get the attention of the ‘New Gen’ audience, for sure, but so will the unreachable price-point. It is a $15,000 motorcycle with another $15,000 for the logo. ‘More Roads’ also called for “stronger dealers” who will “drive a performance framework to improve dealer financial strength and the Harley-Davidson customer experience,” and for Harley to ensure that it is still able to “keep current riders engaged.” ell, if PE was the solution that Harley had hidden in its locker, in the long run they are going to ‘have their ass handed to them’. Especially where the existing core market is concerned. Core Bar ‘n Shield brand values were supposed to be a generational gift, handed down from father to son to grandson, but Harley is now in serious danger of flushing the last vestiges of those values away - the traditional owner/operator dealership model was the cathedral of loyalty and brotherhood in which those values were sustained. At a dealer webinar in December it was revealed that not only can a dealer now buy as many as 10 dealerships (albeit still having to be a top performer), but with private equity also being now able to invest in dealerships, individuals no longer need to be majority owners, and the owner no longer has to be onsite at the dealership. As Duprey states “essentially Harley-Davidson is encouraging absentee ownership of its shops” and that although “the motorcycle company says it is not trying to adopt the auto dealership owner model” it is nonetheless “allowing private equity firms to buy dealerships” and that will only accentuate the auto dealership “profit- at-all-costs mentality, as streamlining, cutting costs and squeezing margins out of every corner takes precedence over good employee, customer and community relations. PE firms also typically invest in a business with an eye on an exit strategy, not the lifetime commitment that many Harley dealers make.” Furthermore, Harley’s thinking is clearly confused and conflicted. One of the major profit streams for dealers is PG&A. But opening an Amazon store front and allowing consumers to buy direct from Harley’s own website pulls a fair sized carpet from under the feet of these “stronger” dealers and their improved financial strength. Harley is stealing the chocolate from the checkout! W “$15k for the logo” T 4 AMERICAN MOTORCYCLE DEALER - MARCH 2019 Robin Bradley Co-owner/Editor-in-Chief