How Bad Will This Recall Hurt?

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On Aug. 30, Polaris Industries (NYSE: PII  ) issued a recall for its Kings Mountain-era Indian motorcycles made between Dec. 10, 2008 and Nov. 1, 2012, and "designed by the previous owner of Indian Motorcycle." Those motorcycles may possess a defective rear rim which "may crack and cause a loss of air pressure." Could this recall conceivably hurt the Indian brand and hinder the prospects of Polaris? Yes -- and here's why.

Branding is everything

A brand not only identifies a company's product but serves as a differentiator. Polaris acquired the Indian brand in 2011 because it possesses a rich legacy that predates even rival Harley Davidson (NYSE: HOG  ) . Indian's sleek design won rave reviews and further distinction to the product line, and Polaris pinned its hopes on the Indian brand's ability to revive its weak motorcycle division.

While this recall doesn't cover the 2014 Indian motorcycles, it could give consumers pause when making purchasing decisions for motorcycles and other Polaris products. Polaris didn't just buy Indian's positive brand identity -- they got its legacy liabilities, too.

Competitors will love it

This recall couldn't happen at a worse time for Polaris, right in the middle of Harley Davidson's 110th anniversary celebration where prospective Indian buyers may be attending to check out their choices. Also, Polaris just introduced the 2014 Indian motorcycles, while all of this remains fresh in the collective mind of the consumer.

The Indian recall may push consumers in other directions. Harley Davidson already has a fascinating subculture built around its brand. Loyal consumers go as far as tattooing the logo onto their skin. Refugee customers from Indian might add to the 3% revenue growth Harley Davidson already enjoyed over the past year. If they do, they could dilute Polaris's 9% growth rate in the process .

Of course, Polaris also makes ATVs, side by sides, and on-road vehicles in the European market, which means that maybe it can make up for its motorcycle shortfalls in that area. But if the Indian recall also gives potential ATV buyers pause, rival Arctic Cat (NASDAQ: ACAT  )  could beneift. The latter company already saw a 32 % increase in ATV sales in FY 2013. Look for an uptick in Arctic Cat's snowmobile sales if it inherits some of Polaris' customers in those areas as well.

Stepping up

Polaris understands the threat to its brand. It's offering to replace the defective parts of all affected motorcycles for free. In addition, Polaris offers its 2014 Indian customers an "Indian Motorcycle Assurance Program" that offers warranty coverage, trade-in guarantees, and roadside assistance. It really needs to extend this program to its "Kings Mountain era" motorcycle customers as well.

The future

Polaris' commitment to manufacturing excellence could minimize the brand damaging recall. If it can go a couple of years without any major recalls, then the company should move past this and continue growing its top and bottom lines, and subsequent shareholder wealth.

However, this recent Indian recall extended Harley Davidson's already large shadow over Polaris, and possibly cemented Harley Davidson's market leadership even further in the motorcycle market. And with Arctic Cat already nibbling at Polaris' heels on the ATV front, Polaris will need to step up its customer service and manufacturing excellence more than ever to maintain its success.

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