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Honda's Grom Is a Hit -- but Should You Buy It?

By Rich Smith - Sep 21, 2013 at 10:42AM

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Honda hopes you'll buy its new Grom, ride it, love it ... then trade it in for a pricier model.

"The Grom is tiny, gutless, slow, and perfect. It's the kind of motorcycle that probably made you enjoy riding in the first place. Invariably, it'll make you enjoy riding again." -- Road & Track

"... the 2014 Honda Grom is the perfect bike for a first timer, yet still fun enough for the most experienced riders." --

"If you've been eyeing an affordable two-wheeler to jet around town that's as simple to park as it is to keep running, then the Grom is for you." --

These are just a few of the nice things that motorcycling enthusiasts have been saying about Honda Motor's (HMC -0.22%) new street-legal pit bike, the Grom. Although barely knee-high to a grasshopper when placed next to a Harley, Grom has taken the motorcycling world by storm.

Introducing the Grom. Source: Honda Motor.

Featuring a 47.4-inch wheelbase and skateboard-ish 30.1-inch seat height, the Grom is positively tiny -- but that's not a bad thing. For new riders, the Grom puts you low to the ground, so you've got less distance to fall. And if the Grom happens to topple over on top of you, chances are its 225-pound curb weight won't do too much damage.

Meanwhile, Grom's sub-$3,000 starting price won't hurt your wallet much, either. And the bike's easy on the pocketbook after purchase, too. Its 124.9cc air-cooled, electric ignition, single-cylinder four-stroke engine positively sips gasoline. Estimates suggest that filling up Grom's 1.45 gallon fuel tank will take you more than 100 miles for a fill-up cost of about 5 bucks.

100 miles will get you quite a few laps 'round the office on Honda's Grom. Source: Honda Motor.

It may not be a particularly comfortable 100 miles, of course. The bike's tiny size means this is no long-distance cruiser. But chopped up into shorter increments, Grom could mean multiple mile-long spurts of fun -- and again, at $3,000 or thereabouts, it's fun a new rider can afford.

What's Honda up to?
Yet this raises a question: If Honda's making only a measly $3,000 in revenue -- not profit -- from each Grom it sells, what's the point of selling the thing at all? You just know the company's $20,000 Gold Wing cruisers have more padding for profit margin. So what is Honda's game here?

In short, Honda's playing exactly the kind of game you'd expect an uber-profitable multinational corporation should be playing: Crushing the competition, grabbing market share, growing sales and profits. With $14.2 billion in annual revenues from its motorcycles division, Honda is already nearly three times bigger as a bike business than rival Harley-Davidson (HOG 1.32%), and several times bigger than Polaris (PII 1.49%), which owns America's oldest bike brand, Indian Motorcycles.

Honda's not as profitable as these rivals, of course. Both Harley and Polaris tend to earn profit margins nearly twice as big as Honda's on their bikes. But the 8.2% pre-tax profit margin that Honda does get on its bikes is still more than twice the profit Honda earns on a dollar of revenue brought in by its better-known car division.

We make it up on volume
This being the case, Honda has a real interest in growing sales at its bikes division. Sales of Gold Wings, sales of Interstates and Furys -- and yes, sales of the Grom as well. For at its most basic level, the Grom is an advertising play for Honda. The sub-$3,000 price point is guaranteed to attract press and grab eyeballs. The rave reviews that Grom garners also serve to burnish the Honda brand.

$3,000 -- a Chihuahua-sized bike at a Chihuahua-sized price. Source: Honda Motor.

In theory, at least, once buyers buy the Grom and find they like it, they'll be more inclined to make their next purchase a Honda bike as well. And buying a Honda to replace that next trade as well.

Lather, rinse, and repeat a few sales "cycles," and Honda can make quite a bit of coin on that first little Grom.

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Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
$27.19 (-0.22%) $0.06
Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
$42.26 (1.32%) $0.55
Polaris Industries Inc. Stock Quote
Polaris Industries Inc.
$122.45 (1.49%) $1.80

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