Canada is one of Harley-Davidson Inc's (NYSE:HOG) biggest markets after the U.S. and Japan, but it's also one that's experienced the roughest ride over the past year. It was the only region that experienced declining sales in the fourth quarter and over the full year, dropping 5.7% and 10.8%, respectively.
Now the big bike maker wants to smooth out how it sells its motorcycles there, and recently announced it was switching from the exclusive third-party distributor arrangement it's had with Deeley Harley-Davidson Canada, to a direct distribution model where Harley will sell bikes directly to some 69 independent dealers itself.
A direct say on operations
Under direct distribution, Harley-Davidson manages sales to dealers, handles the marketing, recruits new dealers, and arranges consumer events typically through wholly owned subsidiaries.
The change isn't necessarily an indictment of Deeley, which has been Harley's sole distributor since 1973 and whose co-founder -- Don James -- sits on Harley's board of directors. But Canada has been a drag on its performance. The Canadian distribution model was an anomaly, and Harley wants sales there on the same page with how it operates everywhere else in the world.
While Harley's current contract with Deeley runs through July 2017, the transition to the new distribution could be moved up to as soon as the third quarter of this year.
A crowded marketplace
Harley now faces growing competition from rivals like Polaris Industries as well as Japanese bike makers Honda, Yamaha, and Suzuki, all of which likely pushed Harley to make the change. Deeley simply represents an extra layer of cost between the bike maker and its customers.
While the exchange rate between Canada and the U.S. can be problematic, Harley also shipped its bikes to Deeley at wholesale, which in turn sold them to the independent dealers in the Canadian market, raising the price. And U.S. dealers would be reluctant to sell their bikes to Canadian customers.
Having Deeley as the exclusive middleman also makes parts more expensive. Harley-Davidson even had to go so far as to warn U.S. dealers not to ship their parts outside of their area or risk losing their dealership. As a result, independent dealers often watched as many customers slipped across the border to buy parts from their U.S. counterparts. Cutting Deeley out of the loop serves to preserve and protect the Canadian market.
New bikes equals new competition
As Harley has gone down market with its Street 500 and 750 bikes in an attempt to lure in new and different kinds of riders to the brand, it is facing more competition on price.
Polaris introduced the Indian Scout model last year to great fanfare, and the Japanese bike makers have always had the market cornered on low-cost entry-level bikes. Peeling back layers of duplication ought to make Harley's bikes in the Great White North somewhat more competitive, even though if you read the various bike forums you can find that Deeley occasionally dropped prices on its bikes to keep them in line with their U.S. counterparts.
The more intense competition may also be why Harley is looking to scrap the exclusivity deal sooner. The 2016 bikes will be coming out, and the push to get customers onto their iron will be strong.
Polaris came out with its new Indian Chief Dark Horse to match Harley-Davidson on its Dark Custom bikes, but also to introduce a new mid-tier priced bike. With the Scout at the low end, the Dark Horse in the middle, and the classic Chieftain at the top end, Polaris is making sure to pressure Harley everywhere.
In Canada especially, Polaris still enjoyed greater motorcycle sales last year even though sales for other vehicles like ATVs and snowmobiles were weak. Sales fell 2% year over year, but that was largely caused by unfavorable currency exchange rates, which wiped 7% from its results.
And that's happening with a much smaller dealer footprint than what Harley-Davidson has. Between the U.S. and Canada, there are only about 100 dealerships, compared to more than 760 at Harley. But Polaris wants to eventually triple that number to around 300, and with the traction the Indian nameplate is getting, Harley had to take some drastic action.
Still a chilly reception
Yet Canada accounts for only about 5.5% of Harley-Davidson's global sales and 3.5% of those made in North America, down from 7% and 5%, respectively, just five years ago. The greater risk is that by bolstering sales with smaller bikes, regardless of whether they're sold in the U.S. or Canada, is it will be narrowing its profits. The Street 500 starts under $7,000; Harley's big cruisers start around $25,000, but after getting tricked out can go for as much as $40,000 or so.
Getting rid of a sclerotic layer of duplication and cost can go part of the way toward helping Harley-Davidson making a U-turn, but there may be bigger problems than whether it sells direct or not that prevent it from revving its engines any time soon.
Follow Rich Duprey's coverage of all the motorcycle industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Polaris Industries. The Motley Fool owns shares of Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.