Harley-Davidson's (NYSE: HOG) new Street 500 and Street 750 bikes were the brightest spots in the motorcycle maker's fourth-quarter earnings report, recording a 20% sales gains for the division, more than double the growth of its touring bikes segment, and infinitely better than the custom division, which experienced a sharp decline in sales.
No wonder the big bike maker is heavily promoting the Street platform with a new marketing campaign that, if nothing else, makes clear this isn't your dad's Harley-Davidson anymore.
No more aging graybeards
Harley's core customer is the 35-and-older white male who for years has been the backbone of its motorcycle sales. But that all changed with the economic recession, which set back that upper-middle-class rider and caused worldwide bike shipments to crater from a high of almost 350,000 in 2006 to 270,000 last year.
That's, of course, better than the 210,000 bikes it shipped at Harley's nadir in 2010, but it's still 22% below the peak, and the core customer just doesn't have the heft he once did to carry the nameplate anymore.
Which is why Harley's got to be stoked about the reception the Street platform has received.
A new class of riders
The runabouts actually debuted in India in January of last year and went on to be christened Motorcycle of the Year there, where it anticipates seeing double-digit growth rates for the foreseeable future.
Harley-Davidson also introduced them into several other European and Asian markets last year, but for 2015, the bike maker plans on expanding the platform's distribution to wherever it has a presence. Expect to see Street sales take on even greater importance for the brand.
That includes here at home, too. Introduced in the U.S. last June, the Street platform was Harley-Davidson's first lightweight bike in decades and was designed for Harley's so-called "outreach" customers: urban riders, women, African-Americans, and Hispanics.
Sales to this new demographic grew twice as fast in 2014 for Harley as sales to its core customers, the third straight year that's happened. The new "Roll Your Own" ad campaign aims to keep that trend going.
Harley gets an attitude adjustment
The ads are unlike other Harley-Davidson ads as they seek to change the concept of who rides a Harley. According to a statement given to AdWeek, the campaign is more about the rider's "independence and attitude" and features plays on common phrases.
For example, the "Morning Donut" ad shows Buddy Suttle from Unknown Industries and the "Harley Wheelies" YouTube video series, burning out a circular pattern in the road and asking, "how much hell can you possibly raise before lunch?"
The "Lap Dance" ad has four bikes on the racetrack, waiting at the line for the girl to drop her scarf to start the race. It notes, "Yeah, it's the kind of place your mother told you not to go."
All of the ads, both video and print, are accompanied by the hashtag #rollyourown.
A balancing act
It's a delicate line Harley-Davidson has to walk. It can't risk alienating the core customer who still accounts for the bulk of Harley's sales, even if they're not at the same level they were a few years back. The new line of Indian motorcycles from Polaris Industries is proving to be a serious competitive threat, meaning Harley can't afford to drive more core customers away.
Yet it needs to reach out to new riders as well. In fact, Harley says the majority of initial purchases of Street bikes in the U.S. went to riders new to the Harley-Davidson brand. It may also be why Harley is dabbling in electric bikes with its Project LiveWire, although I maintain that avenue has limited appeal for the bike maker.
Still, the risk is what these new bikes will do to profits. Harley's big cruisers that start at $25,000 and run upwards of $40,000 or more after tricking them out carry some hefty margins. The smaller Streets with a starting price tag below $7,000 will have much narrower profits.
Honda Motors, for instance, generated operating profit margins of just 10.4% over the first nine months of its current fiscal year, a little more than half the rate Harley-Davidson earned over all of last year.
Harley's goal, however, is to produce even more of these smaller, cheaper bikes. Sure, it's offered Superlow and Iron 883 sportsters below $10,000 before, but the Streets are going to be even cheaper, and that could cut heavily into profits. Particularly if they assume an even larger percentage of international sales.
U.S. sales account for 63% of Harley's total, but international markets are growing faster than domestic ones.
European sales were up 6.7% in 2014; in Asia, they were 11.8% higher. Latin America cooled off a little last year, but sales were still 2% above the year-ago figure, which was more than the rather anemic 1.3% growth achieved in the U.S.
These cheaper bikes won't make up nearly enough in volume for what Harley loses in profit margins. It's also doubtful the new riders coming to the brand will eventually move up to Harley's bigger bikes since there's a different mind-set between the two groups.
Harley-Davidson's new Roll Your Own ad campaign ought to be a good start to luring new riders to the brand, but investors still have to decide whether the increased revenues the Street platform brings in will be worth the reduced profits that will be achieved. That's a new paradigm for a motorcycle maker that until now has lived and died by its big bikes.
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.
More from The Motley Fool
Why Shares of Harley-Davidson, Inc. Plunged 10.3% in 2017
The classic motorcycle brand may be losing its luster.
Is This Harley-Davidson's New Urban-Themed Motorcycle?
The bike maker has filed for an intriguing trademark, though what it's for is anybody's guess.
Here's Why Goldman Sachs Is Wrong About Harley-Davidson in 2018
The investment banker has more confidence in the big-bike maker than is warranted.