BMW recently announced that it set an all-time record in the first quarter, selling 31,370 motorcycles and scooters in the three-month period, a 9.2 percent increase over last year. Meanwhile, Harley-Davidson announced yesterday that its first-quarter sales were down 1.3 percent and it is cutting production in the second quarter. Harley-Davidson stock quickly dropped about 9 percent on the news.
The natural temptation is to think that BMW is doing a better job of building bikes consumers want — simple as that. But with international corporations, it's rarely as simple as that.
In fact, to a small extent, Harley is a victim of its own success. Its numbers look weak this quarter in part because they are compared to a strong first quarter in 2014, when the new Project Rushmore bikes were getting favorable press and generating consumer interest.
But the real reason that Harley-Davidson executives kept coming back to in their report was something most U.S. consumers probably don't consider: the currency exchange rate. If you don't travel abroad or work for a multinational corporation, you may not even be aware of currency fluctuations, but the fact is, the dollar has been on a tear. Nearly a year ago, it took about $1.40 to buy a euro. Today, it takes $1.08. In the same time, $1 went from buying 101 Japanese yen to being worth 120.
Since Harley's main competitors are Japanese and European companies, the falling value of the yen and euro is a headwind for Harley-Davidson. It makes the U.S.-made bikes more expensive in other countries (28.8 percent of Harley's sales in the first quarter) and lets Japanese and European makers discount the bikes they sell in the United States without taking as big a hit.
Both of those sides of the exchange rate issue hit Harley, said President and Chief Executive Officer Keith Wandell, who is retiring May 1 after six years leading the company. Harley-Davidson sales were down 5.6 percent in the Europe-Middle East-Africa region, and Japanese competitors were taking advantage of the weak yen to discount competing models in the United States.
"We're seeing discounts of up to $3,000 a bike" by competitors, Wandell said. During the quarter, Harley lost share mostly to Japanese brands, he said. The weakest segment for Harley was the "Custom" segment, which includes its Softail and Dyna lines. The Touring and Sportster/Street segments were stronger.
But if you're hoping Harley-Davidson will respond by cutting the price on that Breakout you've been eyeing, don't get your hopes up. That's not the Harley strategy. Instead, the company is cutting production in the second quarter to keep supply from outstripping demand and is sticking to its prices.
"We're not going to jump in and respond to price discounting by discounting our great brand," Wandell said. "We're lowering our volume and we're going to continue to sell full-margin motorcycles."
Wandell's successor, Matt Levatich, also made it clear that strategy won't change once Wandell cleans out his desk in a little more than a week.
"As far as strategy and direction, we're doubling down and accelerating on it," Levatich said.
The real challenge for Harley-Davidson will now come in the second half of the year, when it expects sales to rebound. It only lowered full-year estimated motorcycle shipments by 6,000 units, to a range of 276,000 to 281,000.
"History shows," Wandell said confidently, "that market share will come back in a short period of time."