Hurdles On The Road To Hog Heaven

Can Harley expand output and lure new bikers without alienating the hard core?

Jeffrey L. Bleustein worries a lot. The head of Harley-Davidson Inc. (HDS ) frets about keeping the magic in his 100-year-old outfit's potent brand name. He worries because Harley has to freshen up its line of sleek dream machines every year, without dulling its long-standing image for stylish, powerful motorcycles. And he's vexed about broadening his market. Beyond the core baby boomer customers, he wants to attract more women, more young buyers, and the "vertically challenged" -- the guys, says the 5-ft.-11-in. Bleustein, who need lower seats on their Harleys. Lately, he has had something else to worry about: his company's stock price. After Harley said on Oct. 15 that its 2004 production targets would rise only 8.9% -- one of the lowest increases in years -- its share price fell 10%, to about $47.

The pessimists, however, are missing the bigger picture. This is not a demand problem, it's a short-term production problem. Until Harley's new plant in York, Pa., gets up to speed sometime in early 2004, it will be unable to build enough of its storied bikes. In addition, Bleustein wants to phase in changes carefully, limiting them for now to a handful of models. People still love Harley so much that the 317,000 bikes it will turn out next year will be eagerly snapped up. In fact, says Mark Barnett, a Harley dealer in El Paso, demand is outstripping supply so strongly that most dealers can still charge a premium for the bikes, despite a 1% cut in Harley's '04 list price. The top-of-the-line Harley isn't cheap, either: The Ultra Classic Electra Glide, an archetypal Hog, lists at $20,405. Says Bleustein, 64, a Columbia University-educated PhD engineer who once taught at Yale University: "We think there is a lot of life left in that product line, as long as we continue to pay attention."


Harley's biggest problem is one of pace. In anticipation of its centennial this year, when hundreds of thousands followed the call of the Hog to celebrations nationwide, the company ramped up production. The result: Sales jumped 20% last year, to $4.1 billion, while net income surged 33%, to $580.2 million. That growth helped Harley climb to No.37 on the BusinessWeek 50 ranking of best-performing companies. But now it's the morning after. The company turned out enough special centennial-year bikes, which it began selling in mid-2002, only by extending its production year to 14 months. That will cut the number of '04 models, which began rolling out the door in September. Joseph J. Yurman, an analyst at Bear, Stearns & Co. (BSC ), predicts that sales gains might slow to 14% this year, even as profits rise about 28%. The slowdown may really assert itself next year, he adds, with earnings rising just 12%.

The slower growth, oddly enough, also stems from Bleustein's efforts to broaden his market. He's introducing several new features in '04 models, and is determined to avoid the kind of quality problems that plagued Harley back in 1975, when Bleustein first came aboard as chief engineer. The upgrades on the four models in the Sportster line, which hit the market in September, include smaller hand grips, a lower seat, and an easier-to-pull clutch lever -- all done to lure women and those who aren't the grizzled riders traditionally associated with Harley. For riders of entry-level Sportsters, which start at about $6,500, the changes simply make for "a more comfortable ride," says Julie Chichlowski, who manages a Harley power-train plant in Wauwatosa, Wis.

Bleustein is betting that the subtle design changes won't turn off men still keen to work out their midlife crises on a pair of silvery wheels. Harley ads won't specifically target women -- no pictures of soccer moms straddling pink bikes -- and the bikes will still pack plenty of power. But the CEO craves younger riders and women to offset its aging customer base. Only about 9% of Harley's new riders are women, and most buyers are in their mid- to upper 40s. Harley also has a three-year-old riders' education program, Rider's Edge, where first-timers learn to ride at its dealers. And with his Buell line, he's fielding racing-style sport bikes, popular with twentysomethings who favor Japanese makes. In all, there are 23 Harley models and five Buells.

Once riders are hooked, Bleustein bets they'll become devotees. Take JoAnn Emmons, a Virginia Beach (Va.) insurance agent who began riding a Sportster six years ago. At first intimidated, she now commands a hefty 1450cc touring bike, her third Harley. Says Emmons: "There are days when I would just like to sell everything and do nothing but ride."

The bikemaker's recent pummeling on Wall Street was exacerbated by short-sellers who saw the stock as overvalued after a summer runup. But other investors say they are comfortable with Bleustein's vision. "The vital signs look fine to us," says Jonathan Mueller, an equity analyst at AIM Constellation Fund, which holds about 3.8 million Harley shares. Bleustein says: "The way you get to the long term is by thinking long-term." For Harley, there is plenty of road yet to cover.

By Joseph Weber in Milwaukee

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