By: Sharda Prashad, Business Reporter

April 16, 2006, Toronto Star

When his brother-in-law upgraded to a new Harley-Davidson in the 1980s, Brendan Calder and a friend decided to pool their resources and buy the old one.

Then Calder caught Hog fever.

Today the University of Toronto professor and corporate director owns two Harleys of his own - a 1989 FLH ElectraGlide and a 1998 custom-built Hog Fever.

"I had a suit job. I've been president of a few companies," says Calder, who is 59 years old. "(With a Harley) you can dress up and be who you're not.

"It's either that or play hockey."

Professional baby-boomers like Calder - not to mention motorcycle clubs - have helped Harley-Davidson Inc. become not only one of the strongest brands in the world, but a company with resurgent financial success.

Last week, Harley-Davidson reported record first quarter revenues of $1.29 billion (U.S.), 4 per cent higher than a year earlier. Net income hit $234.6 million, a year-over-year hike of more than 3 per cent.

After being a mere two days from filing for Chapter 11 bankruptcy protection in the mid-1980s, Harley has posted 20 consecutive years of record revenues and earnings growth. Last year, sales reached $5.34 billion, a 6.5 per cent rise over 2004, with net earnings reaching $960 million, up nearly 8 per cent.

Equally impressive, earnings over the past 20 years have grown faster than revenue, indicating operating efficiency.

If an investor had sunk $100 into Harley at the end of 1986, she would have earned more than $16,000 at the end of last year.

So, how exactly did Harley achieve such impressive growth - and will it be able to continue doing so?

"This is the story of the power of branding," says Tim Calkins, marketing professor at Northwestern University's Kellogg School of Management. "In the world of branding, they've uncovered what works.

"Harley's always stood for rebellion, danger, bad behaviour and edgy."

Even with technically superior motorcycles on the market, consumers choose Harley because of its brand and what it means to be associated with it.

This "bad boy" image started when fighter pilots returning from World War II started the Hell's Angels and required all members to ride a Harley. It was reinforced when a young Elvis Presley posed with a Harley in 1956 and movies such as The Wild One, Captain America and Easy Rider featured rebels riding motorcycles.

In the past few decades, Harley has won over a new audience: professional baby boomers with disposable income.

But the Harley reputation was built and nurtured in a largely voluntary way by end users, rather than created by marketing or advertising, says Susan Fournier, marketing professor at Boston University, who has written a Harvard Business School Case on the company.

"They hardly advertise (compared with other major brands like) Coke and Pepsi, but instead have let the brand emerge naturally."

The Harley Owners Group (HOG), for example, is a company-sponsored club established in 1983 to help bolster customer - and in turn, brand - loyalty. Today, it boasts more than a million members globally.

Harley has also succeeded because it is an "extremely disciplined company," says Harold Lenfesty, a 27-year veteran of Harley, who left the company in 1997 after serving as president and CEO of Harley-Davidson Canada and group managing director for Europe.

"They have very good controls, corporate governance ... remarkable business planning and objectives."

In the early 1990s, he recalls, targets were set for Harley's 100th anniversary in 2003, such as annual sales of more than 200,000 motorcycles. Harley

reached those goals by "giving people latitude to be creative and do what they needed to do to achieve those goals," he says. "It was an incubator for ideas."

The original incubator for Harley-Davidson was a 10-by-15-foot shed in Milwaukee where two friends, Arthur Davidson and William S. Harley, built a three-horsepower, single-cylinder-engine motorcycle in 1903. Two other Davidson brothers joined the company and by 1920 Harley-Davidson had become the largest motorcycle manufacturer in the world, with sales in more than 67 countries.

Yet, with little domestic competition - its main U.S. rival, Indian Motorcycle, stopped production in 1953 - Harley began to stagnate and lose market share to Japanese upstarts, such as Honda and Yamaha.

Harley went public in 1965, but that wasn't enough to save the ailing company. In 1969 it was sold to conglomerate American Machine Foundry.

Then in 1981, under the rally cry "the eagle soars alone," 13 managers, including Willie G. Davidson, grandson of co-founder William Davidson, bought the company from AMF for $80 million.

"A lot of people looking at us from the outside thought we were nuts," the grandson told the Star in 2002. "With the glut of competitive motorcycles, and our involvement with less-than-high product quality, many people wrote us off."

In 1983, the company successfully lobbied the U.S. government to issue a five-year tariff on 700-cc Japanese motorcycles, making Harleys more competitive. Then, two years ahead of schedule, the newly confident Harley asked the government to end the tariff.

Despite that, Harley financier Citicorp called in Harley's loan due Jan. 2, 1986. Then, as bankruptcy proceedings were about to get under way, Heller Financial Inc. took over the loan, financing it with an initial public offering in 1986. Harley hasn't looked back since.

As it steers into the future, Harley will have to acknowledge that its traditional market of male baby boomers is aging and it will need to find new customers and create new products.

Harley has begun targeting women - who make up about 11 per cent of owners, but represent a fast-growing demographic. In 1985, there were 600 female Harley owners. By 2005, there were more than 30,000.

"In the last 10 years, we've really recognized that they're an audience, and we've done a lot more research in understanding the women's market," Joanne Bischmann, vice-president of marketing told the Wall Street Journal in February. "A rider is a rider is a rider.

"What we also found," she adds, "was they didn't want a special product, they didn't want a pink motorcycle, for example, but they did want a product that fit them better."

Harley is also hoping to increase market share by running ad campaigns in magazines, such as Jane, Allure, Vanity Fair and Glamour. It also is hoping to attract women by enhancing its website and offering programs such as Rider's Edge, where new motorcyclists can learn how to ride.

Other initiatives include global expansion. Harley currently generates 20 per cent of its sales outside the United States - with Canada accounting for about 4 per cent. International sales last year rose by 15 per cent, with growth experienced in all major markets. Last year, Harley opened its first dealership in Russia since the 1917 Bolshevik Revolution. Earlier this month, it opened its first sales office in China.

Brand expansion has also proven successful. In 2005, 80 per cent of revenue came from motorcycle sales, with the rest coming from parts, accessories, apparel and collectibles.

But not all of its expansion efforts have been positive. The Harley-Davidson cake-decorating kit, for instance, was voted one of the two worst brand extensions last year in a poll of nearly 500 marketing experts sponsored by Tipping Sprung marketing consultancy and Brandweek magazine.

"You have to wonder if you push the brand too much, it won't grow," says Kellogg's Calkins. "That's why 20 years (of growth) can be a curse because there's always pressure to grow."

Because Harley has close ties to both its dealers and customers, the company is better positioned than most to hear and respond when it's pushing its brand too much, says Calkins. Customers, for example, let it be known they prefer an old-fashioned carburator to fuel injection.

You can be sure the company won't lose sight of the importance of listening and being in touch with customers any time soon.