November 17, 2014
After a 70 year gap in Indian Motorcycle’s production the brand has been revived by parent company Polaris Industries, Inc. and is ready to re-enter the market against longtime historical rival Harley-Davidson, Inc. Indian Motorcycle’s opportunity and challenge is to build out a vibrant dealership network across the U.S. quickly and effectively in order to capitalize on the brands re-launch. As an avid motorcycle enthusiast and business minded opportunist I am keenly interested in becoming an Indian Motorcycle dealer. There is a market opportunity to ride the wave of nostalgia and excitement for the return of the revered brand. The dealership network build-out will quickly accelerate from only a few dozen to hundreds over the next few years. Early adopters willing to put up the initial investment and the work required to stand up dealerships will be among the first to reap the rewards of this new market entrant.
The Market Structure
The motorcycle market in the U.S. is an oligopoly. The market share of the top three firms is 79.3% (Statista, 2014). The variety of brands available, motorcycle uses and consumer tastes keep the market from evolving into a monopoly. The relatively high costs of entering the market however prevent the market from evolving into monopolistic competition.
Historically the motorcycle market from its inception reflected monopolistic competition. There were upwards of 100 U.S. manufacturers competing to define and capitalize on the emerging market in the early 1900’s. As the market naturally matured many mergers, acquisitions and business failures drastically consolidated market players. Economies of scale allowed the victors to lower their production costs. These firms also got access to new, often costly technologies to stay ahead.
With the demise of Indian Motorcycle in 1953, Harley-Davidson (H-D) was the only American motorcycle manufacturer with the technology, skill, production facilities and scale to operate within and serve the U.S. market. During most of these years, 1953 – 2013, H-D operated in a virtually pure monopoly market save for the eventual low cost competition from eastern Asian manufacturers like Honda and Yamaha in the late 20th century.
Today, with Indian Motorcycle re-entering the market, Harley-Davidson will finally have an American competitor, once though defeated, rise from the ashes to form a duopoly of American motorcycle firms. The support of Indian Motorcycle’s parent company Polaris Industries is paramount to the revived brands success. Many attempts to revive Indian Motorcycles have failed to overcome the multiple barriers to entry into the American motorcycle market (Indian Motorcycle, 2014).
Motorcycles in general have a higher level of elasticity. If prices increase for a particular brand or model consumers have many other alternatives. It is worth nothing that motorcycles in the U.S. market are considered a luxury good. Consumers do not need them so they tend to purchase what they want not what they need. This being the case, luxury motorcycles are somewhat less elastic in that consumers tend to buy what they want despite price. Cost is just one of many factors affecting purchasing habits.
With elasticity of demand in mind I would price the Indian motorcycles just above their competition. In a market that values quality and prestige over price, history has shown that healthy margins are attainable with the right balance. To avoid losing some more price sensitive customers I would limit the price delta versus comparable alternatives to a negligible 8%.
As Indian Motorcycles ramps up production it should be their goal to constantly match marginal cost to marginal revenue to maximize production. Before each time these two variables meet new capacity should be built to start the process over again. In this manner the motorcycle…