Royal Enfield’s Problem Is Bigger Than The Auto Slowdown
To beat India’s worst auto slowdown in a decade, the nation’s largest leisure motorcycle maker launched the cheapest version of its second best-selling model. But Eicher Motors Ltd., the maker of Royal Enfield motorcycles, could be battling a bigger problem—brand fatigue.
On Aug. 9, the Chennai-based company introduced its most-affordable offering in the new Bullet 350 by reducing some features—the company didn’t disclose details. The latest variant is about Rs 9,000 cheaper than the existing version that contributes 21 percent to its volumes.
The move implies this is more a price cut and less a reduction in features, according to Joseph George, auto analyst at IIFL Institutional Equities. “We see very little reason for customers to buy the old variants, when the new ones are almost the same and 7-8 percent cheaper,” he told BloombergQuint. “We estimate this to hurt margins on Bullet 350 by at least 500 basis points.”
Royal Enfield rarely offers discounts. The cheaper Bullet 350 is aimed at arresting falling volumes as Indians are buying fewer cars and two-wheelers in a slowing economy. Still, the company has sold more than three million units in little over five years. While that’s just 3.4 percent to the total two-wheeler sales in India during the period, it’s substantial for Royal Enfield in the niche, premium motorcycle market. With a 96.3 percent share in the 250cc-plus market, the company’s post World War-era style motorcycles are common in Indian cities.
That, according to Chirag Jain, auto analyst at SBI Capital Securities Ltd., may be the problem. “The pressure on Royal Enfield sales is reflective of brand fatigue and increasing saturation levels post years of strong growth.”
Ashutosh Tiwari, head of research at Equirus Securities, said that the Classic 350 has contributed about two-thirds to total sales volumes for the past several years. “Usually, we have seen that such brands get diluted over long periods, especially in the two-wheeler segment,” Tiwari told BloombergQuint. “In the case of Royal Enfield, the customer owns the motorcycle more than the average 5-6 years, which impacts long-term repeat demand.”
Moreover, though in recent times most Indian automakers are struggling, growth in factory-gate sales and same-store sales for Royal Enfield has been slowing for at least four years. And it has underperformed the motorcycle industry in the past four quarters.
Investors are worried too. The Eicher Motors’ stock returned nearly 8,000-fold gains in the decade through its 2017 peak. But, since then, it has wiped off more than 50 percent of its value.
Eicher Motors, in a recent investor meet, rejected arguments of brand fatigue, citing slowdown in demand and cost pressures for its declining volumes. About 60 percent of sales come from self-employed customers, a cohort more impacted by a slowing economy than their salaried peers, the management said in an earnings call.
That comes when auto dealers too are battling a liquidity crunch as their biggest financiers—non-banking financial companies—have been struggling to raise capital after the surprise defaults of AAA-rated IL&FS Group in September last year. About 20-30 Royal Enfield dealerships, the company said in the call, have received notices from financiers on repayment issues.
Higher Costs Hurt
Troubles began in August last year when Kerala, Royal Enfield’s biggest market with a nearly 10 percent share in volumes then, saw its worst floods in a century. Sales tumbled and the situation hasn’t improved yet.
A slowing economy only made things worse as Indians are now buying fewer shampoos and biscuits to appliances and cars.
For automakers, higher upfront insurance costs further hurt demand. The price of a third-party insurance—that contributes to a pool to compensate accident victims—jumped four to fivefold after the regulator made multi-year protection mandatory. As a result, the total cost for buyer of a Royal Enfield motorcycle, according to Investec Research, rose 5-8 percent.
Ownership costs rose further with a hike in road tax in states like Rajasthan, Kerala and Karnataka, Eicher Motors said in its first-quarter earnings call. A compulsory anti-lock braking system in all two-wheelers above 125cc and a better fuel-injection system to meet the Bharat Stage VI emission standards rolling out in April 2020 is expected to make two-wheelers even more expensive.
The focus for Royal Enfield, according to an IIFL note, will now shift from margins to volumes. And a cheaper model may just well be the first step in that direction.
The company, in an emailed response to BloombergQuint, said it plans to bring down the cost of ownership—buying and maintaining a motorbike through its lifecycle—by an average 40 percent in three years by introducing new processes and technologies.
Moreover, top 25 cities contribute 25 percent of the company’s volumes. To reach untapped and rural markets, Eicher Motors will open 500 Royal Enfield dealerships across India, including smaller 225-square-feet stores, it said in the post-earnings analyst call. And the company plans to increase the share of advertising in the vernacular media as it expands beyond metros.
Royal Enfield is well penetrated in the South Indian market which is now saturating, Tiwari of Equirus Securities said.“Opportunities do remain for them in the east and the north.”