Can the Bullet pierce through new roadblocks?

So, what explains this five-day drop?

On 3 July, Hero MotoCorp Ltd teamed up with American heavyweight cruiser maker Harley Davidson to launch its cheapest bike ever, the Harley X440. Two days later, Bajaj Auto Ltd did the same with another iconic global bike maker, UK’s Triumph, to launch the Speed 400. These bikes will be produced in India—the X440 at Hero’s Neemrana factory in Rajasthan and the Speed 400 at Bajaj’s Chakan plant near Pune, Maharashtra.

Priced at an identical ₹2.3 lakh, both the bikes seek to steal the thunder from Eicher-owned Royal Enfield’s legendary Classic and Bullet 350 brands.

“There are hundreds of thousands of customers out there who would want to buy a Harley Davidson, but Harley Davidson, so far, has been out of their reach. It is going to be affordable for them now. So, we do expect fairly large numbers to come in for this particular product," Pawan Munjal, chairman of Hero MotoCorp, said at the launch of X440.

Harley Davidson ended its solo journey in India in 2020 but subsequently tied up with Hero, which imports, markets and sells the bikes in India. The current portfolio is priced between ₹17.5 lakh and ₹40.5 lakh. Triumph’s range of bikes in India are priced between ₹8.5 lakh and ₹22 lakh. The partnership with Indian automakers, therefore, makes the bikes at least eight times cheaper.

This is not an experiment devoid of challenges. Harley/Triumph and Hero/Bajaj operate at two extreme ends of the global motorcycle market. The cult British and American brands are kings of the heavy bike domain—machines with twin cylinder engines of over 500cc. Hero and Bajaj are experts at making low frills, fuel efficient commuter motorcycles with business built on high volumes and modest per unit margins. Traditional wisdom suggests that finding a midpoint is easier said than done.

Thump of the Bullet

Yet, the success of Enfield cannot be ignored. Its sales have more than trebled in the last decade and its profitability—operating margin of 30%—is highest among peers.

Bullet has single-handedly led the premiumization of the domestic motorcycle industry in India. From just 1% share in the overall motorcycle industry, the category of bikes with engines more than 250cc, now accounts for nearly 8% share.

Enfield accounts for 93% of this segment with the second-placed Honda way behind, at a little over 4% share, according to the Society of Indian Automobile Manufacturers.

In outright volume terms, the segment has grown eight-fold, from under 100,000 units in 2011-12 to nearly 800,000 units in 2022-23. It is now too big for even mass market companies to not be interested.

It is also a miss for Harley and Triumph. The two account for a minuscule share of the premium bike segment today, at 0.04% and 0.14% share, respectively.

The wide gap in the price of their bikes, compared to the commuter and budget sports bikes priced between ₹70,000 and ₹150,000 available in the country, presented an opportunity that Enfield has exploited.

Prices of Royal Enfield’s range of bikes start at ₹1.5 lakh for the basic Bullet 350 model and go all the way up to ₹3.55 lakh for the 650cc Super Meteor. The best-selling Classic 350 is priced at under ₹2 lakh.

But for the two multinational brands, as the largest two-wheeler market in the world, India was also too big a market not to do anything about.

“There was a famous bank robber in America called William Francis Sutton. When asked ‘why do you rob a bank’ he said that’s where the money is. So, if Royal Enfield is where the money is, then we have no choice but to rob that bank," Rajiv Bajaj, the managing director of Bajaj Auto, said in an interview to CNBCTV18, after the launch of the Speed 400.

The stellar growth of Enfield has as much to do with pricing as the form factor of the motorcycles. The retro styled cruisers that Enfield sells have the right dose of nostalgia and practicality to appeal to the Indian buyer. Besides, the company has improved the quality of its products and refurbished its dealer network to stay abreast of the competition.

“The cruiser is the most comfortable form factor for Indian roads; hence its dominance will continue and possibly even increase, just like SUVs for four-wheelers," says Avik Chattopadhyay, co-founder of Expereal, a brand strategy consultancy firm.

Enfield was always a ‘cult’ brand with its niche following, retro styling, sound and mechanical niggles. Over the last decade, as it has increased its portfolio and improved its quality and reliability, its attractiveness has gone up for the upper middle-class Indian consumers wishing to be a part of the cult.

“It also fits in between the mass and luxury brands and appeals to those who aspire to own a luxury badge someday but are happy with a Royal Enfield for now. Quite simply, deep down, Enfield is a wannabe Harley," Chattopadhyay adds.

Tough to beat

This is not the first time Royal Enfield has had to face competition. In 2018, Indian startup Classic Legends, with the backing of the Mahindra Group, revived another cult retro brand—the Jawa—to take on the Bullet. A couple of years later, Honda tried its hand with the H’ness CB350. Both did not meet with much success.

“In Honda’s case, there was not enough marketing and building of the brand," says Jay Kale, senior vice president of institutional research at Elara Capital. “There were some production and ramp-up issues in the case of Jawa initially when the demand was strong."

Meanwhile, Enfield has strengthened its presence in the market by launching new products and plugging the gaps in its portfolio. While the addition of the twin cylinder bikes, the 650cc Interceptor and Continental GT, primarily for overseas markets grabbed headlines, the introduction of Meteor in early 2021, Hunter last year, and Super Meteor a few months back, have also delivered.

This has helped the company address one of its biggest drawbacks—its reliance on two bikes for the bulk of its sales. While the Classic 350 remains its highest volume driver, together with the Bullet 350, it accounted for 80% of its total domestic sales three years ago.

Last year, that number fell to 50% with Hunter and Meteor accounting for 30%. The addition of Super Meteor 650 has balanced the pie further with the three bikes accounting for 33% of the sales in June.

“Our competitors are trying to find ways to compete with us which is good because it shows we are important. But it is interesting that they need to tie up with others and cannot do it all by themselves," said Siddhartha Lal, managing director and CEO, Eicher Motors, in November 2020. “It’s not like they have not tried. There is no guarantee of success just because you are entering a segment, but, of course, some would do well."

Battle ahead

So, what happens next? Market watchers are convinced the entry of new players will expand the segment but they are divided on whether Enfield can be beaten in the long run.

Much like the overall two-wheeler market, the premium motorcycle segment is also still below the peak of 2019 but it is recovering faster. Growth in the future is a given. The share of motorcycles bigger than 250cc is likely to top 10% of the overall market in the next five years. It could potentially go up to even 15% to match other developing markets like Thailand, Indonesia and Vietnam.

“The customers, with income profiles at the higher end of the market, are less impacted by the economy than those at the lower end. So, this segment will continue to outperform the entry level segments," says Kale of Elara Capital.

“It will definitely expand the market, but at the same time take away any outperformance that Royal Enfield would have seen, had these brands not been launched at competitive prices. Enfield’s ability to take further price increases from here on is limited and it may not enjoy the strong pricing power that it has had historically," he adds.

Ankit Mhatre, institutional research analyst at HDFC Securities, thinks on similar lines. He believes Royal Enfield would need to revisit its product or pricing strategy as its prospective customers are likely to consider brands like Harley or Triumph as very formidable alternatives. “Royal Enfield would be forced to reconsider its pricing/brand strategy very quickly, which will in turn drive margin pressure. Accordingly, we have now lowered our earnings estimates by 16-18% over FY24-25E as we revisit our growth and margin estimates," he says.

But there are others who believe that the impact on Royal Enfield will be minimal and the reaction of the stock market is unwarranted.

In his 11 July report, Basudeb Banerjee, research analyst at ICICI Securities, wrote that while HD X440 would compete against Enfield, the Speed 400 would compete more with high-end sports bikes. His assumption is that the new players would open up a 20,000 unit per month market for themselves by 2025-26 but it will not undermine Enfield’s projected 9% volume growth between 2022-23 and 2025-26.

Besides the novelty factor, the brands are looking to capitalize on any fatigue that may be setting in around Enfield with a section of the consumers. Also, HD X440 and Speed 400 would benefit from the greater dealer penetration of both Hero MotoCorp and Bajaj.

“But they have to tread a fine line. If prospective customers start seeing them more as Heros and Bajajs just rebadged as Harley and Triumph, that will be the end of this game plan," says Chattopadhyay of Expereal.

Nonetheless, the competitive intensity is only set to increase. Hero has already identified premium motorcycles as the segment where it can make inroads and has lined up multiple products in the months to come. Honda is also planning to bring another 350cc mobike next month, while TVS is reportedly readying a cruiser based on its new motorcycle, Ronin, launched last year.

Unlike Enfield, all these companies are full-fledged two-wheeler manufacturers. Would they have the focus and intensity needed to win in a highly competitive segment in the long term?

“We only focus on the few things we know and we do it well. So, while the first lot of products would come up, the follow-up bikes would take time. We would have many more products in that period," warned Lal of Eicher in 2020 itself. “So, I believe, and time would show that, we will always be a few steps ahead."

But there is no denying that this is the biggest competitive challenge that Royal Enfield has faced in a long time.

“If Harley and Triumph are able to ramp-up production and build the aspiration around the brand...if the execution is good, the Royal Enfield stock (in the market) will remain under pressure," says Kale of Elara Capital.

After shedding 12.5% in five days, the stock recovered 5.5% over the next four trading sessions. But then, this is just the start.