A&R Pro

The Great Motorcycle Buyer Divide

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In my last A&R Pro article, I argued that the recently debuted and updated Honda Rebel was the most important new motorcycle that we have seen thus far for the 2017 model year.

That is a bold statement, as many pointed out, especially when you consider the bevy of intriguing new models that were unveiled at the various industry trade shows this year, and also considering the lack-luster product the outgoing Honda Rebel 250 proved to be for many.

In that story, the bulk of my argument was that motorcycling needs an affordable gateway for young and new riders to come into the industry, and with cruisers accounting for over half of the new motorcycles sold in the United States, having cruiser-styled entry models is a shrewd move by Honda.

There is more to that argument though, which I want to touch upon today. It concerns the growing divide of motorcycle buyers, and how their access to capital greatly affects the motorcycles they can, and do, purchase.

American motorcycles sales fall almost entirely under what is called consumer discretionary income, and when it comes to how we spend our hard-earned money, there are two ways we do so: with cash and with credit.

That is the fairly obvious part of this argument, but this is an important concept for us as enthusiasts and consumers to understand, as it allows us to make better sense of the strategies behind the new models we see from manufacturers. It also allows us to peer into the future of the motorcycle industry.

Cash Buyers


Cash Buyers – the name is pretty obvious, right? The important thing to understand here though is that this category doesn’t cover those who choose to buy a motorcycle with cash. Instead, these are the buyers that have to make a purchase with cash.

These are buyers that either already have the maximum amount of debt that they are willing to carry, or they are buyers that have credit scores that preclude them from financing a purchase.

Millennials perhaps have the highest membership in the cash buyers club, and there is good reason for that – they also happen easiest group to use to illustrate the effects of being a cash buyer. Keep in mind though, this demographic extends will beyond the 20-somethings you see outside coffee shops.

The Plight of the Millennial

This younger generation of rider entered the workforce during one the worst economic periods of our time – one that specifically affected the lending institutions around the world, which made only made matters worse by making the lending process more difficult (if not impossible) for low income / low credit score buyers.

Many millennials have college degrees, though 36% say they regret going to college, which are not only failing on their promise for better employment opportunities, but also saddle these younger buyers with five to six-figures of debt – the repayment of which is crippling.

For illustration, let’s assume one was to attend my alma mater of the University of California, Santa Barbara. Four years of tuition, fees, and books (I’m not counting live expenses here), would tally up to roughly to roughly $15,000 per year – $60,000 in total, assuming a normal four-year path to graduation, which isn’t always the case.

At current interest rates, post graduation one can expect to pay over $600/month in student loan repayments, spending easily over $75,000 in total over the course of the 10 years it will take to repay those student loans. For a private school or out-of-state education, you can double those numbers.

In exchange for that massive amount of debt, the current college graduate averages a $50,000/year salary from the job they get when coming out of school, of which roughly $12,500 is going straight to state and federal taxes.

This means your typical millennial lives off just over $3,000 a month, which isn’t much when you consider the exodus of young people to metropolitan areas.

Where I live, in relatively affordable Portland, Oregon – ranked 15th on Expatisan’s cost of living index – that $3,000 a month will quickly get eaten up by the Economic Policy Institute’s estimate of $2,600/month in living expenses.

When the industry talks about the lack of engagement we see from millennials, it feels like this entire economic situation is completely glossed over.

The point here though is that our typical millennial is far removed from reasonably affording what have long been considered entry-level motorcycles by the industry. The same can be said of other cash buyers.

Buying on Savings

For some, the option of having a monthly payment just isn’t financially feasible, or even possible. This means that these cash buyers are purchasing via some sort of savings, financial windfall, or both.

This also means that there is an upper threshold to how much a cash buyer can spend, a figure I round out to be roughly $5,000.

That number comes from experience, but it susses out pretty well in our previous example, assuming that a would-be purchaser is saving that $400 delta each month, it works out to be a year’s worth of savings.

Of course, the reality is that most cash purchases are a lot less than $5,000 and that no one, especially younger buyers, are saving that much of their discretionary income. That’s why the $5,000 figure is an important upper bound, not average sale price.

Consumer data explains this better, as only 38% of Americans report having more than $1,000 in savings, with 30% having no savings at all. We are notoriously bad at saving money, and what money we do actually “save” tends only to be saved in the short-term, in order buy some sort of material goods. In a nutshell, even our savings isn’t really being saved.

What this means for motorcycle manufacturers is that every hundred dollars that they can shave off the price of an entry-level machine greatly affects the affordability of that model. A $400 price difference, in our example here, equals a month of saving, maybe more.

For a fun exercise, take a look at how many new motorcycles are priced below $5,000 MSRP. You will quickly see that out of the bikes available from the top brands, the Honda Rebel 300 is easily one of the most affordable.

Credit Buyers


On the other side of the coin, we have credit buyers – again a fairly straight-forward label, though one that has deeper implications.

Credit buyers are those lucky individuals whose income has enough headspace to fit a monthly payment, and whose credit score affords them access to money they may not have in their bank accounts (or at an interest rate that is lower than what their bank account earns them).

While things sound bleak for cash buyers, the opposite can be said of those who can afford to buy on credit, because the sky is truly the limit here…assuming we’re making smart financial decisions with our credit, which isn’t always the case.

Having access to credit is becoming a defining aspect of American culture, and it is demarcating the new have’s and have not’s in our world. The reason for this is strikingly simple, once you do the math, as it all comes to down a monthly payment.

This category is more loosely defined, as it is easy to make a sizable yearly income, and yet have a credit score that precludes one from buying on credit. Similarly, one can have excellent credit, but also wisely understand that another $100 to $300 a month is outside of their budget.

Payments Pay

Let me create another hypothetical example, where someone in our credit buyers category is out shopping for a new motorcycle. To illustrate the point to its maximum, let’s say our buyer is looking at the very budget friendly Yamaha FZ-07 ($7,199), and the not-quite-budget-friendly Ducati 1299 Panigale ($19,995).

Over $12,000 dollars separates these two very different motorcycles, which is a ridiculous amount of money. In fact, you can buy two FZ-07 motorcycles, and still have money left over, compared to buying just one 1299 Panigale. But things change when you are buying on credit.

Doing some gorilla math at 3.5% APR, one can expect to fully finance a new Yamaha FZ-07 for about $130/month. For that Panigale though, the one that costs almost three times as much as the FZ-07, the payment is $230 more per month, at $360/month.

The key characteristic for credit buyers, is that the difference of $230 in a monthly payment is an amount that their budget can absorb.

These buyers are significantly less price sensitive – not because they make substantially more money than cash buyers (though, they do), but because they are judging a purchase based on its monthly impact to their budget over time, not the immediate swamp draining affect it will have on their wallet at the time of purchase.

If you bump that income to a comfy $75,000/year (the threshold where research tells us money longer buys you happiness), our previous hypothetical person now goes from $400/month of discretionary income, to a figure that is closer to $2,000/month.

This means that in our example of buying a Yamaha FZ-07 or Ducati 1299 Panigale, we are only deciding between a 10% difference in our monthly free cash – a large outright sum, but for many in this category, that is a nominal amount.

A Super Example

Of course, there aren’t that many buyers who are having a hard time deciding between an FZ-07 and 1299 Panigale (though, I have seen it before), so let’s use a more realistic comparison in the superbike market.

All things being equal, and assuming the same 3.5% APR interest rate, here are some roughly monthly payments for financing the full MSRP of the current crop of superbikes:

Aprilia RSV4 RR ($300/month), Ducati 1299 Panigale ($320/month), Honda CBR1000RR ($310/month), Kawasaki Ninja ZX-10R ABS ($290/month), Suzuki GXR-1000 ($250/month), Yamaha YZF-R1 ($300/month)

There is only a $70/month gap in the entire superbike segment, from Japanese to European brands, a gap that will likely be halved once pricing for the 2017 Suzuki GSX-R1000 models is finally released.

It used to be, you would see very different buyers between the Japanese and European brands, but now both the absolute and relative prices of these machines cater to only one kind of buyer…and I’ll give you a hint, it’s not the young kid buying with cash.

For a quick sidetrack, if you want to know why superbike and supersport sales are dropping off – especially for the Japanese brands – the reason is here as well.

Financially, what it takes to afford a Honda is the same as what it takes to afford a Ducati. While that is over a $2,000 difference in MSRP, it is really only $10/month in the financing payment between the two superbikes. Think about that for a moment.

Going further, we too can find the real reason for Honda’s abandonment of the 600cc supersport class.

At $11,800 MSRP, the very outdated Honda CBR600RR costs only $85/month less than the “new” for 2017, Honda CBR1000RR. With Yamaha’s slightly more updated YZF-R1, that supersport/superbike difference is $80/month, and for Kawasaki it is a $70/month difference.

For a difference in cost that you can reasonably count in units of “taco dinners”, you can own a superbike that is the pinnacle of two-wheeled technology, or conversely you can have a 600cc supersport that likely is still based off of a design that has been around long enough to have earned a doctorate in professional obsolescence. You do the math.

The takeaway here though is simple, when shopping for a motorcycles on a monthly payment, larger price differences get lost in monthly payments with marginal increases in price.

This concept leads me to the opinion that credit buyers aren’t actually deciding their motorcycle purchases on price at all (at least, not rationally), which is why we are seeing strong sales from motorcycle companies that have invested well into both their brand and their product, while “commodity” brands are struggling more so.

Why Cash Isn’t King

The concept that cash is king is totally dead in the motorcycle industry. Yes, there was a point in time where a cash transaction was a dealer’s best friend, but now motorcycle dealers not only prefer credit buyers over cash buyers, but their business relies on them.

The reason is simple: the bank is making money off the loan, and the dealers get a taste on that action. For this same reason, this is why savvy brands create their own dealer lending programs, streamlining and owning this process all the way through.

As such, you will see that Ducati motorcycles can be financed through VW’s credit arm, BMW offers its own quasi-lease program on motorcycles called 3asy, and Harley-Davidson’s financial division accounts for over 10% of the company’s total revenues.

With modern lending almost completely automated, there is virtually no overhead for these business operations, which makes these financial business units extremely profitable to OEMs. When you finance the purchase of a new motorcycle, the money made is pure cream to the OEM.

In what my Two Enthusiasts Podcast colleague Quentin Wilson would say, this creates a race to the bottom for motorcycle dealerships, who can sacrifice profits on the sale of motorcycle, making money instead off the financing kickbacks from OEMs. The more financed (parts, apparel, warranties, etc) at the time of purchase, the better.

What this is really doing though is making credit the preferred method of payment, which in turn makes cash buyers second-class citizens to a dealership’s bottom line.

This Might Be the Most Important Concept in the Motorcycle Industry

I perhaps didn’t sell this very well in the beginning of the article, because I truly believe that understanding the very different groups of buyers in the industry explains not only why some bikes/segments are seeing success, while others falter, but it also predicts where our industry is headed in the long-term.

This concept of two desperately different buying group isn’t novel, and it extends well beyond the borders of our meager industry. When we talk nationally about the disappearing middle class, the rise of the 1%, and other socio-economic issues, this concept is in there, swirling around as well.

A complete collapse of the credit market, like we saw in 2009 is a death sentence for brands that rely on easy financing options for borderline credit buyers (what I would call buyers who can get financing, but not from top-tier lenders, which often means much higher interest rates).

This is why brands like BMW, Ducati, and KTM were still able record years throughout the Great Recession, while brands like Honda, Kawasaki, Suzuki, and Yamaha came to the financial brink with their Western motorcycle operations.

In the end, it all comes down to how well their customer base kept access to credit during a time when banks were tightening lending requirements.

If we assume that motorcycle OEMs will follow the growth least resistance in the industry, then it obvious to see that there will be a slow churn that moves the American two-wheeled landscape away from cash buyers, away from blue collar workers, and away from those who don’t reside in the upper-middle class and beyond.

In other words, what this really means is that we are seeing the early indications of a shift away from motorcycling’s long-standing core demographic in the United States.

This makes a bike like the new Honda Rebel not only important as one last gateway to younger, more cash-strapped buyers, but the success of these budget-focused motorcycles like the Rebel also serves as a canary for the future of the motorcycle industry, and whether they will continue to court the favor of the cash buyer.