You'll Never Guess Harley Davidson's New Business Line (Hint: It's Not a New Motorcycle)

By Markets Fool.com

Riding motorcycles and drinking isn't usually the image bike makers want to conjure, but one Harley-Davidson dealership is moving into a space where it can manage a brew pub. Image source: Motor City Harley-Davidson. Screen cap by author screen of YouTube video announcing new site.

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Is a Harley-Davidson brew pub a smart marketing decision by the motorcycle maker? While brand extensions can be an effective way to incrementally increase revenues because they expand the business into new markets they were not already targeting, it only really works when they link naturally with the existing core brand.

Harley's partnership with Fordfor a limited-edition F-150 pickup truck was a smart blending of two American-made brands that complemented each other's strengths, even though it only ever made up 1% to 2% of Ford's F-150 sales.Harley's cake decorating kits, on the other hand, not so much.

And it's not clear that a corporate blending of drinking and motorcycle riding leans more toward the pickup truck marketing venture than to being a Martha Stewart wannabe.

Certainly, Harley-Davidson needs to do something to boost revenues. Its full year earning released a couple of weeks ago showed the big bike maker's sales were still in decline in the U.S., its biggest market, and profits were getting slashed. Revenues were down 2% in the fourth quarter and more than 4.5% across all of 2015, though part of that was due to the effects of foreign currency exchange rates.

Yet it can't be denied lower sales here at home are hurting. U.S. motorcycle sales were down 4% for the quarter and almost 6% for the year. Finding other sources of revenue to supplement slumping bike sales will at least soften the blow.

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One smart way Harley is doing it is through clothing sales, specifically a new line of Harley-Davidson branded denim jeans through its Harley-Davidson MotorClothes Collection. That's the sort of brand extension that can work.

Harley-Davidson branded clothes have long been a mainstay of the big bike maker. Image source: Harley-Davidson.

The bike maker already sells almost $300 million worth of merchandise and apparel each year, and it was the one segment of its business last year that saw an increase in revenues (up more than 2%), currency exchange rates or not.

Bikers already closely associate with the Harley brand, and wear everything from jackets and bandanas to shirts and gloves emblazoned with the H-D logo. And the reputed willingness of Harley enthusiasts to have the company's logo tattooed on their bodies is legendary. A brand of good quality jean, which is almost de rigeuer when riding anyway, is a natural way to branch out.

A brew pub may not be. Cashing in on one of the hottest trends in alcohol makes sense. Craft beer is the one segment of the beer industry that is still generating broad appeal.

According to the Brewers Association, the trade group representing the craft beer industry, there are over 4,100 breweries operating in the U.S. today, more than at any time in the country's history. Independent brewers also account for about 11% of all the beer brewed annually, and 19% of the industry's total market retail value.

A business desiring to tap into that demand makes sense. Harley-Davidson doing so doesn't.

The big motorcycle maker is reportedly taking over an abandoned 106,000 square foot Sam's Club store in Farmington Hills, Mich., with an idea to open a dealership that will serve as a destination location for the brand.

In addition to selling motorcycles, which will occupy some two thirds of the space, Harley is also hoping to attract the previously mentioned brew pub as well as a gourmet market and maybe even a drive-in/ride-out movie theater. While Harley itself doesn't appear to be the one that will be running the bar, the association with drinking and riding shouldn't be one the bike maker wants associated with its brand.

Recently rival Polaris Industries announced it would be making a limited edition Indian Motorcycle in honor of the 150th anniversary of Jack Daniel's whiskey. While that had some analysts scratching their heads over the decision, again because of linking drinking with motorcycle riding, it's being produced in very limitedquantities and the proceeds from the auction of the very first bike produced in the run will be donated to a wounded veterans charity. It's still a relatively minor pairing of brands.

Harley-Davidson's brand extensions here is once again an example of the bike maker running off the road in trying to juice sales. It may have looked at the demographics of the up-and-coming bike buyers, the urban, first time riders that include many women, and thought they'd be a natural fit for brew pubs and gourmet markets, but that's not likely the destination to where people are going to want to ride their Harleys.

Its decision to get into jeans is a good fit, but having a dealership become a destination location to hangout is not likely. Though it's just one dealership at the moment, it represents the type of thinking that has gotten Harley-Davidson into the hole it currently finds itself in.

The article You'll Never Guess Harley Davidson's New Business Line (Hint: It's Not a New Motorcycle) originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford and Polaris Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.