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growth rate of 50 percent over the last three years. Its operating profit
margin is 24 percent and it has a market share of 96 percent in the midweight (250 cc to 750 cc) leisure motorcycle segment, which includes global
players such as Harley Davidson, Ducati and Triumph. Despite a five-fold
increase in capacity in the last four years, the waiting period averages
between two and four months. Our ability to sell is constrained by our
ability to produce, says Rudratej Singh, president, Royal Enfield. Some
might call it a happy problem. Investors have rewarded this transformation
and the Eicher Motors stock has risen from around Rs 22 in 2000 to Rs
19,000 levels now.
Authentic versus Modern
But change is never easy, as Lal was to find out. For one, the Bullet buffs
wanted the bike to remain authentic. This meant the cast-iron engine and
the gear box should stay separate (which was causing oil leaks), brakes
should be on the left-hand side (the opposite was true for all other bikes)
and persisting with the existing, difficult kick-start instead of an electric
one.
Lal, therefore, had to consider whether his attempt to modernise the
product and attract new buyers would result in alienating existing
customers. If we had listened only to the hardcore enthusiasts and
retained everything authentic, we would have failed. More than the loudest
voice, we had to listen to the unsaid voicespeople who wanted to buy a
Royal Enfield product but were dissuaded by reliability and other issues,
says Lal, today the managing director and CEO of Eicher Motors.
How did he strike a balance? The classic design, the ubiquitous thump and
the low torque were retained; changes such as a shift to an aluminium
unitary engine with the gears and the engine as a single unit, disc brakes
placed on the right and an electric starter were introduced. In some cases,
that meant working against the laws of physics. For instance, the
aluminium engine, with 30 percent less moving parts and 30 percent more
power, failed to reproduce the loud thump that Royal Enfield bikes were
known for. International consultants were called in and sound mapping
was conducted to find a solution. Extending the exhaust pipe helped but the
final decibel level was still 30 percent lower than earlier.
It is a remarkable story of how a physical product was modernised without
the brand losing any of its characteristics that gave it the iconic status, says
Professor Abraham Koshy, professor of marketing, Indian Institute of
Management (Ahmedabad), who also co-authored Marketing Management
A South Asian Perspective along with Philip Kotler.
Lal also changed the way the bikes were soldfrom rickety, basic, even
dirty shops in dingy bylanes to state-of-the-art showrooms in upscale areas
like Delhis Khan Market. Over the years, the company also widened its
product line to include, apart from the traditional Bullet, models such as
Classic, Thunderbird, Desert Storm and Continental GT.
Sales began to rise and soon demand started to overtake capacity. In 2011,
the company had sold 74,626 bikes; this figure jumped to 1.78 lakh units in
2013 and to 3.02 lakh units in 2014. The target is to close 2015 at 4.5 lakh
units. Today we are selling whatever we are producing. Not able to meet
the surging demand is a good problem to have but we are expanding
consistently to ensure that our customers need not have to wait long for
their bikes, says Singh. The manufacturing capacity at Royal Enfield will
touch 6 lakh units by March 2017, he adds. Eicher invested Rs 600 crore
during 2013 and 2014 and will put in another Rs 500 crore in 2015. The
bulk of these funds have been used for capacity expansion. But this appears
insufficient as the order book continues to overflow.
Royal Demand
Royal Enfield enjoys a unique position among Indian premium
motorcycles as its distinctively-styled bikes fulfil the customers key
aspiration of owning differentiated products at a reasonable price, says
Nitij Mangal of CLSA, a broking and investment firm, in his latest report.
Says Lal, At a time when manufacturers launch newer models every year,
forcing customers to upgrade, we offer bikes whose look and feel has not
changed for the last 80 years and will not change for the next 80 years.
The brands individuality, in a largely commoditised world, sells. What
bike you ride communicates who you are. Royal Enfield has successfully
positioned its products as a quintessential macho mans bike. A product like
Bullet, for instance, differentiates the rider from the crowd of commuter
bikes on the road, points out Koshy. Unlike other two-wheeler
manufacturers, Lal isnt the one to go for a publicity blitz. We dont feel
advertisement is a way to build a lasting brand, says Lal. So much so that
when he was looking to hire someone to head Royal Enfield, he initially
avoided FMCG executives. They tend to think only above the line, he
adds. But eventually he chose Singh, an 18-year Hindustan Unilever (and
20-year FMCG) veteran. Singh had an orientation similar to us, Lal
explains quickly. It is to promote riding instead of just selling the bikes.
The company organises riding excursions like the Himalayan Odyssey and
Tour of Tibet to add value to the brand. There are numerous Royal Enfield
clubs that dot the country, with each conducting its own rides. Our
evocative bikes have the capacity to connect man, machine and the terrain
in unison, says Singh.
But Royal Enfield has still not fully leveraged the strong pricing power it
has in the market. The company has exercised some prudence by not
taking up prices too much so as to expand the overall market rather than
solely maximising profitability, says Mangal in the CLSA report. Eichers
CFO Lalit Malik sees no reason for upping prices. Raising prices is the
easiest lever to improve profitability. We are looking at more challenging
options like improving operating ratios, he says.
That is already happening on the ground. With volumes ramping up over
the past few years, fixed cost as a percentage of sales has declined sharply
from 17 percent in 2010 to 10 percent (in Q1 of FY16). This has also brought
down material costs to less than 60 percent of sales as against 70 percent
five years ago. The operating profit margins have thus touched the highest
levels of 24 percent in the first quarter of this year. We are not a luxury
brand. For us, the miracle happening in the marketplace is because we are
seen as an affordable and aspirational lifestyle brand, adds Malik. This
pricing policy has ensured that Royal Enfield products do not have much
competition. Its costliest bike Continental GT is priced at Rs 2.25 lakh while
the price of Harley Davidson Street, its nearest competitor, is Rs 4.33 lakh.
Other products from Triumph and Ducati are priced even higher.