Royal Enfield – Faster than a Bullet


A brand that grew 54% in FY 2013, 68% in FY 2014, and 60% in FY 2015 should hardly be the one we choose to talk about on the pages of IAR. But who said we should always be the harbinger of bad news?

We find Royal Enfield (REML) at an interesting time in its life. The company has successfully built a rolling juggernaut of sales on the back of three main product lines, three engines, and one chassis with three tweaks. On the way, it has redefined biking in India and almost singlehandedly created the problem of trash disposal in Ladakh.

It’s recent acquisition of Harris Performance, UK – the guys who did most of the chassis engineering on the REML flagship Continental GT – also indicates that the senior management is hungry to go higher and go global. It also tells us that the guys running the company are pragmatic and aware of the company’s shortcomings in product development.

Siddarth Lal’s (the company’s promoter & group CEO) recent decision to move to London for a year to focus on new product development also indicates that he is aware that the company’s future prospects lie in the export market. The mid-segment motorcycle is where Royal Enfield plays and that is where REML sees a big opportunity in the global markets.


Fast Growth

Over the last three years, Royal Enfield has nearly quadrupled its sales. To make it sound even more impressive, REML’s sales in 2015 were nine times its sales in FY 2008. This is a CAGR of 36.87% over the last seven years and a CAGR of 60.39% over the last three years.

That is impressive by any account, especially for an industry which has grown at only 12.55% in the same period.


REML.001Emerging Markets Automotive Advisors (EMMAAA) maintains its forecast of REML as the fastest growing mainstream motorcycle brand over the next decade. As per the company’s recently released forecast update, REML should end the current financial year with domestic sales of more than 445,000 units and should end FY 2021 with dispatches over 942,000 units.

In doing so, REML has transcended from being a niche manufacturer to a volume manufacturer. It completely dominates all the SIAM defined segments that it participates in. It also outsells all the import large capacity bike brands, all taken together.

While REML has always led Piaggio/Vespa in the Indian market, it has now also overtaken Mahindra and Suzuki. That too without making cheap scooters.

Media outlets also gleefully point out that Royal Enfield now also outsells Harley-Davidson globally. This is pretty much on the lines of how Hero Motors has outsold all of North America since birth. Frankly, that is an apples to burritos comparison and not something that should be a part of this analysis. Somehow, it will still pop up somewhere later, to prop up a facet of the company we want to analyse.


The Renaissance

REML’s explosive growth was kick started with the launch of the Classic range in 2011. While Royal Enfield always had character, the Classic brought in style and a build quality a few notches above the traditional Royal Enfields. The company was left fighting waiting lists for the next few quarters as the production capacity was woefully inadequate. REML followed with multiple variants of the Classic, mostly depending on the paint job and the extent of chrome.

While the Classic was the avalanche waiting to happen, the actual tectonic shift had started to happen when REML decided to swap the gear-shifter and brake levers from the old English-Royal Enfield way to the positions most of the world has known them to be. This swap, combined with the introduction of the unitary construction engine, eased the effort in gear-shifting and operations, making the Royal Enfield as easy to operate as a Honda. In a way, this was the parallel of power steering in motorcycling. No longer did you need to have balls the size of grapefruits to ride a Royal Enfield.

All this happened without any sacrifice in the ‘machoness’ of the product. This was good news for the hundreds of bikers who were anyways going to buy a Royal Enfield. It was even better news for the many thousands of wannabes who did not buy a Royal Enfield earlier because they simply couldn’t get the damn shifter into neutral.

Scratch that, getting into neutral was a piece of cake. It was finding second that was a pain.

Suddenly, thousands of bikers came out of hiding and embraced Royal Enfields. If Harley-Davidson has always been the antidote for a person’s midlife crisis, Royal Enfield became the hallmark of knowing when you were no longer a person; you were an individual.

Note to self — we must examine the correlation of Macbook sales, ponytails, french beards, mobile internet penetration and Royal Enfield sales.


Over-dependence on Classic

The Classic also had a rub off effect on the rest of the showroom as demand improved for the traditional Bullet Electra and the Thunderbird range. The Thunderbird range itself was restyled in 2012 and that provided a much needed acceleration to sales.

However, and there is always a however, the company has been over dependent on the Classic. As of recent data, the Classic range (350 & 500) account for more than 55% of the company’s overall domestic sales.

Exports may be an even more skewed story considering numerous variants of the Classic account for most of the numbers. However, on a single model name basis, the Continental GT has an edge.

The over dependence on Classic should not be a reason for worry. Most Royal Enfields trace their mechanicals to the same drawing board. The Classic, the most glittery Royal Enfield this side of the Thunderbird, just means fatter profit margins. So frankly — the company would be wishing — all strength to the Classic.

However, the situation is like Maggi Noodles Masala flavour. (That is before the recent blanket ban on Maggi noodles.) Sure, the Masala flavour sells really well. However, the other flavours are so marginal that small retailers don’t even bother stocking them. The company then has to resort to experiments like Oats Maggi, Atta Maggi, Dal Maggi and Water Chestnut Maggi for fasting Hindus.

Okay, we made the last one up but the point is that most of the sales still come out of Masala Maggi. Even the new variants like Oats, Atta and Dal may have added ingredients but still rely on the same Masala flavour. This may be less of a problem for the company and more of a headache. You have success, how do you replicate that in the future?

Recent debacle of the Continental GT indicates that it is not an easy task.


The Continental GT Problem

Talking about the Continental GT brings us to a real problem. Launched in 2013, the Continental GT is REML’s most expensive bike till date — at about INR 200,000, it is priced nearly twice as much as the entry Bullet 350 Twinspark.

It is also REML’s most aggressive bike, featuring a completely new cafe racer styling and higher quality cycle components. With chassis inputs from Harris Performance and styling by Northumberland-based Xenophya, REML has not left any stone unturned for the Continental GT. Media reviews ranged from the Excellent to Great with even European journalists liking it, mostly due to the comparatively low price point for their market.

However, the domestic response has been cold. Introduced in November 2013, the Continental GT’s domestic dispatches peaked in April 2014 at 388 units. Over the past twenty months, sales have been patchy with an average of little more than 200 units a month. REML dispatched 26562 units (twelve month rolling average dispatch volume) of its 350cc range in June 2015. The same month, the Continental GT dispatches stood at 198 units. That’s a pity considering the profit margins on the GT would be a couple hundred basis points higher than the Bullet 350 Twinspark.

More than the profit margins (quite healthy!), what is more worrying for the company is the indication that the customer believes that Royal Enfields should be priced at a certain level. This is hitting the pricing glass ceiling in the motorcycle market.

Any future product development now has to aim at either playing within the ceiling and delivering value & profits or aim at shattering the glass ceiling. While the first is easy, the second needs a considerable improvement in the product attributes as well as the brand image.


Richness of the Portfolio

The above mentioned Continental GT vs 350cc range dispatch volume comparison also brings us to the next problem — richness of the REML portfolio. The company makes motorcycles in three engine sizes — 346cc, 499c and 535cc. However, sales of the 346 cc machines by far outstrip the other two combined.

As of June 2015, 346cc machines accounted for 89.5% of dispatches (based on twelve month rolling dispatch numbers). This is an overwhelming customer tilt towards the lower priced machines. That number 89.5% is actually an improvement for the high capacity machines. Till 2011, they used to have a share in sales of a little more than 5%. However, the launch of the Classic moved a lot of new customers into buying the 499cc version.



For the purpose of analysing sales volumes, EMMAAA uses 12-month rolling sales averages. Under this system, we consider the last 12 month net sales as a better indicator of performance than the much used (and abused) monthly dispatch numbers.This shift to a 12-month rolling sales volume ensures that any sudden spurts or declines in volumes are ironed out effectively. Also, since sales volumes in India are not exactly sales volumes, but dispatch volumes, a 12-month rolling volume system effectively negates anomalies introduced due to minor factors like temporary production disruptions, over-jealous sales managers or temporary logistics issues.


As a result, the share of higher capacity machines in REML’s sales mix improved to 9.48% by the end of 2011. This share peaked by Q3 2014 to 10.95%. However, since then the customer mix has moved towards 346 cc again and the share of higher capacity machines has come down to 10.52% in Q2 2015.

For the sake of simplicity, we will assume that margins improve as we move up engine sizes as the company has been able to extract nearly 30% more in prices from its 499cc Classic 500 over its 346cc Classic 350. Practically, not many components change in value significantly between the 350 and 500 so the margin gain should be good at higher engine sizes. In essence, due to the tilt towards 346 cc machines, REML would be losing some margins.

However, within the segment, the customer tilt is more towards the higher priced, higher margin Classic models. This indicates — and what should be good news for Royal Enfield — that the customer desires to acquire the brand and the Classic styling. However, within the brand, he doesn’t care if the engine is small or big.

In a way, the virtues of the Royal Enfield brand — relaxed, lifestyle, cruising, and independence — don’t have anything for high power and more cubic inches.


Which leaves many question marks on future product development. If higher power and bigger engines is not what the customers want, then what should REML serve?

Take the H-D Comparisons with a bit of Salt…Chase it down with a tequila!
While the recent comparisons with Harley-Davidson reveals (once again) the naiveté of the Indian media, it did highlight an issue for REML. Going by the ambitions and the direction taken in recent times, REML has ambitions of becoming a global motorcycling force. Theoretically, it has everything going for it — a heritage brand, good looking bikes, huge domestic volumes, improving quality levels and a price point that is extremely affordable for most developed market audience and competitive for developing market audience.

However, a look at the export numbers reveals that the exports are still at a nascent stage. The big positive takeaway from the numbers has been that first the Classic, and then the Continental, are driving exports. Exports have more than doubled within the last two years as REML adds more markets and offers better products. The company has focussed on getting recognised as a global brand and pushing the customers to recognise it for its British heritage — the Continental GT was launched with a bike ride from the iconic Ace Cafe, London to Brighton. This was before the actual launch happening in India.

Theoretically, REML has a huge global opportunity — the affordable classic mid-size bike market is under-penetrated across the world. Even though Harley-Davidson has come down the engine class with the Street 500, it being a twin and much more expensive than the Royal Enfield offerings means that both are essentially fighting in different areas of the market. Others like Triumph end up even higher and are twins as well. There are plenty of obscure Russian, Chinese, Czech and Global manufacturers but none of them has a heritage matching Royal Enfield.

Though arguably, nothing can match the quirkiness of a Ural.

We digressed…

But then, Royal Enfield also has its quality issues. Even though build quality has improved significantly, it is nowhere near the Japanese defined benchmarks. Luckily for REML, it is on an upwards curve of quality improvement. The company also has new platforms under development, always good news for improving quality. And then it operates in the classic bike market segment, a segment the most forgiving on quality issues. It also helps that even H-D had a bad quality day with the Street 750, an issue that the brand is now busy addressing.

Saying that, it does not absolve REML with the quality problem thingy. Most Continental GT riders that we spoke to, were not very happy with the quality and vibration levels in the bike. Perhaps they feel it more because they paid twice as much as a basic Bullet 350 Twinspark and because the promise in the GT does not match the actual product.


Tip of the Iceberg – Opportunity or Shipwreck in waiting?

Surprisingly, for a brand with the kind of rich heritage that Royal Enfield has, it has failed to exploit the same extensively. Parts & Accessories and Merchandise (PAM) sales are the cream for most heritage brands. For some like Ferrari, they are the core business. For others like Harley-Davidson, a much better comparison, they account for nearly 17% of revenues. For Royal Enfield, they are in the nascent stages of development.

The problem with PAM is that it’s an ecosystem that needs to be developed from scratch. Part of it is to identify and nurture vendors who will provide top-notch quality and designs that extend your brand’s attributes. Royal Enfield has taken the first baby steps in this direction. The company has launched a full range of merchandise available now on an online store as well as the company’s exclusive merchandise store at some of the most tony locations in New Delhi. That’s a step in the right direction considering that REML has chosen some of the most expensive shopping centres in Delhi to open its stores. There is no way that the stores would turn profitable anytime soon but the idea is to propagate the Royal Enfield brand and a good location works wonders.

However, the PA part of PAM is still unexplored. For someone like Harley, the PA alone accounts for 11.5% of revenues. For Royal Enfield to get into that area will need the brand to collaborate extensively with tuners and aftermarket experts. This also needs extensive work by the company’s own engineering department. It’s not there yet but something that could be the next step for the brand.


New Products – A Himalayan Task

A Royal Enfield draws many parallels with a Harley-Davidson. Both are iconic, both have a characteristic note and both have an unparalleled brand loyalty. Both brands can also get away with murder as long as the jury is populated by their fans. Harley-Davidson has always been the laggard on the technology front in a race defined and led by the Japanese manufacturers. That has not deterred it from growing faster than the Japs in the North American cruiser bike market.

Royal Enfield on its part has been selling the classic experience for a long time in an almost unapologetic way — for the most part they sell a classic bike with lots of modifications and not a modern bike dressed like a classic. This works as long as the customer is already an enthusiast. Beyond a certain point, as you enter new markets, and have to tell your story repeatedly, customers also like to take a long hard look at your product.


This has traditionally been the weak spot for Royal Enfield as far as global markets are concerned. While the small steps of improvement and new paint jobs work well in the Indian market, the big international markets look for more than that. They need new products, new engines and new chassis, and this is what Royal Enfield is working on now.

Media reports — IAR is not in the scoop business — indicate that the company may be working on two new platforms. Note the keyword is platform which in industry parlance means new engines, new transmissions, and new chassis. Needless to say the other component modules — suspension, brakes, lights and tyres would be completely new specs as well.

The engine sizes of the two new products may be (as per media reports) between 370 cc – 750 cc. To us that looks like a single and a twin in the works. The single is needed to replace / supplement REML’s current engine range and should pack in significantly higher output than Royal Enfield’s current range of singles. It would also need to meet Euro V and Vi and the noise output regulations in developed markets.

The twin is another level of awesomeness altogether. A 750cc twin means a lot of power, which would require mechanicals beyond the comfort area of REML. That is where Harris Performance would start making a lot of sense.

During this analysis, we have said that Harley-Davidson and Royal Enfield are brands with parallel stories. This 750cc twin is where the paths intersect each other. Actually, it is also the platform that will have REML’s path intersecting Triumph and the Japanese as well. A twin 750cc does not just mean a bigger engine, it would also mean significant jacking up of prices. This would mean Royal Enfield going to the enthusiast and asking for significantly more money, up to 50% — 60% more than the Continental GT.

Does the brand have the kind of loyalty? It may be a tough ask in the domestic market going by the experience of the Continental GT. However, the international market is a different game altogether and REML has a bigger shot at success if it plays its cards right.


Brand Drives the Bike

A surprising facet of the global automotive analysis industry is that two-wheelers are not considered a part of the automotive industry. Concession is made for markets like India, ASEAN and China where two-wheelers mean a mode of transport. In the global developed markets, two-wheelers mean lifestyle and that is why every brand craves to carve a niche identity for itself.

Royal Enfield operates in the classic road-bike segment, a segment that is defined by enthusiasts as machines with character, quirks, difficulties, and yet top notch quality and build. Fanatic enthusiasts won’t mind machines with a starting sequence reminiscent of the cult classic YouTube video of loading a Howitzer. However, they would be extremely pissed off if the paintwork peels off within months. The funny thing is that the pricing of these machines leaves the realm of logic far behind as long as the brand is solid enough. One just has to look at the pricing of a Harley-Davidson and their annual report to see the margins they enjoy.

Brand is what Royal Enfield is aspiring for. That is where the money is. A better brand identity will give them more export numbers, higher pricing power and better margins.

That is also where it makes sense to hire a Unilever top honcho like Rudratej Singh to run your brand identity, merchandising and retail efforts. REML appointed him as their new President in January this year. The fact that the company chose to pick up a soaps & shampoo guy to run their motorcycles business, instead of poaching someone with industry experience, is an indication how serious Royal Enfield is about its brand image.

Subtle, yet serious, efforts are visible since then. The company has opened exclusive merchandise stores in New Delhi and an exclusive brand store in London (now two stores). Future Royal Enfield dealerships are expected to follow the same format as their London store.

A far cry from a decade back when it was hard to distinguish a RE dealership from a three-wheeler dealership.


Leaving Sloppiness Behind?

The thing with a habit is that it takes time for it to go. Changing from the sloppy to the slick is not an overnight thing. It takes many months, perhaps years, of concentrated efforts and RE has miles to go before it starts getting taken seriously as the torchbearer of British origin biking. Some efforts have started working well, others still reek of sloppiness.

Take the Enthusiast Speak section on the homepage of Royal Enfield’s London store. It has wannabe suppliers, job seekers, people with poor language, and even someone who once did SEO for RE’s website, all commenting. Being open to comments is fine and we like that. Displaying it on the homepage of your prized London store is sloppiness to the power N. The last thing you want a knowledgeable classic bike enthusiast to see on his wannabe favorite brand’s website is someone called Chanchal using the homepage to seek a job.

And this Chanchal is not even a graduate…

Then there is the History section of the UK website. The navigation sucks and we are still figuring out how to go beyond 1930 in the section.


Production Capacity

There is also the issue of production capacity. In the early days, it was a matter of pride when the Classic had a wait-list of nearly a year. When the wait-list continues years after the launch, it is just poor planning. The company’s growth has been unprecedented and often keeping production aligned with sales becomes tough. Royal Enfield has been slow in expanding capacity. Currently, the company’s operational capacity is just sufficient to meet the projected 2015 demand. By the end of the year, REML plans to expand it to 600,000 units, again sufficient for two more years.


Separation Time?

Part of the sloppiness is also the Eicher brand, a brand fondly remembered for tractors and now recognised for capable Heavy Trucks. Due to its history, Royal Enfield operations are still clubbed with Eicher Motors, the parent company. While that does not pose operational challenges, the blistering pace of growth of Royal Enfield presents an opportunity to split out the division into a separate company. Considering Harley-Davidson and Triumph have their separate identities and someone like Polaris has a complementary product range (ATVs), RE really has no business in being clubbed together with Eicher.

It also doesn’t make financial sense to club a very fast growing lifestyle business like Royal Enfield with a cyclic business like trucks. Separation would also be good for investors considering a lifestyle business would attract a better P/E ratio in the stock market than a diversified group business.

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3 Responses

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  1. prabhjot
    Aug 03, 2015 - 03:06 AM

    Thanks: good stuff, very useful.

  2. John
    Aug 26, 2015 - 08:54 PM

    Great article: Here in the US the enthusiasts are awaiting the rebirth of the twin cylinder Royal Enfield; either as an Interceptor, Constellation or Continental GT-style Metisse. The bike has got to have the power to handle highway speeds over long distances. Only the twin can handle it. Of the consumers, I hope RE realizes there should be market continuity from the bikes of the late 1960s-early 70s to today, that was interrupted with low quantity manufacturing, few dealerships and then closure. The consumers of that period ARE STILL THERE, albeit older. They still have the cash ( and probably more of it) and the time to buy and at last enjoy these bikes but that window of opportunity has to be used now. I would recommend RE markets via the AARP magazine and newsletter to reach those people. After reaching that specific group and using them as the “process builders” for brand awareness, then RE’s base in the US will be far better positioned for growth.



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