A substantial part of Eicher Motors' success story can be attributed to Siddhartha Lal's conviction in Royal Enfield, a struggling business back in 2000
When Siddhartha Lal got married in the winter of 2004, he chose to ride a modified red Bullet for his baraat, forgoing the traditional horse. His vehicle of choice wasn’t a gimmick or a quirk. It was an acknowledgement of the then 30-year-old’s unabashed passion for the bike, produced by Royal Enfield, a division of his family-controlled Eicher Motors Ltd.
Lal also changed the way the bikes were sold—from rickety, basic, even dirty shops in dingy bylanes to state-of-the-art showrooms in upscale areas like Delhi’s 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 customer’s 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 brand’s 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 man’s 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 isn’t the one to go for a publicity blitz. “We don’t 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. Eicher’s 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.
(This story appears in the 24 July, 2015 issue of Forbes India. To visit our Archives, click here.)