Hero's lesson: there's lots in the 'Honda' name

New Delhi: This may come as a surprise to you but Hero MotoCorp’s sales have been suffering because it dropped the Honda tag from its motorcycles after it split with the Japanese partner of 26 years. For many people in smaller towns and villages, a Hero Splendour still means ‘Honda ki Gadi’ and they have not taken too kindly to the Honda name being removed.

Ashish Nigam and Kunal Jhaveri of Antique Stockbroking said in a note to clients this morning, quoting unnamed Hero dealers, that after the company has dropped the ‘Honda’ tag from the Splendor Pro and Splendor Plus motorcycles, conversions (which means number of people who enquire after the bike actually buying it) have been impacted by 5-10 percent. These two models account for about 35 percent of Hero’s total volumes and therefore the negative impact created by the removal of the Honda tag does not bode well for Hero.

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“This trend is restricted to these two models as they are the only ones where the parent-brand name (Hero Honda, now Hero) is written on the fuel-tank (in a bigger font) and the sub-brand name (Splendor Pro/Plus) is written below the seat (in a smaller font).

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Perhaps, the company has tried to leverage on the popularity of the Splendor brand to strengthen the parent Hero brand…,” the analysts said in a note to clients.

After the Honda tag was removed, some buyers have come forward saying they are willing to pay Rs 2,000 premium for the old Splendour (which came with the Honda name)! Obviously, Honda’s quality assurance still carries weight.

Hero accounts for 45 percent share of the domestic market so by its sheer size it presents a formidable competition to partner-turned-competitor Honda Motorcycle & Scooter India. And for the next 2-3 years, Hero’s dominance in motorcycles may remain unchallenged as Honda gears up to attain scale. But even then, the branding issues with Splendour need to be sorted out.

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Jatin Chawla and Akshay Saxena at Credit Suisse said “We continue to believe that Hero will not lose significant market share in motorcycles to Honda over the next 2-3 years as Honda would need time to establish a new brand in the Indian market.”

But Hero is already facing headwinds, and not necessarily only from HMSI. The company has been dispatching bikes far more than actual retail sales, leading to double the normal inventories at dealers’ end right now.

Yogesh Aggarwal and Karthik Subramaniam at HSBC Global Research said earlier this week that their interactions with Hero MotoCorp dealers confirm a continued slowdown in motorcycle demand.

“Retail sales for Hero have further slowed down in certain demand markets, leading to sustained high inventory levels in the range of 30-40 days (on average),” they said.

Nigam and Jhaveri of Antique have estimated inventory levels “remain alarmingly high at about 6 weeks against normal levels of 3.5 weeks and hence we expect August/September dispatches to decline by 6 percent and 4 percent year on year at 4.75 lakh and 5.25 lakh units respectively. We lower our FY13 volume growth assumption to 6 percent (from 8 percent previously), but still see downside risk to our estimates.”

This surely indicates that at least on some Hero bikes, you could demand a discount from dealers between now and the commencement of the festival season.

Another reason for Hero to begin worrying is long-time foe Bajaj Auto’s export vision-an area where Hero is still struggling to establish itself. Chawal and Saxena of Credit Suisse have estimated that Bajaj’s export growth could log CAGR of 20% for the next five years as it strengthens in existing geographies and looks for new markets to take on Chinese competition there.

Hero’s export turnover accounted for barely 2.3 percent of its FY11 net sales against 28.4 percent for Bajaj Auto. Hero has also begun focusing on exports-it has already announced commencement of exports to new markets in Central America and Nigeria in this quarter. All exports to new international markets will be under the “Hero” brand name.

So from clearing out piling inventories, to assuring customers of Splendour on why Hero remains a strong brand and going international-Hero’s tasks to remain competitive are cut out.