[dropcap]F[/dropcap]or most motorcycle and powersports dealers, 2016 was anything but sweet. In fact, we would venture to say that it was a year most dealers would rather forget. Much of the volatility that plagued the end of 2015, carried over into 2016 and pressured not only sales, but more importantly, weighed on profits.

Issues that caused headaches for dealers include:

1) Macro weakness (recall that 1Q16 GDP grew a mere 0.8%), energy price deflation (especially painful for dealers that have been operating in North America’s oilpatch);

2) Product recalls;

3) A very price-sensitive consumer, which gave way to an incredibly intense competitive environment; and

4) The added layer of uncertainty that accompanies U.S. presidential election cycles (we believe more this year than ever before).

Certain issues, such as the impact that a strong dollar and low oil prices have in Canada show no signs in the market that would indicate dealers will see any real strength in their business next year. That said, many of the issues are in the rear-view mirror, which could ultimately set the stage for a better operating environment in 2017.

Indeed, our conversations have revealed that the outlook dealers have has certainly improved since the election ended. Irrespective of political leanings, dealers are in nearly complete agreement that the mere fact that the airwaves are no longer dominated by election rhetoric will help consumer confidence. Anecdotally, many dealers feel that Trump’s victory will usher in a more favorable business climate, which has led to further optimism – though we would note that dealer confidence will fade fast if the consumer is not supportive.

Looking ahead to next year, the four questions that are top of mind include:

How will the new administration impact small business and the broader economy?
Unfortunately, the most pressing question is also the most difficult to answer – especially given that President-elect Trump has yet to take office. However, we feel comfortable saying that the industry will benefit from lower taxes and a more robust manufacturing jobs picture.

Conversely, we have all seen the negative effect of low energy prices on this industry, which would seemingly be a consequence of certain policies. Additionally, the USD has been very volatile since the election, which can also have a major impact on the market (one just needs to look at used motorcycle prices for proof).

What impact will Harley’s Milwaukee Eight have on the motorcycle market?
The last year and a half has not been kind towards the Milwaukee-based stalwart (retail sales -4.7% YTD after being down -1.7% in ’15). However, the introduction of the company’s eighth big twin platform seems to have kick-started demand in North America.

While improving trends seem to be concentrated in the MY17 touring bikes that feature the new engine and inventory levels of older bikes are still a little high, this is the most optimistic Harley-Davidson dealers have been in a couple of years. In our view, this bodes well for H-D in 2017…the question will be whether the broader market can do its part.

Are Polaris’ recall woes in the past and what will the ultimate impact be to the brand?
As any powersports dealer knows, the significant number of ORV recalls to fix thermal issues Polaris issued in 2015 were a significant drag on sales. While this likely helped some other brands, it was likely tough on the entire industry. These headwinds appear to be largely behind the OEM, so the question transitions into one about how the brand will be hurt by a change in perception.

In our view, we do not expect the recalls to cause a migration of ORV owners. On the other hand, competitive new products such as the models introduced by BRP’s Can-Am label could. Indeed, share shifts in the ORV market will continue to be a key theme in 2017, in our opinion.

Dealer profitability: where has it gone and will it return?
Another issue that is near and dear to every dealer’s heart is that of profitability. Sales are great, profits pay the bills. Over the last year and a half, dealers have complained about waning profitability. In fact, we would attribute the sharp share gains that BRP has made in 2016 to a superior profitability structure.

While there are a number of factors that have hampered retail profitability, we think that one of the biggest factors should improve next year as both Harley-Davidson and Polaris seem determined to right-size dealer inventory ahead of the new year. Aside from that, the bigger factor will be the economy.

Specifically, if consumers have more confidence in the economy and sales accelerate then dealers will be less concerned with moving units before curtailments kick in. To the extent that this occurs, dealers should look for a better year on the bottom line. That said, this is largely dependent on the unknowable.

Enjoy the holidays and Happy New Year!

Note: If you would like to be contribute to Northcoast’s studies, please email Seth Woolf at [email protected] and you will receive in-depth results of the monthly studies.