September 24, 2007 – A discussion with the founder of Big Dog Motorcycles

SAN DIEGO — Sheldon Coleman, founder and sole owner of Big Dog Motorcycles, sat down with Powersports Business to discuss the custom market, the company’s interest in exporting bikes and whether the allure of growing international markets could prompt him to seek investors.

Powersports Business: Has the custom motorcycle business peaked in terms of popularity? Is the market now simply settling into reality regarding the number of new unit sales?

Coleman: I always go back to consumer demand. Consumers today — men, women, young and old – all want a customized product. I don’t care if you’re talking about a tennis shoe, a TV station, a piece of sporting equipment or a motorcycle. The concept of the custom market is such a wonderful, brilliant exciting concept because it is so much individualized product. None of our paint jobs are alike. They’re hand-painted, fantastic pieces of art. But with that, with all of these small manufacturers and all of these people providing individualized product, then you also have a real reliability problem. Over the past 10 years there has not been (an adequate) supply of a lot of high-end product and so small manufacturers have been able to provide that, and consumers have bought a little bit without knowing how long the product would last, taking some risks and chance. Reliability in the custom industry has been suspect. People want the product, but they’ve been a little burned by the reliability. So they are taking a step back. Plus, in the economic conditions we’re in today, the higher-price product is going to take a holiday. We’re going to have a little break from people wanting to spend that kind of money. But those things cycle. The custom market is not going to go away. People want individuality. They don’t want to look like everybody else. They want the things that the custom market offers. But what they want from the custom market is a product they know they can count on. That’s the one thing that we have — that’s our special niche at Big Dog.

PSB: In the down cycle we’re in, when you consider marketing, are you focusing more on the consumer that isn’t necessarily an enthusiast, or are you trying to attract more of the enthusiast?

Coleman: We’re trying to grab more of the enthusiast. It’s a little harder in this type of market, so the consumer is just a little quieter, a little gun shy. In that environment, it’s hard to move the fringe buyer into being a buyer. You really need to take really good care of the core group and the people that are familiar with you, that are looking to buy another product, upgrade, have been considering it for a period of time but the product is just perfect that you’re bringing out for them. We’ve found some very effective grassroots marketing. The Internet has been a big boost. We had an ad this year called the minivan ad that was really fun. It ran on national cable TV. However, its biggest distribution was YouTube and e-mails and consumers were really excited about that. So we always want to appeal to a broader base market, but really taking care of the core custom market is best for us.

PSB: Big Dog cut back on motorcycle production in the first half of this year and as a result, laid off some of its workforce. What do you expect the second half of the year will bring business-wise?

Coleman: The real key to our success right now is inventory control. The reason we are doing so much investment in engineering is we’ve taken inventories down in the company. Less finished goods, less work in process and less raw materials and that releases cash. And we’ve taken all of that extra cash and dumped it into engineering and long-term value creation in engineering and testing for the new product. That has helped us with our investment profile in the company and why we’re so healthy from a cash-flow perspective. At the same time, we’re able to do investments for future product and reliability improvements and all of those nuts and bolts things we need to do. Part of that reduction in inventory is you have to reduce production rates. We have really good forecasting tools. We watch retail sales. We watch patterns around the country for how our bikes are selling. A year ago, we saw that (housing issues) were affecting our market. That’s when we took the production down prematurely, and we did some layoffs, hating to do that. We’ve always been blowing and going and growing like a weed. But having been through enough business cycles in my business career, the front end of this one smelled like it was going to be a tough one. So we bit the bullet and took the production rates down, and we’re in a very good position now. We’re very happy with our production rate and the way demand is matching up.

PSB: Big Dog previously has said entering international markets was not a major goal because there was still plenty to do in the U.S. market. But do the slower sales in the U.S. perhaps move the international market up the to-do list?

Coleman: The global economy is interesting. In the investment market right now, many people are adding international equities to their stock portfolio even at reducing some of the domestic equities. I believe this is a good time to consider more of the international options long term. There’s good long-term, interesting markets internationally, and I think our bikes will appeal to some certain areas. It’s a matter of resources. I’ve had large international operations in previous businesses and it’s a lot trickier than people think. You think at the first sale, ‘Oh I can get my bike in there. I can get it qualified (for emissions).’ There are a ton of tax consequences of selling (bikes) and sending parts in. There are ongoing law changes. There are many, many issues in international business long after the sale. Plus the product is much further away from you and you want to make sure you can take care of those customers really well. I’m very methodical about going into (international markets), but it is more on the chart. Canada is the first. We’re working hard on that one. And then there are some other markets that we’re starting to eye and think about.

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PSB: Harley-Davidson has done well with its international sales over the past year. Because the majority of Big Dog buyers are former H-D riders, are you watching how Harley is doing in specific international markets and considering following them into those areas?

Coleman: Yes, in the U.S. markets and international markets. That’s exactly how we’re analyzing it.

PSB: Is there any temptation with the potential growth that international markets present to go public to raise additional funds to get into those markets quicker?

Coleman: No. My prior company (Coleman, the outdoor recreational company) was taken over and that was a brutal pill. Being the 100 percent owner and having no investors, this is really a good thing, and this is the way I want to keep it. I have friends who have private companies that have done amazing things in their lifetimes. There’s really no reason to go public if you just watch your cash flow.

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