Embarking on E-Business at Ducati Motorcycles (Italy)

Following its 1996 liquidity crisis, Ducati, an Italian manufacturer of high-performance motorcycles, took several initiatives aiming at strengthening the company brand, enhancing its portfolio and increasing its sales and profitability. This case first presents the above initiatives and discusses how Ducati streamlined its production process and rationalised its distribution network. It then focuses on the company’s e-business strategy and the capabilities offered by Ducati Internet web site. The key starting point of Ducati ecommerce activities took place on January 1st, 2000 when the limited edition of its MH900e motorcycle was exclusively sold through the Internet. It was the first motorcycle ever sold this way and the first year production of the MH900e was sold out after just 31 minutes, making Ducati one of Italy’s largest e-tailers. The case describes the above pioneering e-business initiative and presents the way the company created the physical and the virtual “World of Ducati” (which contains motorcycles and motorcycle-related products and services). It concludes by highlighting future challenges that Ducati faces, mainly its attempt to solve the online/offline channel conflict and to build the first motorcycle Internet portal. The latter aims at offering content, context, virtual communities, and commerce (i.e. business-to-consumer, business-tobusiness, and consumer-to-consumer transactions). 1. DUCATI: COMPANY OVERVIEW Founded in Bologna (Italy) in 1926, Ducati is a leading manufacturer of high performance motorcycles. Since the 1950s, its motorcycles have dominated the World Superbike Championship and compete in the sport sub-segment of the road market segment with engine capacities of over 500cc 1. 1 cc stands for cubic centimetre, a measurement for the motor cylinder capacity. Tawfik Jelassi, Stefanie Leenen 398 The motorcycle market is divided into four segments: the motor scooter market, the off-road market, the road market with engine capacities of less than 500cc, and the road market with engine capacities of over 500cc. The road market segment with engine capacities of over 500cc includes four sub-segments: sport, touring, dual and cruiser. Motorcycles in the sport sub-segment are built for, or inspired by racing. Those in the touring and dual sub-segments are designed for comfortable, long-distance travel and for both on-road and off-road riding. The cruiser sub-segment comprises heavy motorcycles with classic American design. The four Ducati model lines differ in design, technical features and target customers. The most popular model line is the Monster (52.1% of revenues in 1999), followed by the Superbike (25.2%), the Super Sport (14.3%) and the Sport Touring (8.4%). The flagship product, Superbike, has gained much ground over the last 3 years. Besides motorcycles, Ducati sells parts, accessories and apparel in 40 countries worldwide, with a focus on Western Europe and North America. In 1999, these regions accounted for 85% of overall sales with the remaining 15% generated in Asia and Australia. Ducati has a global distribution network. In Belgium, Italy and Sweden, it sells motorcycles and related products to its retail dealers directly out of Bologna. In other key markets (including Germany, France, Japan and the United States), wholly owned subsidiaries are responsible for Ducati’s wholesale distribution. Ducati enhanced its control over key markets by increasing the number of subsidiaries, replacing underperforming distributors and appointing new distributors to enter new markets (such as Bahrain, Chile, Malta and Thailand). In Italy, Ducati started restructuring its dealer network by turning dealer outlets into special Ducati retail outlets (called Ducati stores and Ducati corners). In the remaining countries, independent distributors function as intermediaries between Ducati Motor and retail dealers. In all markets (except Belgium, Italy and Sweden), dealers purchase Ducati products from subsidiaries or distributors and sell them to the final Ducati customer. In 1983, Ducati became part of the Caviga group, an Italian manufacturing conglomerate. In September 1996, following a liquidity crisis at Caviga, Ducati Motor Holding (DMH) was created. Through a series of transactions, the US-based Texas Pacific Group (TPG) and Deutsche Morgan Grenfell Capital Italy2 (DMGCI) acquired 51% of DMH. In July 1998, the remaining 49% of Caviga shares were purchased by TPG, which still owns 33% of Ducati Motor. All other shares are traded over the New York Stock Exchange and Borsa Italiana, the Italian stock exchange. Since September 1996, a turnaround programme has been initiated: Ducati increased its working capital to raise production levels, installed a new management team and hired 250 professionals world wide, rebuilt its sales, marketing and public relations departments, revamped its corporate image, streamlined its assembly process and introduced new models. As of December 1999, Ducati’s revenues totalled L570 billion3, an increase of 22.6% over the previous year. In the same period, registered motorcycles, a key measure of retail sales, increased by 17.7% to 32,135 units. The net profit was L17.3 billion4 compared to a loss of L2.4 billion in 19984 and a net profit of L5.2 billion in 1997. Ducati mainly competes with four Japanese manufacturers (Honda, Suzuki, Yamaha and Kawasaki), two European manufacturers (BMW and Triumph) and, to some extent, with the US-based Harley-Davidson’s “Buell Division”. Within its specific business segment, Ducati’s market share increased in 1999 to reach 6% of the Western European market. Japanese competitors have a greater market share worldwide, with Honda accounting for 26%, Suzuki for 23%, Yamaha for 17% and Kawasaki for 17%. Harley Davidson, BMW and Triumph have market shares of 5%, 4% and 2% respectively. Ducati estimates reaching a market share of 17% in Italy, 6% in the UK, 4% in North America, 3% in France and Germany, and a 2% market share in Japan. 2 DMGCI is the Italian subsidiary of Deutsche Bank’s asset management and private banking arm. 3 On 31 December 1999, Italian Lire(L)1,000= Euro0.5165; L1,000 = US$0.5186. 4 The 1998 loss was due to non-recurring, operating expenses of L16.9 billion caused by the write-off of debt issuance costs and cash settled for warrant rights to credit institutions that arranged prior financing. Ducati had no similar non-recurring expenses in 1997. Embarking on E-Business at Ducati Motorcycles (Italy)[Case Study] 399 2. DUCATI’S BUSINESS STRATEGY Since the 1996 acquisition, Ducati has been trying to increase its sales and profitability by broadening its product portfolio, restructuring its distribution network, strengthening its brand and raising production efficiency. Besides introducing new models, Ducati continuously upgrades its existing motorcycles through design and technical innovations, which constitute its main product differentiation. The company’s short-term aim is to increase the number of registered Ducati motorcycles worldwide by an average annual growth of 15%. To achieve this goal, Ducati decided to broaden the boundaries of its market niche by leveraging its brand name and by introducing new motorcycle-related products (such as accessories and apparel). In 1999, the sales of motorcycle-related products amounted to 4.2% of total revenues while motorcycle sales accounted for 86.3% (spare parts accounted for 8.3% and other miscellaneous items accounted for the remaining 1.2%). The company’s short-term goal is to increase motorcycle-related sales to 10% of revenues. In 1997, Ducati restructured its distribution system with the goal of maximising retail sales and getting closer to the customer. Motorcycles, spare parts, accessories and apparel are sold worldwide via 800 independent privately owned dealers. The reduction of dealer outlets was one part of the turnaround programme that was started in Italy. Between 1996 and April 2000, the number of Ducati dealers was reduced from 165 to 61. Ducati stores are exclusive Ducati outlets, selling motorcycles, spare parts, accessories and apparel. They offer a customised retail environment as well as an increased level of service and technical support. In the medium term, Ducati expects to set up about 200 Ducati stores worldwide. Today’s 40 independent Ducati stores outsell the ordinary dealer outlets by significant margins. Ducati corners are a compromise between the exclusive Ducati store and the ordinary dealer outlet. If the market is not big enough to justify setting up an exclusive Ducati store, a Ducati corner can be set up in a large dealer outlet offering a number of brands. Furthermore, the company introduced a Ducati store on its web site and started selling over the Internet with the introduction of the MH900e model. Ducati increased its production efficiency by rationalising the manufacturing process and reducing complexity. The number of motorbikes made per production employee increased from 78 units in 1998 to 83 units in 1999. EBITDA5 also increased in 1999 by 24.3% to L98.3 billion, which is 17.2% of total revenues, one of the highest EBITDA margins in the industry. 3. THE “PHYSICAL” WORLD OF DUCATI To strengthen its brand image, Ducati created the “World of Ducati” containing motorcycles and motorcyclerelated products and services. The core products, consisting of motorcycles, accessories and apparel, are complemented by six categories: Racing, Advertising, the Ducati Desmo Owners Club (DOC), Events, the Ducati Museum and the Ducati University6. Each category contains several sub-categories; for instance the “World of Racing” includes Sponsorship, a Hospitality unit, the Racing School7, Desmobid8, Racing Apparel, Technical Support and Sales. The single categories are inter-connected and are part of other categories (i.e. Racing is a category in its own right as well as being part of Advertising). Thus, the “World of Ducati” aims at strengthening Ducati’s core products and image and thereby increasing Ducati sales and profitability. 5 EBITDA stands for earnings before interest, taxes, depreciation and amortisation. 6 Ducati managers and technicians give lectures world-wide at Universities and Polytechnics on Ducati and its products. 7 The Racing School teaches motorcycling at all levels. 8 Desmobid is a Ducati memorabilia auction on the Ducati web site. Tawfik Jelassi, Stefanie Leenen 400 3.1. Motorcycles and Complementary Products Ducati started several production initiatives aiming at reducing production costs and improving the underlying process. In January 1999, it introduced a production software that monitors the information flows from receipt of the customer order to the delivery of the motorcycle. Through customised material requirement planning (MRP) capabilities, the system automatically generates production schedules based on sales forecasts, optimises warehouse volume levels, generates orders for purchasing materials and manages flows of materials for production. Another Ducati production initiative is the implementation of the “platform” approach, through which suppliers become responsible for delivering the key motorcycle components and managing their own subcomponent providers. This reduces the number of suppliers, increases the volume of components provided by each supplier and thereby strengthens Ducati’s bargaining power. Since several motorcycle models share common components, Ducati is able to maintain efficiency even at relatively low volumes. “We outsource 85% of our production cost,” says Christopher Spira, Head of Investor Relations. “Our factory could be anywhere. We are an assembly plant, an R&D centre and a design centre. We also have a large commercial area and a PR [public relations] operation. We have outsourced all of our logistics.” Today, Ducati essentially focuses on designing and assembling engines and motorcycles, and testing their quality. As a result, the fixed cost structure is relatively low. Direct and indirect labour costs amount to 15% of total costs incurred. Due to production initiatives, the daily rate of Ducati motorcycle production increased from 25 in September 1996 to more than 200 in May 2000. In order to reduce the number of key motorcycle components, Ducati tries to co-develop new components with its key suppliers. For the next 3 years, 59 platform projects are planned that will optimise production and involve outsourcing non-strategic activities. In 1999, sales of spare parts accounted for 8.2% of total sales, compared to 8.3% in 1998 and are among the highest margin products sold by the company. The spare parts catalogue and order processing are managed electronically. By December 1999, over 93% of all spare part orders were fulfilled in Europe within 48 hours of receipt, and within 72 hours in the rest of the world. Logistics are outsourced to Saima Avandero, an Italian logistics company that is responsible for the physical movement of the spare parts, their storage and the automation of the Ducati spare parts warehouse. In order to personalise the Ducati motorcycles, Gio.Ca.Moto designs and distributes performance and custom-made accessories, such as specialised exhaust systems, fenders, fairings and custom-painted gasoline-tanks. These accessories and apparels have high margins. Since 1998, Ducati Gear has been providing Ducatisti9 with technical riding gear. Leather racing suits, jackets, gloves, boots and helmets are developed and produced in co-operation with Dainese. Ducati T-shirts, caps and memorabilia are also commercialised. In the future, Ducati intends to focus its activities on the motorcycle-related business, enriching the “World of Ducati” with the licensing of motorcycle model replicas, toys, video games and “online” racing, allowing fans to “virtually” compete with each other through the Internet. Such activities aim at increasing Ducati brand awareness among the general public and also creating additional revenue streams.