Case StudySTEINWAY AND SONS: BUYING A LEGEND

Quiz?Level I

• How many presidents have managed Steinway & Sons till 1995 ?• Yamaha held __ % of the market share in the year of 1994• A Steinway piano’s lifetime is reportedly _______ .• When was Steinway’s 500,000th Piano was produced?

Level II

• Estimate the total number of Piano’s sold by Steinway & Sons.• Was integration of Steinway and Selmer favourable for Selmer? (Sales increase/

decrease %)• What was Steinway’s biggest market? What was the net sales there in the year of

1994?• What is the average profit margin that Steinway & Sons gain over sale of each piano?

Quiz?Level I

• How many presidents have managed Steinway & Sons till 1995 ? (7 presidents)• Yamaha held __ % of the market share in the year of 1994 (35 %)• A Steinway piano’s lifetime is reportedly _______ . (ageless…. Jk (80 years))• When was Steinway’s 500,000th Piano was produced? (1988)

Level II• Estimate the total number of Piano’s sold by Steinway & Sons. (3,60,000 grand pinos)• Was integration of Steinway and Selmer favourable for Selmer? (Sales increase/ decrease %)

(Yes, no actual gross profit increase, however EBITDA increased by 1%)• What was Steinway’s biggest market? What was the net sales there in the year of 1994?

(USA was Steinways biggest market, $59.100 million)• What is the average profit margin that Steinway & Sons gain over sale of each piano? ($5651)

The Steinway PurchaseApril 18, 1995 saw an historic moment in Steinway's

history as Dana Messina and Kyle Kirkland had purchased Steinway & Sons for 100 million dollars

The New York Times article stated that “… people familiar with Steinway and the piano industry’s problems … were amazed that the company fetched [$100 million].”

People couldn’t believe that the company fetched such an exorbitant amount

Challenges

• No synergy between Selmer and Steinway

• Sales was declining steeply

• Competitors such as Yamaha who were marginalizing Steinway and Sons

• Introduction of mid-prized Piano which did not go along with their ‘elite’ status

Opportunities

• An pre-eminent brand name as the producer of highest quality grand pianos

• Piano of choice for the world’s greatest artists

• Improving economic conditions in the Europe and U.S

• Unexplored markets such as China, Korea etc. (scope for expansion)

The Piano IndustryThe industry is basically split into two- concert grand pianos for institutions and professional performances,

vertical pianos for private (or individual) market

Industrial Trend (1/4) – Drop in sales• Sustained downturn in the piano

industry• Global sales dropped by 40%• Reasons:

Rise of computer as a home entertainment device

Natural cycle of piano salesGrowing popularity of the ‘electric

keyboard’Global recession in the 90’s

Industrial Trend (2/4)- consolidation of piano manufacturers

From over 100’s of piano’s in the 1900’s, there were only 8 piano makers by 1992

Industrial Trend (3/4) - Asian manufacturers• Emergence of Asian

manufacturers who used automation and assembly line techniques to produce in bulk

• Provided cheaper alternatives to their American and European counter-parts

Yamaha Kawai

Young chang

Fazioli

Industrial Trend (4/4)- New markets• Opening of new and potentially large markets in countries

such as Japan, South Korea, China

Competitors (1/4)- BaldwinSole remaining large-scale producer of vertical and grand pianos in the United states Sold over 20,000 pianos domestically through a network of 700 dealers with a revenue of $122 million Offered full line of pianos unlike S&S

Competitors (2/4)- Yamaha*• Largest producer of piano in the

world• With $1 billion in piano sales, it

holds 35% of the world market share

• Has successfully monopolized the Japanese market

Competitors (2/4)- Yamaha**- strategy towards Steinway

Used noticeably high quality raw materials in its concert grand pianos and publicized the use of same

Engineers regularly purchased and disassembled Steinway concert grands in an effort to duplicate the techniques of Steinway

Production process was automated wherever possible, with transportation carried about in moving assembly lines

Employed a high degree of vertical integration

Worker discretion was kept to minimum to maintain consistency

Launched the “artist program” that was a direct copy of Steinway’s “Concert and Artist Program”

Competitors (3/4)- Kawai• Specialized in the production of

vertical pianos and hence wasn’t a direct competitor of Steinway and Sons

• Manufactured on highly automated assembly lines

Competitors (4/4)- Bösendorfer and Fazioli• Produced very small volumes of top quality pianos• Their quality was considered at par with Steinway’s

Piano retailers/ dealers• Most pianos were distributed through

independent dealers• Each dealer sold three type of brands

Primary brand: Steinway or YamahaMid Tier brand: Kawai or BostonHigh end level brand: BosendorferEntry level brand: Samick or Young Chang

Used piano market• Over 40 million Pianos are

believed to exist around the world

• With Steinway pianos quality and extremely long life- 70 to 80 years

• With a major restoration the lifetime is further extended

Steinway & SonsFor 140 years, Steinway and Sons has been recognized as the market leader for high-quality piano. Established in 1853 Steinway has a rich

heritage and has always stayed true to its commitment to quality

History

Early years• A 140 year-old company, established in New York City in

1853.

Success Mantra

Technical excellence with over 120 patents in piano making

1854: Gold medal at Metropolitan Fair in Washington DC

1860: Factory on Fourth avenue in New York

1866: Opening of the Steinway Hall

Brand proposition: “build the best piano possible and sell it at the lowest price consistent with quality1871: Long Island City headquarters

1880: Factory in Hamburg, Germany

The Steinway tradition(1/4) – craft method• All Steinways are assembled by craft method with limited

use of assembly-line techniques.• Each grand piano took 2 years to build from scratch and

contained over 12,000 individual parts

Exhibit 12

The intricate methodology used to manufacture pianos

The Steinway tradition(2/4)- skilled labor and attention to detail

Skilled labour was employed with average experience of 15 yearsBought its own material by sourcing the best quality available in marketTheir attention to detail contributed to the legendary sound and durabilityNo 2 Steinways sounded the same

The Steinway tradition(3/4)- Steinway’s concert and artist programme• 330 pianos (valued at $17 million)was dedicated for this

programme which took place across 160 cities • Artists:

Use Steinways for all performances Only pay for transportation costsTest at a showroom and request for use

• Company:Long standing relationships between performers and pianos Visibility during performancesEndorsement from world renown artists

The Steinway tradition(4/4)- Artist relations

• Artists considered each Piano to be unique• Master piano technicians were provided by Steinway to

adjust and tune the pianos to suit the performers need• They tested and endorsed the pianos they used

Steinway & Sons – The CBS years

In 1972, Steinway and sons was sold to CBS musical instruments division. Steinway could no longer serve as a

family business

The CBS years (1972-1985) (1/3)- Developments• Invested millions in Steinway’s aging Long island and

Hamburg facilitiesAim: increase revenues and decrease manufacturing costs• Expanded the dealer network

Adding small dealersAccepting dealers who had Yamaha as their primary product line.

The CBS years (1972-1985) (2/3)- Effects

Effects

The quality of the Steinway pianos were put to test

Sales volume and profits increased

The dealer network was under a lot of

scrutiny

The CBS years (1972-1985) (3/3)- Downfall• The concerns about quality coupled with the steady

turnover of Steinway management further weakened the company’s image

• In order focus primarily on its broadcasting CBS decided to sell of Steinway despite it being a moderately profitable company

• In 1985 the company was sold to the Birmingham brothers for a sum of 50 million

Steinway & Sons – The Birmingham years

In 1985, Steinway and sons was sold to the Birmingham brothers. CBS wanted to shift all its focus on broadcasting

Birmingham Brothers (1985-1995)• Their family was centred around the fuel oil distrubution

businessAim: to re-establish Steinway as the maker of the highest quality piano in the worldBruce Stevens was appointed as the CEO and president of Steinway

Developments (1/4)- The First Six months• Assuring Steinway’s employees, dealers, customers that the

owners were committed to qualityEach of the 740 boxed, stagnant pianos were unboxed, inspected for

quality and then shipped for deliveryStevens personally visited the dealers and re-assured them about the

managed (built relationships)

Developments (2/4)- Manufacturing• The manufacturing units were upgraded and modernized • The documentation of Steinway’s entire piano

manufacturing process was for the first time.

Developments (3/4)- The dealer networkThe overextended and unfocused distrubution network was acted upon

Only dealers who were fully committed to Steinway were retained • Reduced the dealership in America from 153 to 93

A “partnership program” was developed which included• formal sales training programs• formal technical support programs• Promotional events planning• coordinated advertising and public relations• institutional sales programs, etc.These helped in the improvement in the quality of their dealers

Developments (3/4)- The dealer networkHow important it is?The shortcomings of the dealer network during the CBS times hurt Steinway heavily as one of their most valuable artists Andre Watts defected to Yamaha. This was because of the dissatisfactory service provided by one of Steinway’s dealers. Hence, Yamaha had attracted a high profile artist, who played about 150 concerts per year, to endorse its concert grand pianos and this endorsement came at the expense of Steinway.

Developments (4/4)- The Product line (mention products alone)

The Boston piano• Mid-tier product sold at half the price of a Steinway grand

• For “customers who weren’t ready to purchase a Steinway”

• “designed by Steinway & Sons”, manufactured by Kawai

• Allow to capture sales that might otherwise would go to Yamaha

• $17 million dollar market

Steinway limited edition

• Limited number of high quality pianos, specially designed for an occasion were sold at premium rates

“Instrument of Imortals”

• Targeted the elite, niche market

The crowned jewel collection

• Traditional Steinway pianos that were finished in exotic woods such as east Indian rosewood, kewazinga etc.

• Sold at 20-30 % price premium to the traditional alternatives

• 30% of Steinways sales

Steinway & Sons – The Messina and Kirkland

acquisitionIn 1995, Steinway and sons was sold to Messina and

Kirkland. Birmingham brothers weren’t able to manage the high capital intensive business

Who were Messina and Kirkland?

• Harvard MBA • Investment

banker

Dana Messin

a• Stanford MBA• Investment

banker

Kyle Kirklan

d

Recent past – Selmer company

• The company sold the following high end band equipment such as:Selmer saxophonesBach trumpetsLudwig snare drums etc.It was a company localized in USA with over 40 % of market share

• It sold a mix of High-end (professional) and mid-tier (student) equipment

Selmer were having very turbulent sales and were going through bankruptcy

Recent past – Steinway and sons

• The Positive changes bought about by the Birmingham brothers and the introduction of the Boston pianos boosted sales

• However the sales of Steinway grands was declining due to various factors affecting the industry in general

• The sales of Boston Pianos however recovered this loss

Exhibit 3The sales of Boston Pianos helped the company to recovered from the decrease in sales of Grands

Exhibit 4

The decline in the number of grans sold from 1990 to 1994

Sales ?

USA

Germany

Japan

England

Switzerland

Others

Exhibit 5

Majority of sales for Steinway’s sales in USA took place at New York

Dealer’sSteinway and Boston pianos were sold through a network of 93 dealers in North and South America and 92 dealers in Europe, Africa and Asia.

Roughly 85% of all Steinway and Boston pianos were sold through these independent dealers

Boston Vs Steinway

The typical buyer of a Steinway piano was over 45 years old, had an annual income in excess of $100,000, and had a serious interest in music.

The typical buyer of a Boston piano was 5 to 10 years younger and was slightly less affluent.

Different Target Segments

i.e. segmentation

Exhibit 6

Steady flow of income from the mid tier Boston Pianos

So what Happened ?In 1995, Steinway and sons was sold to Messina and

Kirkland. Birmingham brothers weren’t able to manage the high capital intensive business

Exhibit 7

Net Income:$2452 (in

thousands)

Questions to ponder upon ?In 1995, Steinway and sons was sold to Messina and Kirkland. Birmingham brothers weren’t able to manage the high capital

intensive business

Should they stay in the high end market?Steinway’s has always been known for its High-end, top quality products. Culturally, the company has been built on it. Quality is Steinway’s principal value proposition and is something that keeps the loyalty of their customers.

Verdict: It makes sense for them to retain their High-end strategy

Boston pianos- the situationThe Boston pianos had a market of $17 million as opposed to the $92 million made by the company.

Positives: Expanded the customer segment of Steinway and

Sons by introducing them to the Mid-Tier Directly stole sales from their rivals Yamaha, who

were a mid-tier brand Increased revenue

Negatives: Dropped the eliteness or high-end nature

possessed by the Steinway brand Steinway was no longer a top-of-the-line prestige

piano

To analyze a trade off between Revenue and brand value, one must also incur the risk currently involved with the brand. Since the piano industry is on the decline and involves a high amount of risk. It is in best interest to choose revenue over brand value

What role should Messina and Kirkland Play?Similar to what the Birmingham brothers did, Messina must hire professionals who are involved in the line to take care of the management. They must also refrain from trying to acquire profits at once and to develop the company on a long run.

Improve relations with the stakeholders through setting up departments such as:● Dealer relations Department● Artist relations Department● Set up Steinway schools

Explore and expand in new markets such

as China, Korea, Japan which have a enormous scope for business and sales