STEINWAY AND SONS: BUYING A LEGEND(A)

CASE STUDYBy Rukmi Sarmah

NIT SILCHARDuring an internship

under Professor Sameer Mathur, IIM Lucknow

STEINWAY AND SONS WAS FOUNDED IN 1853 AND WAS A FAMILY OWNED

COMPANY FOR MANY YEARS…

Steinway was the pre-eminent brand name in the music business and the maker and producer of highest quality grand pianos in the world.

What is the situation??

On April 1995, two investment bankers Dana Messina and Kyle Kirkland purchased the legendary piano maker Steinway and Sons for $100 million through their Selmer company which they had purchased controlling interest two years earlier….

Selmer was leading manufacturer of orchestral instruments in the US..

Challenges faced by Messina and Kirkland???

No synergies between Selmer and Steinway….

The unit sales of Steinway grand piano slipped from 3576 in 1990 to 2698 in 1994…

Yamaha, a Japanese piano powerhouse, continued its efforts to challenge Steinway as the maker of the world’s finest concert grand piano…

Steinway had introduced a Boston Piano range whose price was less than half of a traditional Steinway…

Sales of upright pianos in US has fallen by 40%...

On the other hand, Economic conditions were improving in the U.S. and Europe, Steinway’s two largest markets and Steinway had yet to take full advantage of a growing Asian market

Sales of musical instruments tended to closelyfollow the birth rate, plus 11 years. With U.S. births up and average of 8% every fiveyears since 1980, the 1990s ARE very promising for the sale of Selmer instruments and Steinway Pianos..

BACKGROUND INFORMATION…

Selmer financials…..Total sales $101.1 million…

Pre-purchase financials of Steinway and Sons..(Total sales $100 million)

Unit sales of Steinway Grand Pianos (1965-1994)…

Steinway’s top 10 American Markets….

Industry trends…

Sustained downturn in the piano industry, with global sales dropping by 40% since 1980. In the United States, piano sales dropped even farther, from 233,000 units in 1980 to less than 100,000 units in 1994

Reasons for downturn…

Natural Cycle of Piano Sales

Rise of computer as a home entertainment device

Growing popularity of increasinglysophisticated, low-priced electronic keyboards, by the mid-1980s, many times more electronic keyboards were being sold than conventional pianos.

The industry was hurt by the global recession of the early 1990s.

The second major trend in the industry was the consolidation of the piano manufacturingindustries in the United States and Europe. In the United States, for instance, where there wereseveral hundred piano makers at the turn of the century, there were only eight piano makers by 1992.

The emergence of several Asian manufacturers.

In particular, four Asian companies combined for 75% of global sales by the 1990s. .

Emergence of new markets other than US and Western Europe…

Competition….

Baldwin Yamaha

Kawai Bosendorfer

Fazioli

Baldwin…Only other American manufacturer of high-quality grand pianosIn 1994, 20,000 pianos sold..Revenues $122 million

Yamaha..Largest producer of pianos in the world..Held a 35% share of theworld market and a 50% share of the Japanese market..

Used highly automated assembly line techniques..In 1966, made the world’s finest concert grand piano..To promote its concert grand pianos, in 1987, Yamaha launched an “Artist Program”Yamaha activelymarketed its pianos to major universities

KAWAI..Produced about 90,000 vertical pianos and 10,000 small grand pianos per year…Had not yet impressedthe critics with its concert grand.

Bösendorfer and Fazioli..

Focused almost exclusively on very small volumes of top-quality grand pianos

Widely recognized as beingamong the highest quality in the industry

THE USED PIANO MARKET…

A used Steinway represented a serious threat to the sale of a new Steinway

A Steinway lasted for about 80 years..For every new Steinway sold, 5 used Steinways changed hands..

Steinway & Sons – Company Background….

For 140 years, Steinway & Sons has been recognized as a leader in the market for high-qualitygrand pianos…

Managed by the Steinway family from 1853 to 1972.Was highly received and regarded in those years. Sold to CBS for financial reasons..

But CBS wanted more revenues…It sold additional pianos and grew dealer networks..

Sales increased but critics began to question the quality of Steinway Pianos…

The business of repairing old Steinway began to boom..

In 1985, Steinway was sold to Birmingham brothers…

The new owners were committed to quality…

Manufacturing was modernized..

The owners personally visited dealers to know their problems…

They reduced the dealer network keeping only the committed dealers..They introduced training and support programs for their dealers…

Expanded the product line…

1.Introduced Boston Pianos in 1992, a mid priced range of Pianos..

2. Steinway Limited Edition Pianos in 1993…

Steinway decided to introduce a limited edition piano every two years..Sold out to dealers within hours of being made available.

3. The Crown Jewel Collection

The Crown Jewel Collection—otherwise traditionalSteinway pianos that were finished in exotic woods, such as east indian rosewood, kewazinga bubinga, african pommele and macassar ebony. These pianos sold at 20% to 30% price premiums to the traditional ebony Steinway

There is over $75 million in inventory at any givenmoment to manufacture a Steinway…

In the mid 1990s.. Due to lack of working capital and financial constraints.. the Birminghams decided to sell the company to Messina and Kirkland…

How do Messina and Kirkland run the company effectively??

They must maintain a small network of loyal dealers…

They should remove charges on delivery and tuning.. Like Yamaha does…

They must be committed to quality.. They should preserve the aura of exclusivity of Steinway handcrafted pianos..

They must invest in innovative designs and continuously raise the quality of pianos…

This will cause new Steinway pianos to be more attractive to buyers and the used piano market will loose its dominance….

They must maintain their stronghold on the artists and Steinway partnership and continue their efforts to endorse their pianos by renowned musicians

They must explore possibilities in the growing Asian Market… and try to revive their old name in the US and Western Europe Maket…

At the same time, they must continue producing the Boston range of pianos.. As they appeal to the younger generation and are reasonably priced…

The crown jewel range and the limited edition range must also continue as they sell off within hours…

Because… Buying a legend is easy…Leading the business to success is another thing….

These slides were created by Rukmi Sarmah as a part of an Internship done under the guidance of Prof. Sameer Mathur, IIM Lucknow (www.IIMinternship.com)