STEINWAY & SONS: BUYING A LEGEND

SBM case presented by Group-6 of Oct-2011 PTPGPM:

11PT2-17 11PT2-51 11PT2-62 11PT2-63 11PT2-64 Atul Malik Puneet Gulati Sayak Chakrabarti Shakti Tandon Sidhartha Rastogi

Group 6

Agenda
2

Company background The CBS years The CBS Pit falls Industry Trends Industry Competition Target Market Marketing Strategies SWOT Analysis Conclusion & Recommendation

History
3

Steinway and Sons was established in New York City in 1853 by Henry

Engelhard Steinway, an immigrant from Germany

Due to the companys innovative ability and technical supremacy, orders grew rapidly and a new larger factory was constructed in 1860

For the next 140 years, Steinway and Sons would be recognized as the
leader in the market for high quality pianos

Background
4

After 120 years of being a closely held family operation, it was decided

Steinway and Sons could no longer survive in this manner

The company was sold to the CBS Musical Instruments Division in 1972 for $21 million worth of CBS stock

The primary reasoning for the sale was associated with finances which
hadnt changed in the following few years; the companys return on capital was only about 5%

The CBS Years

5

In the beginning, CBS invested several million dollars in the first few years

after purchasing the company

This may not seem like an exceptionally large amount; however the Steinway family had never before invested more than $150,000 per year in

capital improvements

In addition, to ease the transition and to ensure quality focus, CBS employed Henry Steinway as president of Steinway and Sons for next five

years

The CBS Years (pitfalls)

6

CBS wanted to increase revenue and decrease manufacturing costs by increasing

production

Their first step was to increase dealers by almost 40%. While these changes did in fact increase sales volume and profits, it damaged the

reputation of Steinway and Sons

Critics and buyers began to challenge the quality of Steinway and Sons pianos Over the next 10 years, Henry Steinway is replaced by several CEOs, only to worsen the calls from critics challenging the quality of Steinway and Sons pianos

In November of 1984, CBS announced the sale of Steinway and Sons for $50 million to John and Robert Birmingham

The Birmingham Years

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Although the Birmingham brothers had no experience in the musical

business, they set out to re-establish Steinway and Sons as the maker of
the highest quality pianos in the world

CEO Bruce Stevens set out to assure everyone, customers, employees, and

dealers, that the new owners were highly committed to quality

The company now became refocused and returned to what had made them so successful. Aside from the newfound focus on quality, the

Birmingham brothers expanded Steinway and Sons product line

The Birmingham Years

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The product line now included the Boston Piano line introduced in 1992, the

Steinway Limited Edition pianos introduced 1993, and the Crown Jewel
Collection of Steinway pianos introduced in 1994

Despite these positive changes by Stevens and his team, the running of Steinway and Sons was once again constrained by limited financial resources

The company was again sold on April 18, 1995 to Dana Messina and Kyle Kirkland for $100 million

Messina and Kirkland had already acquired the Selmer Company, a meat processing and a paper company, and felt as though Steinway and Sons was a well run organization which could reap the benefits of their financial expertise

Industry Trends
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Over the years, piano sales have increasingly dropped from as high as 223,000 units in the 1980s to nearly 100,000 in 1994

People have different arguments of why piano sales dropped so dramatically over the past 20-30 years

The first of these arguments includes the idea that the decrease in sales is simply a trend and that it is predicted that in the future piano sales will once again rise significantly

In addition, computer home entertainment and electronic devices such as keyboards were being sold more than traditional pianos

A second observation is that the piano industry has become a consolidation of many of the top piano manufacturers

Industry Trends
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Many of the industries in the US & Europe have been going through consolidation efforts (several hundreds of piano makers in early 1900s, whereas only 8 in 1992)

A third trend is that many Asian piano manufacturers arose. Four Asian companies including Yamaha, Kawai, Young Chang and Samick accounted for 75% of global

sales in the 1990s

Asian imports achieved a 35% unit share of the vertical pianos market and an 80% unit share of the grand piano market by 1994

The fourth trend in the industry market was the change in market size. With
countries such as South Korea, Japan, and China representing a very large portion of the market, the United States and Western Europe were no longer the industry

leader in sales

Industry Trends
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A fifth and final issue that faces the piano industry is that these high-priced, high

end pianos may limit piano sales

Owning a Steinway and Sons piano may be viewed by some musicians as a symbolic representation of high status

Only a small percentage of people who are looking to purchase a piano can afford
a product of Steinway and Sons

Industry Trends
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In 1995, Steinway and Sons grand pianos were priced from $26,000 to over

$70,000, verticals were priced from $11,900 to over $17,000, and Boston pianos
were priced from $6,395 to over $30,000

The Boston models are around half as expensive, however they continue to be

out of the price range of the average customer. The majority of the public is just
not willing to pay that kind of money on a discretionary item such as a piano

The recession of the early 1990s can also be linked to the decrease in piano sales in recent history

Industry Competition
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Steinway and Sons had only a few competitors that were considered threats to their market share. Their high volume manufacturing competitors included Kawia, Yamaha, and Baldwin. Competition in the low volume, high quality market was Bsendorfer and Fazioli. Baldwin Piano and Oregon Company was the only remaining competitive large scale producer of grand and vertical pianos in the US in 1995 aside from Steinway and Sons. Baldwin sold many varieties of pianos ranging from factory manufactured vertical and baby grand pianos, to expensive hand made grand pianos. Baldwin was seen as a major competitor in 1994 selling 20,000 pianos worldwide and generating $122 million in sales.

Industry Competition (Yamaha)

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Yamaha Corporation, a 100 year old company, was the largest producer of pianos in the world. Yamaha had $1 billion in sales in 1994 with 35% world market share and 50% Japanese market share. In 1994 Yamaha produced 175,000 pianos using highly automated, assembly techniques. Yamaha also produced high concert end grand pianos using traditional craft methods with the goal of producing the best grand piano in the world. Yamaha would often seek new strategies to compete with Steinway and Sons in the grand piano market. Yamaha claimed that the wood used in Yamaha pianos was from the same wood mill as Steinway and Sons. Yamaha marketed their pianos to major universities, in order to gain on Steinway and Sons. They would often loan pianos to universities for students to use and to be considered for purchase later.

Industry Competition (Kawai)

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Kawai was a competitor from Japan which produced 90,000 vertical pianos and 10,000 small grand pianos a year

Much like Yamaha, Kawai wanted to specialize in a high quality concert grand piano

Kawai was not a major competitor of Steinway and Sons since their materials used in their pianos were considered low quality by many critics

Industry Competition (others)

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Bsendorfer and Fazioli were two companies that competed with Steinway and Sons in the top-quality grand piano market

Bsendorfer from Austria produced 400 grand pianos in 1994 to Faziolis 40 These two companies used the same handcrafted techniques as Steinway and Sons and were considered top notch among customers for being made in low volumes

Target Market
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Steinway and Sons two major markets to sell their pianos in were the

home or private market and the institutional market

These two markets were grounds for selling Steinway and Sons vertical and grand pianos

Vertical pianos have their strings mounted vertically while grand pianos
have their string mounted horizontally

Target Market (contd)

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The home market, often called the private market made up most of Steinway and

Sons sales buying 90% of its vertical pianos and 80% of its grand pianos

The home market generally was 45 years old and had over $100,000 incomes a year. To find their market, Steinway and Sons had to figure out who the music lovers were and who had enough money to purchase their pianos

The institutional market accounted for 10% vertical piano sales and 20% grand piano sales

This market included universities, music institutes, hotels and performance halls. Steinway and Sons wanted to get their pianos in these institutions so that it would

lead to more sales in the home market

Marketing Strategies
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Steinway and Sons have shown a decline in recent years on the sale of Grand Pianos

Some reasons for the decline

Price new technology new markets people that have pianos have had them for a while and will not need to refurbish a piano that often.

Steinway needs to take advantage of the different marketing strategies and use the Asian market to their advantage

They also need to look at price and technology to enhance their profits in the piano

industry

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SWOT Analysis

Strengths
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Steinway and Sons have an established brand reputation of quality and

durability

There are minute differences between the sound of each crafted piano which allows for differentiation and customization of the product

The Steinway Concert and Artist program has around 850 artists who
choose the Steinway and Sons piano

Weaknesses
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The durability and quality of their products limits the concept of repeat

buyers and brand loyalty

The average customer is over 45 years old and earns in excess of $100,000/year

With the introduction of the Boston piano line, Steinway and Sons image
took a step away from tradition

Growing technology and innovation has taken toll on traditional pianos; they have been replaced by keyboards and other computer technology

Opportunities
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Establish a larger customer base in Asia to increase market share

Steinway and Sons could increase their industrial market by offering

discounts to universities or concert halls and/or being more customer service oriented

Using innovative technology, Steinway and Sons could potentially increase

markets by appealing to lower and middle class purchasers with low to mid-priced products

Threats
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With the expansion of Asian manufacturers, global market share is no

longer being controlled by American manufacturers

Relative inexperience of the current younger owners/CEOs

Conclusion
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Piano manufacturing is in a stagnant industry and the used piano market

threats to the piano industry seriously

When a company is in a stagnant industry, the most important points are

seeking out a strong niche, continually monitor its position, and finds new ways to differentiate itself

Recommendations
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Steinway should maintain its high quality niche market for reputation of great master and keep going mid-priced Boston line

To reinforce marketing activities into Asian market, Steinway should introduce new lowerpriced piano to Asian market as a flanker to compete against low-price competitors

Also attractively meet customer demands; i.e. satisfying demands for free in hall tuning & delivery for pianists endorsements & establishing customer base with customer service

As an individual brand, Steinway should make good use of The Crown Jewel Collection, as

it represented almost 30% of Steinway unit sales by 1995, in spite of price premiums

They should use quality & their reputable sophistication to market more to the institutional market which makes up only 10% of vertical piano sales and 20% of grand piano sales

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Thank You !