Steinway&Sons: Buying A Legend

GROUP CASE REPORT

STEINWAY&SONS: BUYING A LEGEND

I. INTRODUCTION

Kirkland and Messina had several problems facing them in their purchase of Steinway&Sons in 1995. For 140 years, Steinway has held the reputation for making the finest quality grand pianos in the world. However, the past 25 years has proven to be a challenge. First, the company has changed hands several times and product quality has become a concern. Second, the worldwide market for pianos has been in a steady decline, and competition for high-end grand pianos has increased. Moreover, they introduced a mid-priced line of grand pianos under the brand name ÐŽ§BostonЎЁ in 1992, which represented a major shift in strategy for the company. Within this context, what should the new owners do to leverage the Steinway brand name to increase its profitability in order to receive a worthwhile return on a $100 million dollar investment? That will be the content of this analysis

II. GENERAL ANALYSIS

a. Who are Steinway&SonsÐŽ¦ customers? (Customer analysis)

1. Individuals market: The Steinway customer is the middle-aged and above, affluent music lover. With over 90% of sales to individuals, this customer is SteinwayÐŽ¦s most important. They view quality of product as more important than price and Steinway is the most respected brand name in the industry.

2. Professional and institutional market: Most of the famous pianists of the world use Steinway. Although this segment is a minimal profit, if any, it is one of the most important and visible for the brand. The artists merge with the educational and institutional segments to form the other 10% of the Steinway business. Schools such as Julliard and other famous universities as well as famous artistic institution are fond of the Steinway brand.

b. Who are Steinway&Sons main competitors? (Competitor analysis)

1. Yamaha:

Yamaha is viewed as the number one competitor of Steinway. With $1 billion in piano sales, Yamaha is the industry leader for all automated piano segments, with over 175,000 total pianos sold in 1994. Yamaha also owns a 50% share of the Japanese market and is the overall leader in the Asian market. Yamaha may be the follower in quality, but it intends to use its deep pockets to develop better hand-made pianos. It has the goal of overtaking SteinwayÐŽ¦s leadership role in the high-priced piano market with these strategies:

- Attract a high profile artist to endorse its concert grand piano by let them use Yamaha grand piano for performance and wave entire fee related.

- Produce a limited number of concert grand pianos using traditional craft method (beside its automated mass-produced piano) in order to introduce themselves as the best grand piano in the world, as 1996 when Yamaha announced that, ÐŽ§We have now succeeded in manufacturing a test model of what we believe to be the worldÐŽ¦s finest concert grand pianoЎЁ.

- In order to chase Steinway, YamahaÐŽ¦s overarching strategy for its concert grands was continuous improvement, such as using higher quality raw materials; its engineers regularly purchased and disassembled Steinway concert grands in an effort to duplicate the techniques of Steinway; worker discretion was kept to minimum and the entire operation was designed to ensure a consistent product.

2. Kawai:

Kawai is not in the same league as Steinway, however, their pianos compete directly with the Boston line. Although, Kawai has attempted to delve into the hand-made piano, their efforts have been fruitless up to this point. Their hand-made grands have been purely for promotional reasons, and have failed at breaking into this market. Kawai is strong in automated pianos with over 100,000 total pianos sold per year.

3. Baldwin:

Baldwin is the last remaining US competitor of Steinway. A maker of nearly 20,000 pianos a year, Baldwin also used automated techniques. Baldwin does offer well respected handcrafted pianos that are well received by artists.

4. Bosendorfer and Fazioli:

These two European companies are the only two who take the same approach to the piano market as Steinway. Each deals only in handcrafted pianos, manufacturing low volumes each year, while charging high prices. The Bosendorfer and Fazioli pianos are well accepted in the high-priced market and are direct competitors in SteinwayÐŽ¦s strongest market.

5. Steinway itself

Steinway has become a direct competitor to itself due to used piano sales. The incredible craftsmanship of the Steinway piano allows for the pianos to persist for well over 100 years. Thus, many potential Steinway customers are purchasing lesser priced used models, while still maintaining the same Steinway quality. The glut of used pianos available for purchase is a potential loss of sales for new Steinways.

c. How was Steinway&SonsÐŽ¦ performance and what factors helped it succeed? (Company analysis)

1. Financial information

Steinway (in 1994) is making a net profit of $3 million dollars a year. With an initial investment of $100 million dollars for the purchase of the company, on paper it looks as a poor investment. The company must find tremendous growth opportunities to become a profitable investment for Kirkland and Messina. From Exhibit 3, we can calculate the ROA for Steinway as such:

ROA = profits/sales x sales/assets = 2,487/101,896 x 101896/76019 = 3.27% (for 1994)

Total Debt-to-Equity ratio = total liabilities/equity = $58,348/$76,019 = 76.8%

3% ROA is a critically low number for any business. Additionally, the D/E ratio is very high as the company is heavily leveraged in financial debt. It is our own opinion that the company is in poor financial shape. Part of the reason for this may be the high amount of investment and inventory Steinway is required to maintain to build the pianos (there is over $75 million in inventory at any given moment). As each piano takes over two years to complete, there is a large amount of capital invested over an extended period of time.

2. Past strategy:

Owner Strategies Results

Family-own (1853 ÐŽV 1972) - Build the best piano possible and sell it at the lowest price consistent with quality.

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