Stelnway & Sons: Buylng a Legend (A) s0G{I28 manufacfuring Ptocess. Our number one goal was to eliminate any question of product quality. The Dealer Network Feeling that Steinway's dealer network was overextended and unfocused, Stevens also focused efforts on distribution. Early ory he promoted Frank Mazurco to the position of Executive Vice President with responsibilities for sales and marketing. Mazurco quickly set out to reduce the size of the dealer network, only keeping dealers who were fully committed to Steinway as their primary product line. Irr the Americas, for example, Steinway reduced the number of independent Steinway dealers from 153 to 93 between 1985 and 1995. In large cities that were deemed shategically important to Steinway, this involved the replacement of over 20 underperforming dealers. I:r smaller cities that cotrld not support a full-scale Steinway dealership, it involved the termination of 50 dealers. Second, for its remaining dealers, Steinway developed a "Parbrership Program" which induded; (1) formaf sales training programs, (2) formal technical support programs, (3) promotional events plaruring, (4) coordinated advertising and public relations, (5) instihrtional sales prograrns, (5) concert and artist activities, and (4 extensive merchandising support. As an example of Steinway's merchandising suppo$ Steinway aided dealers in the creation of a separate "Steinway Showroom" within the dealer's retail space. These roorns were designed to showcase Steinway pianos in a quality environment, increasing sales for both the dealer and for Steinway. The Defection of Andre Watts The importance of a high quality dealer network became painfuly obvious to the Steinway management team in early 1988 with the defection of a prominent "steinway Artist." In a televised Lincobr Center performance to cornmemorate the 25h anniversary of his debut with the New York Philharmonic, Andre Watts had chosen a Yarnaha concert grand. Reportedly, Watts was dissatisfied with the service he had received from certain Steinway dealers and was frustrated by what he felt was a lack of attention to his requests. He made this dear in a 1988 interview in which he jtrstified terminating his relationship with Steinway and mdorsing Yamaha as his piano of choice: I sit in my house and practice and prepare a program. And I start to go on the road and the instrurnents I encounter start taking away, start stealing parts of what I've built up, what I've developed ... this doesn't work, that doesn't work, you can't get ttris fixed. When you call back to New York, you may find out, very cordially, ... "that it's an independent dealer, we don't have any control over that person, I'm sorry." After a while, if there is something better, I don't see why not.12 Others would daim that the prirnary reason for Watts' defection was financial. Whereas Steinway charged for piano delivery and in-hall tuning, Yamaha waved thee fees for its concert artists. For a performer such as Watts, who played about 150 concerts per ye.u/ the resulting annual savings came close to $1fi),0fi). Regardless of the reason for Watts'departure, however, Yamaha had atbacted a high profile artist to endorse its concert grand pianos and this endorsement came at the ogense of Steinway. The Product Line Finally, Steinway began to expand its product offerings. This involved the introduction of the Boston Piano line i^ 1992, the launch of the Steinway Limited Edition pianos in 1993, and the launch of the Crown Jewel Collection of Steinway pianos in 1994. TheBoston Piano Steinway's first new product introduction was a mid-priced piano under the brand name "Boston." This new product concept was the brain&ild of Steinway's Robert Dove, who refined the concept and was subsequently given responsibility for the worldwide launch D The MacNeil/Ichrer News Hour, Apli,L1, 1.988 11 11
Transcript
Stelnway & Sons: Buylng a Legend (A) s0G{I28
manufacfuring Ptocess. Our number one goal was to eliminate any question ofproduct quality.
The Dealer Network Feeling that Steinway's dealer network was overextended andunfocused, Stevens also focused efforts on distribution. Early ory he promoted Frank Mazurco to theposition of Executive Vice President with responsibilities for sales and marketing. Mazurco quicklyset out to reduce the size of the dealer network, only keeping dealers who were fully committed toSteinway as their primary product line. Irr the Americas, for example, Steinway reduced the numberof independent Steinway dealers from 153 to 93 between 1985 and 1995. In large cities that weredeemed shategically important to Steinway, this involved the replacement of over 20underperforming dealers. I:r smaller cities that cotrld not support a full-scale Steinway dealership, itinvolved the termination of 50 dealers.
Second, for its remaining dealers, Steinway developed a "Parbrership Program" whichinduded; (1) formaf sales training programs, (2) formal technical support programs, (3) promotionalevents plaruring, (4) coordinated advertising and public relations, (5) instihrtional sales prograrns,(5) concert and artist activities, and (4 extensive merchandising support. As an example ofSteinway's merchandising suppo$ Steinway aided dealers in the creation of a separate "SteinwayShowroom" within the dealer's retail space. These roorns were designed to showcase Steinwaypianos in a quality environment, increasing sales for both the dealer and for Steinway.
The Defection of Andre Watts The importance of a high quality dealer networkbecame painfuly obvious to the Steinway management team in early 1988 with the defection of aprominent "steinway Artist." In a televised Lincobr Center performance to cornmemorate the 25hanniversary of his debut with the New York Philharmonic, Andre Watts had chosen a Yarnahaconcert grand. Reportedly, Watts was dissatisfied with the service he had received from certainSteinway dealers and was frustrated by what he felt was a lack of attention to his requests. He madethis dear in a 1988 interview in which he jtrstified terminating his relationship with Steinway andmdorsing Yamaha as his piano of choice:
I sit in my house and practice and prepare a program. And I start to go onthe road and the instrurnents I encounter start taking away, start stealing parts ofwhat I've built up, what I've developed ... this doesn't work, that doesn't work, youcan't get ttris fixed. When you call back to New York, you may find out, verycordially, ... "that it's an independent dealer, we don't have any control over thatperson, I'm sorry." After a while, if there is something better, I don't see why not.12
Others would daim that the prirnary reason for Watts' defection was financial. WhereasSteinway charged for piano delivery and in-hall tuning, Yamaha waved thee fees for its concertartists. For a performer such as Watts, who played about 150 concerts per ye.u/ the resulting annualsavings came close to $1fi),0fi). Regardless of the reason for Watts'departure, however, Yamaha hadatbacted a high profile artist to endorse its concert grand pianos and this endorsement came at theogense of Steinway.
The Product Line Finally, Steinway began to expand its product offerings. This involved theintroduction of the Boston Piano line i^ 1992, the launch of the Steinway Limited Edition pianos in1993, and the launch of the Crown Jewel Collection of Steinway pianos in 1994.
The Boston Piano Steinway's first new product introduction was a mid-priced pianounder the brand name "Boston." This new product concept was the brain&ild of Steinway's RobertDove, who refined the concept and was subsequently given responsibility for the worldwide launch
D The MacNeil/Ichrer News Hour, Apli,L1, 1.988
11
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s0G028 Sblnway & Sons: Buylng a togend (A)
and marketing of the Boston line. For Steinway & Sons, the introduction of the Boston piano linerepresented a significant break with traditioru as suggested by the following assessment:
1n1992 the Birminghams did something that Steinway & Sons had resistedtfuoughout its history. They introduced a mid-priced piano. Every time the ideahad been raised before, it had been rejected because Steinway wanted to stay in theexdwive niche, selling only a top-of-the-line prestige piano. The Birminghamsbelieved that they cotrld retain the high end of the market while providing a lowerpriced [instrunentl for "customers who were not yet ready to acquire a Steinway."They named their new piano after their hometown of Boston.r3
Importantly, the Boston piano line was "designed by Steinway & Sons," but manufactured injapan by lGwai. The intent was to produce a line of pianos that sold for about halI the price of acomparably sized Steinway and to sell that line exdusively ttuough Steinway dealers. tr the process,the line would provide dealers with a high-margin product in the mid-market price range and allowSteinway to capture sales that might otherwise have gone to Yamaha. It was believed that Kawaiagreed to manufacture the pianos to make use of idle capacity.
In 1995, the Boston piano line consisted of eight models of vertical and grand pianos thatranged in price from $6,395 to$29990. By 1994, Boston piano revenues had grown to $15.9 million onthe sale of 2fl0 units, up from $2.7 million on the sale of 500 units nL992.
Steinway Limiteil Eilitions Steinway's second new product introduction was its LimitedEdition Collection. To celebrate 140 years of piano making, Steinway introduced a specially designedL406 Anniversary Limited Edition Piano in 193. Limited to 140 grand pianos, each in a mahoganyfinish, these pianos sold at a 25% premium to the traditional ebony Steinways. Withnr hours of beingmade available, Steinway dealers had purchased all 140 pianos. Based on this success, Steinwaydecided to introduce a limited edition piano every two years. Its L995 limited edition, numbering 145grand pianos, was entitled "brstrument of the Immortals" and was errgraved with the names of the 73immortal "Steinway Artists." It also sold out to dealers within hours of being made available.
The Crown f ezoel Collection Steinway's third new product introduction was its Crown
fewel Collection. Through L993, over 9oo/o of the pianos sold by Steinway were finished in dassicebony, with the 10olo finished in walnut or mahogany. In L994, Steinway sought to shiftthese proportions with the introduction of the Crown fewel Collection-otherwise traditionalSteinway pianos that were finished in exotic woods, such as east indian roeewood, kewazingabubinga, african pommele and macassar ebony. These pianos sold at 20o/o to 30olo price premiums tothe traditional ebony Steinway. In spite of these price premiums, by 1995, the Crown ]ewelCollection repreented alnrost 30"/o of Steinway unit sales.
The Purchase by Messina & Klrkland - Aprll 18, 1995
In spite of the positive changes made by Stevens and his management team, by the mid-1r990s, the runrring of Steinway was constrained by limited frnancial resources. With the companystill highly leveraged, there was a constant lack of working capital. Stevens described the situation asfollows:
Making pianos is capital intensive. Between lumber, serni-finishedpianos and finished pianos, there is over $75 million in inventory at any givenmoment. Yet we were financed on a shoestring, constantly banging up against ourcredit line, so that even a $200,000 had to be negotiated with the banks.
13 Richard IC Lieberman, Steinway& Sons,YaleUniversityPress, 1995
12
Stelnway & Sons! Buylng a togend (A) 500-028
This was especially true during the summer when we would erperience our seasonaldownfum in demand. Costs would stay constant, revenues would decrease, andwe'd be left scrambling for funds. Rather than focusing on the making and selling ofpianos, we'd be dealing with bankers and lawyers. It got to the point where it wasreally tough coming to work in the sumrner.
Finally, in late-1994, for personal reasons, the Birminghams decided to sell the company.Made aware of the sale by an investrnent banking firm, Kyle Kirkland and Dana Messina becameintrigued. By 1995, their small firm, Kirkland Messina, had purchased controlling interest in Selmer(in 1993), a meat processing company (n 1992), and a paper company (in 1993). hr Steinway, theysaw a well-run company that could benefit from their financial expertise. hr addition, as frwtratedmusicians, they saw a company that sparked their imagination. The decision to bid on Steinway wasnot without risks, however, as noted by Messina:
When we purchased Selmer i^7993, we had little to lose. We put in 9250,000of our own money, which represented the brllk of otrr assets, and we came away with23o/o of. the company. By the time Steinway became available, that 23o/o was worthover $10 million. So while many people saw the b.ryrng of Selmer and the buying ofSteinway as being sirnilar, we had a lot more to lose in Steinway.
Nonetheless, on the strong insistence of Kirkland (the piano player among the two), theywere one of 64 groups to bid for Steinway. And with a first round bid of $75 million, they were oneof tm groups invited to give a second bid. Subsequent rounds saw the number of bidders drop from10 to 4 to 1., with Kirkland Messina increasing their bid from $75 million to $90 million to $100million' Messina noted that their finat bid of $100 million was not the highest received by theBirminghams. However, combined with their successful track record with Selmer, it was sufficient towin Kirkland Messina the bidding war.
llovlng Fonrard
Upon completing the purchase of Steinway, the questions facing Messina and Kirklandqutd.ly became one of building a business. In particular, they needed to decide whether Steinwaywouldlontinue its high-end, niche strategy of being the world's pre-eminent maker of high qualityvertical and grand pianos? Alternatively, might it make more sense to forego this long-standingatategSr to pursue some bolder, more aggressive plan? Within these larger questions, the twopartrcrs needed to decide what to do with the recently inkoduced line of Boston Pianos. Firs! did itmake sense for Steinway to sell a mid-priced line of vertical and grand pianos? Second, if it did makecense, might there be other ways to leverage the Steinway brand name to ftrrther enhance revenues?Finally, what role should Messina and Kirkland play in the running of Steinway? It was one thing toormthe company; it was something else to run it effectively.
l3
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500-028
Exhibit 1
Steinway & Sons: Buying a Legend (A)
The Ncto YorkTinrcs Article, Aprtl19,7995
Steinway & Sons ,Is Sold fo, $100 MillionByKENNETHN. GILPIN
Steinway & Sons. the pianomanufacturer that has been a NewYork institution since its founding byHeinrich E. Steinway in 1853. rvassold yesterday for $100 million to theSelmer Company, a maker ofmusical instruments.
A private comp.uly that isprobably most famous for its Selmersa,rophone. an instrument used byboth arnateur and professionalmusicians including PresidentClinton and Kenny G, Selmer iscontrolled by two young formerDrexel Burnham Lambert investmentbankers who purchased their stake inthe company in 1993.
Under the tenns of thetransaction, Selmer and Steinwaywill continue to operate asindependent entities, with no changesin management, plant locations,marketing strategy or totalemployment. Each company employsabout 1,000 people.
"We are very excited." said DanaMessina, who along with his partner,Kyle Kirkland, controls Selmer. "Wethink it is quite an honor to becomepart of the team with Steinway."
Steinway has been producingconceft grand and baby grand pianosfor many of the world's mostaccomplished pianists from itsfactory in Long Island City, Queens.since shortly after the tum of the
cenfury. The sale marks the thirdtime in its illustrious history thatSteinway has changed hands.
In 1972, Henry Z. Steinway. thefounder's great-grandson, sold thecompany to CBS for an undisclosedprice, ending family control. Then in1985, a group of investors led byJohn P. Birmingham and his brotherRobert M. Birmingham, boughtSteinway for a price rumored to be inexcess of $50 million.
Without disclosing what hisgroup paid for the company, he saidthe $100 million sale price "beats
inflation by a little bit" over whatwas paid a decade ago.
In an interview, JohnBirmingham said "personal reasons"prompted the group to seek a buyerfor Steinway about four months ago.
StiI, people familiar withSteinway and the piano industry'sproblems. said they were amazed thecompan) fetched that much.
Over the last l0 years. criticshave been quick to fault Steinway forwhat they say is a decline in thequality of its new pianos, whichcurrently sell for as much as $75,800.In addition. the company has had tofight what some contend is a declinein demand, as well as compete with ahuge supply of older Steinwaypianos.
The $100 million price is "an
extraordinary number, and does notseem rational," said D.W. Fostle,author of "Steinway Saga," a book
about the company to be released byScribner's on Ma1, l.
According to Mr. Fostle. sales ofupright pianos in the United Stateshar.e fallen since 1988 b1, more than40 percent. and show few signs ofcoming back.
Competing with the huge pool ofsun'iving Steinways is anotherserious problem.
"It's as if every Ford build since1903 is still on the road and is asgood as a Lincoln Continental." Mr.Fostle said. "There is no wav to setrid of those pianos."
In the inten'iew. Mr.Birmingham acknowledged that thepiano market in the United Stateswas mature, and that the company'sbiggest competition was from "our
own used piuros." But he said thequalitl' problems had been solved.
In coming years, Mr.Birmingham said the company waslikely to find demand f?om agingbaby boomers. as well as foreignmarkets.
Steinway employs about 500people in the United States. Thecompany also has a manufacturingplant in Hamburg, Crermany. Lastyear the company had sales of a littlemore thiur $100 million.
Selmer, based in Elkhan, Ind..recorded earnings of a little less than$3 million on revenue of $ 101. Imillion last year.
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Sblnway & Sons: Buylng a t€gend (A)
Exhibit 2 Selmer Financial Information (Prior to Acquisition of Steinway)
500-028
Flscal Year Ended December 31.
1990 1991 1992 1993 1994(All Dollarc in Thousands)
