Estonia Pianos and its unique place in the piano industry during the “Great Recession”

It isn’t often that we as a retailer can sit down with the owner of one of the companies we represent and have him/her speak candidly about why they do what they do — or what their plans are for the future. Recently I had the opportunity to spend some time with Dr. Indrek Laul, and asked him some very pointed questions about his company. His answers were both fascinating and admirable.

A little back story: I was very interested to see what would become of the European segment of the piano industry when the recession hit in 2007. European piano companies were already struggling going into the recession, so how would they cope? Who would emerge from this recession still standing? As a piano retailer carrying five European piano brands at the time, my interest wasn’t just academic. I had a lot of “skin in the game,” as they say. So the below thoughts represent my experiences and perspectives over the past decade “in the game”.

Between 2007 and 2012, several European piano companies closed their doors. Others merged or were sold. There were instances of bankruptcy, complete withdrawal from the U.S. market, U.S. distributor battles, government bailouts — you name it. Other surviving companies were siphoning family money to keep the doors open. That’s not a dig at the Europeans — many piano retailers across the world were doing the same thing during that difficult time.

Why did the recession hit this market segment so hard? Beyond other issues facing the whole industry (dealers closing their doors and dealer financing vanishing), European piano prices were largely deemed too high by North American piano buyers — and they needed to go much higher. Piano prices weren’t keeping up with the US dollar’s decline so manufacturer profit margins were already very slim. Proposing even higher prices stood to dry up whatever consumer interest remained in new pianos. How can you viably increase prices when the US dollar steadily falls for a period of years, as it did in the early 2000’s? You can’t, and that is precisely the dilemma that set the stage for trouble.

Here’s a look at the USD-EURO exchange rate from 2002-2004 (view source):

1. January 02, 2002 – 0.9038
2. January 02, 2003 – 1.0446
3. January 02, 2004 – 1.2592

Due to the exchange rate decrease, piano prices needed to INCREASE 39.32 % within two years in order to stay level (exchange rate from 0.9038 to 1.2592 = change of 39.32%) — and that doesn’t take annual inflation into account. Thus, just to receive the same profit from your average piano, Europe had to increase prices by over 40% in two years. And that wasn’t the worst news. The USD continued to tumble all the way to 1.5928 by April 16th 2008 — a 76% change from 2002! (These dates and exchange rates will become very important in the later discussion of Estonia’s unique strategy and surprising success through this difficult time.) All European manufacturers faced either steadily raising their prices on a product that was already price-sensitive in the U.S. market or holding off, hoping that the dollar would bounce back. Manufacturers who raised prices would see slower orders. Those who didn’t had bigger problems ahead, when they would need to raise prices by a staggering 20-30% in one year, after seeing that there was no end in sight to the dollar’s freefall. When this occurred, many US dealers just stopped ordering. During this time, selling these pianos to consumers became more challenging because most American consumers either don’t know about or don’t closely follow European exchange rates. Presenting the same piano at a much higher price on account of obscure exchange rate issues was not an easy sell.

And if a European piano company survived that Great Fall of USD-EUR 2002-08, it was followed by the Great Recession (gulp). So leading up to and during this bloodbath, surviving manufacturers had to revisit everything from their product offerings, to sourcing supplies, to trimming work forces — and even complete rebranding. Some developed secondary and tertiary brands to sell, using their premium brand name as the hook for consumers. This was a trend Steinway started many years ago (a concept borrowed from Baldwin decades before) and was now seen in the “3 B’s” (Bosendorfer, Bechstein and Bluthner). This strategy includes sourcing components and even entire pianos from China and Indonesia — a far cry from the astringent purism of the European piano building tradition.

Many marketers would agree that this approach waters down a premium brand name — even if the construction methods of a company’s premium piano brand remains the same. In other words, say Bechstein (the famed piano builder from Berlin) is sold to a Korean piano company, Samick. Bechstein pianos themselves may not have changed, but some potential buyers are turned off because it is no longer European owned. This, and because Bechstein offers a lower-grade Bechstein AND a tertiary line of pianos called W. Hoffman — also made outside Germany — can confuse a consumer’s perception of a brand name. It can also jeopardize the resale value of a brand — in this case, the real “C. Bechstein” premium handmade pianos. This brand name “degradation” (for lack of a better word) is a real concept, as we have seen the resale value of handmade Baldwin Artist Grands plummet in the U.S. in the wake of Chinese Baldwin grand pianos imported for fractions of the price. The public doesn’t necessarily take the time to learn the difference. Even at its most subtle and unsubstantiated level, such brand name confusion is often used a bargaining chip by a consumer — “Well, I can get a NEW Baldwin for $8000, so why would I pay $12,000 for your USED one?” The argument is invalid but it doesn’t stop consumers from using it — or worse yet, believing it.

After earning a bachelor’s degree in marketing, then logging 25 years in the retail piano business, I’ve always enjoyed marketing. While I certainly don’t know everything about marketing in the piano business, having grown up in it, I probably know more than most in our industry. I have seen almost every manufacturer make marketing decisions that had me scratching my head. Most of the time, my suspicions were correct. Through all of this, there is only one company I have yet to see make a strategic marketing mistake, and that’s the Estonia Piano Factory.

When I had the chance to sit down with the president of the Estonia Piano Factory, Dr. Indrek Laul, during his visit to my store for a Piano Technicians Guild meeting, it turned out to be a most enlightening conversation. Via his insights, combined with knowledge I already had about the effects of the recession on the rest of Europe’s piano industry, I felt like I was experiencing a case study in marketing. And it wasn’t coming from a marketing professor. It was coming from a bright, thoughtful musician who happens to own a piano company.

Indrek’s approach on surviving the declining dollar was indeed unique. His strategy, along with a little bit of luck being in the “right place at the right time” paid off. He didn’t see how raising prices for the same exact piano would hold water with dealers and consumers. Instead he chose to introduce many changes and improvements to his pianos — almost 300 in total — leading up to the recession. By increasing quality he thought, he can offer a much better piano for a slightly higher price. Luckily, John Q. Public and websites such as pianoworld.com and pianobuyer.com had emerged into popularity, inadvertently carrying Estonia’s message in a way that no marketing budget could ever promote. Estonia became “The Golden Child” on the internet — the piano brand to buy. Even the toughest piano industry critics on the web were largely agreeing that Estonia’s prices, while continually higher through the 2000’s, were well justified. The hundreds of changes were noticed and publicized — and Estonia’s rating on pianobuyer.com rose to the level of Steinway, creating quite a buzz in and of itself.

As the Great Recession unfolded, Dr. Laul’s company was already in a good place. His prices were already favorable to the competition and he was running a lean ship with no excess inventory, but that didn’t stop him from preparing further. He decided that the best global marketing strategy would be to continue to focus on the North American market rather than to pursue opening new markets. This was interesting to me because the U.S. was falling into a recession, so conventional wisdom might dictate he explore new markets and go where the money is.

There were several problems with pursuing new markets / countries for a small company with limited production, however. There’s governmental red tape, the cost of establishing one’s presence and brand in new countries, producing professional marketing materials in various new languages, establishing dealer networks, service & support networks and transportation relationships, to name a few. That’s a lot of time and money, which would invariably translate to even higher prices for Estonia pianos, especially considering that the costs would need to be amortized across an annual production of a paltry but comfortable 200 units.

Additionally, the business climate in Europe was accustomed to customers flying in to visit piano factories. After all, a flight from Berlin to Tallinn is the same as taking a flight from Chicago to Orlando, so if people are used to taking such flights for big ticket items such as a piano, there’s no reason to maintain a large dealer network across Europe. So Dr. Laul didn’t need to find additional dealers in Europe.

Alternatively, the Estonia piano business infrastructure in the U.S. was already in place. The owner lives in the U.S. He speaks the language and doesn’t need a translator or a distributor to communicate with the people of the country. The dealer network is in place, the service & support is in place, etc — and the demand for Estonia pianos in the U.S. has always outstripped supply since they began distributing here almost a decade ago. Even with a slight decline in production, if necessary, this could be an easy storm to ride.

During the recession Dr. Laul has also used the downtime to design new pianos. Most manufacturers who weathered the storm are coming out of the recession with reduced product lines. Estonia went into the recession with three models and are coming out with five (the 7’4″ model 225 was added in 2010 and the 6’10” model 210 was added in 2012.) While other companies had to outsource materials from cheaper countries, Estonia did the opposite. They insisted that their instruments remain European inside and out. In an effort to maintain the purity of the Estonia brand name, they do not build additional piano brands or subcontract the use of their factory to another piano company. Estonia does not build vertical pianos at all and the quality of their grand pianos doesn’t degrade in smaller models like so many other manufacturers’ product lines do. The Estonia Piano Factory remains deeply focused — focused on building a single line of high-end grand pianos, led by a visionary who is truly a world-class musician and first-rate human being.

As we approach the 2013 NAMM show in Anaheim, I’m not surprised to see that, as of this writing, there are only two European piano manufacturers contracted for space at the show — Estonia and Fazioli. I honestly hope that the other companies remain strong and healthy for the future of our industry as well as out of respect for their illustrious past. But it’s also a time for me to be proud to be an Estonia dealer and to feel fortunate that my visit to their tiny trade show booth in 1997 has turned into one of the best business decisions of my career.

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