Sunday, July 4, 2010

Martin Guitars & The Price We Pay (Part 3)

No company operates in a vacuum. It is very rare not to have competitors, and if you manage to find a niche where there aren't any and have success than you'll soon have some. The cost of producing your goods and/or services is also going to be a factor in your success. If you can't do what you want to do at a cost that leaves you enough margin to make an acceptable profit than you have no business being in business. This is why figuring out the cost and likely pricing of your product or service as early as you can is so important.

Not surprisingly, in this final article on the Martin Guitar company I'm going to look at their competition & possible issues related to their raw material costs & availiability. Guitar companies have some unique and interesting challenges, particularly ones that have been around for a long time and have customers with very specific ideas as to what is, and isn't acceptable.

The Competition

No other company in this business has had the longevity or consistent reputation for Quality of Martin. Taylor and Gibson are their two largest competitors. The quality of both companies is currently very good. Gibson has been around since the late 19th century and has had both highs and lows in terms of the quality of the product they deliver. Their reputation is built more on electric guitars and arch tops though they have made some well respected flat top acoustic guitars as well. Taylor has only been around since the 1970’s but has had a reputation for building quality instruments during that entire time. There are two additional categories of competitors to Martin. The first are “boutique” builders. Boutique builders are very small, generally one to five person operations. The most successful charge very high prices and have long waiting lists. Prices vary greatly depending on the reputation of the builder and how custom the desired instrument is. The final category is inexpensive imports, generally made in China or some other part of Asia. Build quality and materials vary but is often quite good. Many of these builders have little or no interest in where their materials came from and how they were harvested. This translates into lower material costs on top of much lower labor rates.

The following table shows a comparison of five different guitar types across three different companies.

MSRP Comparison (Summer 2009)
Type
Martin
Taylor
Blueridge
Premium Rosewood
$9,999
$7,498
$1,650
Mid Rosewood
$6,499
$4,998
$1,095
Low Rosewood
$2,999
$2,898
$895
Mahogany
$2,599
$2,398
$895
Laminate Back & Sides
$1,199
$798
$496

Blueridge is a brand marketed by Saga[i]. These instruments are made in Asia and generally considered to be of good quality. As you can see the price differential between Martin and Blueridge is substantial. So long as Martin can maintain their reputation as the preeminent builder of American style acoustic flat top guitars they will be able to continue to charge a high premium for their instruments. Sales volumes will vary depending on the strength of the economy but there has been and likely always will be people willing to pay top dollar for the Martin name. The Martin advantage is clearly differentiation.


Cost


Traditional materials are increasingly rare and costly. Over the past few years Martin has resorted to modifications in their standard models in order to keep their desired price points. Exhibit i from part 2 of this series shows the MSRP of Martin’s D-28 Guitar in 2008 dollars from 1980 through this year. Over that entire time the price has rarely strayed far from $3000 in year 2008 dollars. In order to maintain that real price point the company has had to make many changes including factory upgrades and material changes. The most substantial being switching from Mahogany to Spanish Cedar for the necks of most of their guitars. There is a silver lining to this cloud. Martin is able to market special edition instruments that still use the rarer materials and charge very favorable prices.

Martin’s strong adherence to environmental standards and laws such as CITES[ii] likely leads to higher material costs. There are also opportunity costs as they cannot always attain the volume of material they need to service demand for rare and premium wood types. Here is a link to a video from a public statement on the challenges that Martin faces in regards to materials that Chris Martin IV made in August 2006.

http://www.youtube.com/watch?v=epN43HC8g4k

For more readily available materials Martin does enjoy a cost advantage due to their high volumes.



Mission/Strategy

A big part of the Martin brand is the location of the factory and the history. As such all but their least expensive instruments are still made in the very same town that has been Martin’s home since the mid 19th century. Martin has a strong environmental focus, insisting on proper documentation for all materials used.

Martin clearly prices their instruments at a very high premium and seeks in real terms to maintain a consistent price point across time. They can and have made adjustments to materials and manufacturing processes in order to maintain these desired price points. As materials such as Mahogany become increasingly difficult to attain Martin is going to be under a lot of pressure to make further changes that may alienate their core customers who are very conservative in regards to what they consider acceptable. Every change that Martin makes in their standard series and above (D-18+) causes new complaints and cries that the world is ending even though these sorts of changes have been made in the past; for instance the switch away from Ivory as an ornamentation material in the early 20th century and the switch from Brazilian Rosewood to Mahogany on their 18 series guitars at about the same time.


Summary

Martin’s biggest pricing challenge is and will continue to be the increasing rarity and cost of the materials used in their mid to high end instruments. This challenge is not unique to Martin but they do face additional difficulty because of their volume and strong environmental stance. Smaller and/or less scrupulous builders can and have continued to attain materials in sufficient quantity and often at lower cost. The conservative nature of many of Martin’s best customers makes it difficult for them to make substantial changes in the materials used to build their standard and above series guitars. However Martin has been able to satisfy some of the traditionalist’s desires by introducing limited edition guitars that conform much more closely to historic specifications than current models. In addition they are able to charge an additional premium for these special edition instruments that almost certainly offsets the added costs and generates improved margins. Even so the time is coming when Martin will have to make some very fundamental shifts in materials or increase real prices substantially. That will be a significant inflection point in Martin’s history. There is the potential that they will see substantial brand erosion when that happens which could in turn lead to significant sales volume reductions. It is doubtful that they can continue to exist in their current form if that happens. It took Martin 150 years to make their first half million guitars. Between 1990 & 2009 they made an additional eight hundred and thirty thousand.

[i]
Link
[ii] Link
[iii] Info taken from “Martin Guitars: A Technical Reference” by Johnston, Boak & Longworth

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