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PCBB Banc Investment Daily January 13, 2014
Banc Investment Daily
January 13, 2014

Top Drawer Or Bargain Basement

No matter your playing skills, everyone loves a piano. Although the number of pianos in homes has declined over the years (downsizing, foreclosures, digital interests, etc.), there are still enough around that kids of all ages can usually find one to play. But let's talk about the top level in the piano world, specifically, those brands found in concert halls. For many, the piano that epitomizes excellence is Steinway and it is favored by players ranging in style from Harry Connick Jr to Lang Lang. Unfortunately, after years of financial trouble, Steinway was recently sold to a hedge fund manager. The number of piano manufacturers worldwide has dwindled from more than 300 in the first half of the 20th century to only 9 and now there is one fewer. Similarly, Pleyel, the world's oldest piano maker who made instruments favored by Chopin and Stravinsky said it too will close its workshop in France after more than 200Ys.
As in so many industries, the forces at work here are varied. Chinese manufacturers can produce a piano far cheaper, digital versions abound, they are difficult to carry around and people seem more interested in playing games it appears than learning how to play. Despite these headwinds, there is always a market for top quality products, so that fact alone shouldn't alter the economics entirely. In fact, the best pianos are eye-openingly expensive - a handmade concert grand piano by either Pleyel or Steinway costs north of $125k. Consumer versions are available as low as $2k and like every other industry, one can go digital for far cheaper with electronic keyboards running $100.
As we circle back to banking, consider that Steinway and Pleyel took two approaches but both ended up in trouble. Steinway still builds grand pianos for concert halls at its plants in New York City and in Germany and they offer piano lessons to the super-wealthy to build on their high-end market. Meanwhile, Pleyel also maintained its focus on the high end market and made only tailor made instruments for concert halls and connoisseurs. Despite a similar focus, Steinway survives yet Pleyel did not adapt and is now closing their doors.
When consulting with banks, we spend quite a bit of time talking about the 80/20 rule (20% of customers generate 80% of the earnings in a bank). The piano story above was provided to remind community banks they cannot hold onto the past too long if things are changing around you, so be nimble. Do not rely on only one part of the market, even if it is the most profitable. This concentration is risky over time because markets and customer preferences change.
There is no issue having a specific market focus like commercial banking or business lending. After all, the expertise of personnel already in the bank likely has a business focus. The key is to segment customers to truly assess where money is made in the bank and take action to reduce concentrations if at all possible over time. Focus on specialties and strengths, but be agile, adaptable and sensitive to customer preferences.
It's not practical to change your geographic location, but be sure to keep up with economic, demographic and other changes within that geographic footprint. A bank always has a choice on where to focus its efforts, so focus on your strengths, but keep your eyes open for change and opportunity to succeed.
We sincerely hope for the best for Steinway and its new ownership, but this serves as a reminder. As with every industry, the piano makers illustrate that one must continually adapt and change or eventually face the music.