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THE
APRIL 5, 1924
MUSIC TRADE
REVIEW
Why the 36 Per Gent. Overhead Cost?
Excessive Selling Costs Lower the Piano Merchants' Net Profit Below Its Proper Ratio to Sales—Overhead
Problem a Neglected Study in the Trade—Its Relation to Distribution Methods—The First
of a Series of Articles on Present-Day Piano Distribution
NE of the leading dealers in the Western
section of the retail piano trade recently
reported gross sales of a certain type of
inst.unient in the line he carries amounting to
over $1,000,000 with a net profit of less than $50,-
000, this before deductions had been made for
taxes, etc. Of three of the largest music dealers
in the country who recently made public their
annual statements, not one of them reported a
net profit of more than 7 per cent. An investi-
gation recently conducted by The Review, based
on figures furnished by approximately 100 deal-
ers, showed that average overhead costs in their
warerooins ranged slightly over 36 per cent, in
some cases going as high as 42 per cent. One
of the best-known dealers in the trade, shortly
after the results of this investigation were made
public, made the flat statement that the real
profit in the average instalment piano sale, in
many cases, represented no more than the inter-
est collected on the outstanding paper, which
the sale created.
A Fundamentally Wrong Condition
These facts show a condition in the retail
piano trade which is fundamentally wrong.
Representing one of the highest forms of
specialty selling, and moreover conducted on an
instalment basis io the extent of at least 85 per
cent of its sales, the average net realized does
not represent an adequate return on the invest-
ment when the risk is taken into consideration.
Vague charges of extravagance in selling costs
in the past have constituted the sole reasons
alleged for this condition, but unquestionably
the causes lie far deeper than this and are prob-
ably inherent in the conditions under which the
industry is conducted at the present time. They
have arisen out of the fact that the industry has
never studied its distribution problem as a
whole, has not directed it upon a reasonable and
logical plan, has lacked adequate knowledge of
its actual state, and has permitted it largely to
come into being as the result of disordered
growth rather than as the result of study, plan-
ning and preparation. For an industry of its
size there is probably less known about it to-day
than of any other similar industry in the
country.
These arc perhaps strong statements, yet
every piano man who has ever given compre-
hensive thought to his own industry knows they
are true. Despite the progress which has been
made in the last ten years in the betterment of
distribution methods, much more remains to be
done before the industry will have passed
through its present transitional stage and be
truly placed upon a modern basis. For the dis-
tribution of pianos is by no means a unique
problem; it has all those sides which have al-
ready been solved in other lines of industry,
which have either lacked the burden of tradition
that acts as a brake upon the adoption of new
methods, or else have studied and solved their
problems in common.
First Definite Figure
The Review has made the first comprehensive
study of retail overhead that has ever been
undertaken in the music trade. From this has
come probably the first definite figure telling
the average cost of making the average piano
sale. It is the basis from which the further
study of overhead problems must proceed. That
is the fundamental condition which confronts
both manufacturer and merchant at the present
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day, one that is of mutual interest. F"or the
manufacturer bears an equal share of respon-
sibility with the merchant for conditions as they
exist, since with but a few prominent exceptions
it is only within a very short time that he has
devoted any attention to them. That this mutual
responsibility is to-day more widely recognized
than ever before is one of the most encouraging
signs that are present, and the one that is most
likely to bear fruit in the shape of increased ex-
pansion within the near future.
Hound up closely with the questions of dis-
tribution and overhead is that of increased turn-
over. Turnover in the retail piano trade is a
complicated proposition, primarily because of
the preponderant instalment element in the re-
tail sales. Stock turnover is likely to be far dif-
ferent with many dealers from capital turnover,
a condition which exists because of the widely
varying financing methods which are in use. Un-
questionably, however, turnover to-day does not
bear the proper relation that it should to tin-
percentage of net profit, else the average net
profit of a dealer over a year would be consider-
ably larger. This directly leads back to distribu-
tion methods, and shows once more conclusively
that what is wrong with piano selling to-day is
a question of distribution and nothing more.
In short, if one seeks the reason for the heavy
overhead cost in retail piano selling, one is in-
evitably led to the question of distribution.
There is no getting away from it, and many of
the leading figures in the trade, both manufac-
turing and retail, realize it and are using their
best efforts to reach efficient solutions. It is the
purpose of this series of articles to deal with
some of the high-lights of this progress and in
some detail to discuss what is being accom-
plished.
Lack of Knowledge
Retail distribution to-day suffers primarily be-
cause of the dealers' lack of knowledge regard-
ing the territories which they cover. They are
not selling a product of either universal or
staple demand. They are not selling a product
which has an uncompetitive field. On the con-
t.ary, the piano in its various forms has the
sharpest of competition, since it is usually paid
for from the surplus which the average family
has over and above the amount required for the
actual necessities of its existence. Yet the aver-
age dealer scatters his selling efforts over the
entire mass of the population and rarely con-
centrates upon those classes which are able to
buy what he sells. He sells pianos, or endeavors
to sell them, too much like groceries are sold.
As a result his sales cost is high through the
wastage involved in handling prospects that are
cither unable to buy at all or else if they do
buy are exceedingly poor credit risks.
As a matter of fact, all this is unnecessary,
provided he is willing to do a little preliminary
work. If a dealer will consider, according to
figures available and within his reach, taking the
families of lowest incomes only into considera-
tion, that the average home with an annual in-
come of between $2,000 to $4,000 has an aver-
,-ige surplus of between $500 and $1,000 over
that required for the actual necessities of life,
that the family w r ith an income of between $1,000
and $2,000 has the sum of between $200 and
$400 available, and will provide similar propor-
tions to families of greater incomes, he will be
in a much better position to direct his selling
efforts where they will count for a good deal
more than they do when scattered haphazardly
over his entire territory. If he will find the
number of families of these various incomes in
his territory, and he can easily do so by using
the income tax statistics published annually by
the United States Treasury Department, he is in
a much better position not only to sell more
economically, but to concentrate on those grades
of instruments for which his territory presents
the largest demand. Few dealers ever do this,
yet it is the simplest and most necessary of all
preliminary work in planning a retail selling
campaign and in buying the grades of instru-
ments which are to be so sold.
Rigidity of Sales Methods
This is but an example. Here is another.
How many dealers are there wjio know the pre-
vailing industrial conditions in their territories?
All know them generally, of course, but few in
sufficient detail to apply them to their Own
selling policies. Some two years ago there were
a number of dealers doing a good business in
low-priced players in a territory that drew most
of its local prosperity from coal mines. Strike
conditions killed this business completely. With
the exception of one dealer, all of them con-
tinued to work along the same old lines. This
one dealer switched his selling efforts to a better
grade of instruments and did business while all
his competitors were dead with the exception
of paying high overheads right along. It seems
paradoxical that where cheap instruments could
not be sold due to strike conditions, better grade
instruments could be moved, but the answer is
simple enough. The officials and permanent
forces of the mines were continued in employ-
ment and paid their full wages. They were a
market, in fact, the only existing market, and
the'"c was only one dealer going after them
strongly. H e had practically an unrestricted
field and he cashed in, his overhead keeping at
its proper relation to his volume. Yet this was
something that every other dealer could have
done just as well if he had thought the situa-
tion out from the facts at his command.
Improve Distribution
The comparatively high selling cost thus can
be traced back largely to inefficient selling
methods, or, in other words, poor distribution,
(ietting at the nub of the question, the trade has
got to have better distribution, both wholesale
and retail, ii it is going to have lower selling
costs. The manufacturer has to link his own
selling efforts more closely to those of his deal-
ers and come into closer relations with him;
the dealer in turn must take advantage of the
manufacturers' co-operation and must study his
own selling problem in relation to the territory
from which he draws his sales. The reasons for
a 36 per cent overhead are these, and upon their
solution depends whether or not it will be
bi ought to a lower figure. And also upon that
solution depends whether or not the industry
will once more expand in a proper ratio to the
growth and development of the wealth and
population of the country.
Further articles in this scries, which will
appear consecutively in The Review during the
next four weeks, will deal with a number of
different aspects of this very important question
and it is hoped will prove of great value to
those merchants who are endeavoring to im-
prove their methods.
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