I last interviewed Jim D'Addario in 2004 - only a couple of years ago, but given the company's impressive rate of growth, it was clear that we needed to ask again: just how is it that this dynamic, New York-based manufacturer of musical instrument accessories, including D'Addario strings, Planet Waves accessories, Evans drum heads and Rico reads, seems to keep on pulling head of its competitors. This article appeared in the December 2006 issue of Music Trade News.
 

INTERVIEW: JIM D'ADDARIO

Though it may not have quite the obvious glitz of a Fender or Peavey (not least because its brand names aren't on display every time they are used) D'Addario is clearly one of the smartest-run businesses in US MI. Though it seems like it has been around forever, the company only dates back to 1973, when it as formed by John D'Addario Sr. and his two sons, John Jr. and James (Jim), who decided to break away from the ownership of CF Martin, which had purchased the previous family-owned string business, Darco. Of course, the D'Addario family's involvement with string-making reaches back several hundred years - but the point needs to be made that the success of the current business has come about pretty quickly.

Since 1974, what impresses most about D'Addario is its consistent growth. It now claims to be the largest music accessory manufacturer in the world - and with brands that include the eponymous strings, Rico reeds, Evans drumheads, Planet Waves accessories and others, it is not hard to believe. If hard evidence of D'Addario's success is called for, how about turnover figures that have shot from $71 million in 2003 to $100 million in 2005? And while some of that growth came about by acquisition, a lot didn't.

Acquisitions, none the less, have been part of the D'Addario plan since 1981, when the company purchased the long-established Kaplan Musical String Company. In 1995, it acquired Evans, the US drum head manufacturer, then purchased Planet Waves in 1998 and in 2004 acquired HQ Percussion and then Rico - the world's largest reeds business. The common themes in all those businesses are their indispensability to the musician, their comparatively low purchase prices and the fact that they are all consumables. It's a recipe for always having customers, whatever the commercial climate and it's also a recipe for being popular with retailers, as it is still possible to make margins from accessories and consumables.

It would be wrong, though, to assume that D'Addario either only grows by acquiring other businesses, or even that acquisitions are the biggest thing on Chairman and CEO Jim D'Addario's mind. Indeed, he points out, acquiring other businesses just happens when the right business comes along at the right time.

One effect of a business growing so rapidly is that you have to have the right management to make it work. Having the financial resources to buy other companies is one thing, but it's easy to bite off more than you can chew. Which may explain why D'Addario made two significant hirings this year - bringing in Rick Drumm as president (Jim D'Addario's previous role) and David Via, as vice president, sales.

'We had a chief operating officer, my second in command, who was here for about seven and a half years, and did some great things for us, but we decided to make a change and upgrade the position to president, as part of my succession planning,' D'Addario says. 'We hired Rick Drumm, who started his career as a professional drummer, then spent 12 years at Remo, ending as vice president of sales and marketing, and later was president of Vic Firth for ten years. I've known him for over twenty years.

'I'm 56 and the business has grown significantly. The next generation of D'Addarios that is working here are all doing fine, but there's no one yet ready to take over as the day to day leader of the business and we needed some help. I wanted someone who really knew the music business and Rick fit that perfectly.'

D'Addario's mention of having other members of his family currently in the business is almost an understatement - apparently there are 14 family members involved, which may go some way towards explaining why the D'Addario 'feel' is unlike some of the larger US corporations which can sometimes seem corporate to the point of dehumanisation.

'The family business aspect is going very, very well' he says. 'I have my son, my son in law, my brother's four children and his daughter in law, who are all integrating nicely into the business at various different levels in managerial positions. But, you know, when you have a family business that's, say, a $10 million business, it's easier to hand it over to the next generation, but at $100 million - and we are going to do $125 million in 2007 - that requires different skills for managers in the top level and I wanted to bring somebody in who had those skills now and could help mentor family members. But it's still very much a family business.'

A lot of music retailers are family businesses, too. Does D'Addario feel that gives his company some special affinity with them?

'Well, there's no question that family businesses operate differently, but our whole industry is changing and, whether it's a family business or a part of a larger corporation, the successful people are going to be the people who figure out how to adapt and adjust with those changes.'

Which, neatly, brings us to the two topics there is simply no getting away from when you talk to anyone in this industry - the Internet and China.

For example, how is D'Addario coping with the shift to on-line retailing of its products? Given that the USA habitually gets to these things before we in the UK, what has been going on over there and what effect has it been having on his business?

'We obviously have some very large customers now that are predominantly - even 100 per cent - online now, like Musician's Friend, and there's absolutely no way that a company like D'Addario could have a policy where we would say: "we support the bricks and mortar dealer and we'll never sell our stuff online". That would be suicide because there is X number of customers that are going to want to buy this new way and we have to keep our factories and employees busy, and our business growing. There is no way we could take a stance and say we want to keep things exactly the way they were.'

As he says, business changes. 'They once said VHS tape was going to kill the movie theatres, but they haven't. The theatres can gross $70-80 million on a weekend when they introduce a new movie in the United States. What VHS is did was create a whole other industry of selling intellectual property, first on tape and now on DVD, so I think online music and product sales could actually grow our business for everyone.

'The world is changing, so we all need to step back and say "How do I change my business model, so that I can fit into this new business culture?". And whether you're a family business, or owned by a conglomerate, you've got to do it. The big fear is that someone like Guitar Center, the one goliath here in the United States that is getting very big and which is very successful, is going to take over. And yet we see that lots of independent dealers - the ones that do their job right, that really serve their customers well - are doing fine. It's the ones that are marginal, that aren't really managing their businesses well, that are having problems.

'It's a question of getting smarter and doing your job better, to survive. You can't blame it on the Internet, or on corporations: you can only blame it on yourself if you don't grow as a leader.'

Which is fine, but if online customers are only interested in the lowest price, who tells the young guitarist he should buy D'Addario's XL strings instead of another of its types or, maybe more to the point, sells the young player up to the D'Addario brand in the first place?

'I think if somebody is buying ten sets of strings, he might look for a better price on the Internet - but then he has to pay the shipping and before he's done with it, it's pretty comparable with the street price from a retailer in a metropolitan area. I think price on our products hasn't been as big an issue as it may be on a starter Stratocaster guitar, or some product where big box stores are selling something for maybe $10 more than the price an independent dealer pays for it. I think dealers still have the ability to sell our products and make a sizable margin.

'I don't think Internet sales are necessarily price driven, either. I think a good part of the reason why people shop on the Internet is selection - retailers just can't carry every set of our strings or every SKU in our product line.

And here, D'Addario reveals a new approach to Internet sales that his company is taking part in and which, one hardly needs to be a soothsayer to guess, must be on its to the UK, given the prevailing trade winds..

'We use a company called Shopatron, based in California. They've developed a unique software system and we have 600 regular dealers that have signed-up to the Shopatron programme. How it works is, suppose you're looking on our site for a dulcimer string that no dealer has, locally. You hit the "Buy Now" button, it goes to Shopatron, which shows a price - and quite a high price, generally just a little bit under the manufacturer's suggested retail price. Shopatron then takes the order and offers it for dealers that have signed-up. The order goes to the customer's geographically closest dealer and within 24 hours the order is shipped. We started it in August and though it's not doing tremendous volume, already we've had over 600 orders - and they're mostly long tail items; things at the bottom of the catalogue, like Chordmaster for Palm Pilot, special cable adapters, things that we have in the inventory, that we know are good products but which most dealers don't stock yet. So it's helping us create a market for those products that people have asked us to create, but which we sometimes have trouble getting through the pipeline.

'So the Internet is not just about price - I think it's about selection.'

So where do we end-up with this? Will, one day, someone just decide to sell direct and have done with it?

'I don't think we'll ever get to that. It would be unfair to the customers that helped us get where we are today. We're very loyal to both our distributors and dealers and we try to help in any way possible to teach this new way of selling online. We don't want to short-circuit them. We're in the accessory business and with accessories, the average order size is very small, so it would not be a profitable operation for us to do it anyway. Selling direct to consumers is not in our short or long term business strategy.'

Moving on to discuss D'Addario's acquisitions and how they have been performing, it came as a surprise to learn that Evans, although known to have been doing well, has gone quite as far as it apparently has. Suggesting that while D'Addario strings are a market leader, Evans still had some way to go, D'Addario interrupts with a laugh: 'Oh no - not anymore. We're up to 10,000 heads a day now. As a matter of fact, in the United States were probably neck and neck with Remo.'

So how has he managed that?

'New product innovations, better quality, constant improvements, offering great service - and service is a big issue. The dealers know we're a reliable source and consumers are accepting our new products with open arms, too.'

Though it plays the game, D'Addario's approach to that great obsession of drum and percussion marketing - endorsements - isn't perhaps quite as keen as some of its rivals. Jim D'Addario suspects that the whole endorsement game might have been overplayed in recent years. 'I think they have less of an impact than they had ten years ago,' he says. 'I still think they are important, but people take advice from each other now, using Internet forums and talking among themselves. So if someone says "I've got this set of drums and this head worked well" the guy will try it. It's not just about listening to the endorsee anymore, though they are still a key part of our relationships and market growth in the industry.'

And D'Addario's response to this trend is typically smart. It employs people to watch the forums, listen, learn and, where necessary, react. There are Japanese camera and consumer goods companies, dozens of times bigger than D'Addario, who haven't worked that out yet.

Another key to success has been huge investment in production. And here D'Addario is revealed as an almost unfashionable business in these days of outsourcing. In fact it is so vertically integrated that it even has its own printing department to produce packaging and marketing materials, and has a solid (and apparently immovable) base in Farmingdale, New York. At a time when some business gurus will tell you to shift manufacturing, if not to third parties, then at least to owned facilities in the Far East, Jim D'Addario and his team continue to make over 80 per cent of their products in the USA. On Smith St it has some 279,178 square feet of premises, while over on the West coast it has a further 75,000 ft. But that doesn't make D'Addario parochial - far from it. When it bought the Rico business, it acquired plantation operations in Argentina and France and it also has offices in Australia, Hong Kong, France and Japan.

Buying Rico was a very big deal for D'Addario. Not only was it a large purchase, but it suddenly meant the company had a manufacturing facility in California and France and agricultural businesses, growing the reed cane, in Argentina and France. Had they found it a difficult acquisition to manage?

'It was a little bit, but we're getting pretty good at it and we are definitely doing a better job now that we are two and half years into our ownership of the company. We've grown in both France and Argentina, particularly in Argentina where we've just added 10,000 ft on our factory down there, and an additional 100 acres to our plantations - in fact we have almost 400 acres that we farm now and our harvests are way, way up. In fact we've instigated some great new technologies and experiments on the agricultural side and we hired a Ph.D. agronomist that spends time travelling, looking for spots to grow cane - so it's a huge investment for the long term. You plant a new plantation, but you don't get any playable canes for three years.'

Did he ever imagine he'd end-up a farmer?

'No, but it's fun, actually,' he laughs. 'But you know, it's mostly about good management skills, and they can be transferred and used in just about any application. Not that we have all the answers, but we have some good fundamental work ethics and effective management styles that have worked well in both places. In fact we're in the process of making an $11 million capital investment in the business over the next three years; rebuilding all the machinery, designing new automated machinery ourselves, introducing new high-end products like the Rico Reserve reed we launched a few months ago. It's a very exciting project.

'We're just starting to come out of the box with Rico. We didn't really do anything in terms of marketing with it for two or three years, because we wanted to make sure that we had the product right, so we have been working hard on that. We're not finished yet, but we have product that we can debut that we're proud of and we think we are going to be a major, major force in this market, worldwide.'

And so, inevitably, to China. Not a week passes, it seems, without someone in our industry moving manufacturing to the Far East and yet it is a trend that D'Addario has largely bucked. Is it a stance it can maintain?

'We absolutely think so - if not we're making a very bad gamble right now. We're making a huge investment in all three factories, to automate production and improve the quality of our reeds, drumheads and strings. In fact we're in a tremendous factory rebuild for the string programme as we speak. In three years we will have replaced 90 per cent of our winding machines with automatic ones giving 50 per cent more production and higher quality. We are investing hard so that, even if somebody beats us on price, we're going to maintain the quality side of the business'.

It may not be true that you can transfer the business skills of running a $125 million business down to a single music store struggling to survive. Or maybe you can. Jim D'Addario runs one of the best-managed businesses in MI, so if he had the chance to impart some of that skill, what would he say?

'Advice to smaller dealer? It's hard work. You've got to do the job better than the big chain guy. He might be buying a little better than you on price, but you have to out-service him to stay in business - and it's really all about service. There's a great little deli in Ann Arbor, Michigan, that specialises in giving the best service in the world. It's called Zingerman's and they have a little book called "Zingerman's Guide to Giving Great Service" - it's great, I just read it and they also run clinics on great service. I really believe that if every dealer was to read that little book and honestly ask if he was doing this stuff, then he would see his business grow. It's about service and keeping the customer happy no matter who or how big they might be.'

Ends.

2006 Gary Cooper