Klipsch Exec. Explains Thinking Behind Bold Distribution C

Early last month, Klipsch Audio Technologies announced a bold new distribution strategy that includes ending relationships with two key dealers and adding a major new retail partner. According to company officials, the changes will bring order to the market, address escalating regional conflicts, and provide a consistent brand story across all channels of distribution.
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Early last month, Klipsch Audio Technologies announced a bold new distribution strategy that includes ending relationships with two key dealers and adding a major new retail partner. According to company officials, the changes will bring order to the market, address escalating regional conflicts, and provide a consistent brand story across all channels of distribution.

As part of the plan Klipsch has discontinued its relationships with Magnolia Hi-Fi and the Tweeter Home Entertainment Group and its subsidiaries. Additionally, Klipsch will begin selling a limited line of its award-winning Synergy Series loudspeakers, excluding installed and outdoor models, at Best Buy stores across the country on Memorial Day weekend this May.

The Reference Series, Klipsch's flagship line of high-performance loudspeakers, will continue to be sold exclusively through audio/video specialists nationwide.

Paul Jacobs, chief operating officer of the Klipsch Worldwide Products, recently spoke with Residential Systems editor, Jeremy Glowacki, and explained more about his company's new strategy.

JG: There have been several reasons cited why Klipsch is discontinuing its relationships with Magnolia and Tweeter, but was there something in particular that provided the final motivation for your decision?

Paul Jacobs: The challenges of regional conflict have been out there. We've seen it for the past year, and when I say we've seen it, I mean that in markets where we have overlapping distribution with large retailers such as Good Guys, Magnolia, Tweeter and Ultimate Electronics. In the case of Tweeter, they went through some acquisitions but these things started to become more of a challenge as these retailers met in multiple markets.

A lot of this had to do with timing and what was the best decision for the future of Klipsch. Eventually when you have lots of retailers carrying your brand, if it's not managed properly at the floor level, sales people start to step away from the brand. They're looking for some protection and knowledge that they're not going to be "shopped" on a particular model. If you take Tweeter and Magnolia out of the equation, we just looked at the regional conflict that was going on. Easily as important was the fact that not only was there conflict by multiple large retailers having the line, but in the markets where this was happening where we had a good independent specialist, the first people to go away were the independent specialists. Their decision was easy. If they had two of these large regional guys fighting over a product line, they had to do something else. For us, the independent specialist has really been the core of our business. To see that start to be negatively impacted was not good for us.

JG: What happens in this regional conflict and how do you decide which retailer may make more sense to stick with you for the Reference Series?

PJ: One of the responsibilities I think every manufacturer has in working with the regional partners is that we all have challenges of having too many models, too many SKUs. We all have to manage our inventory turns. Klipsch has consciously tried to do a better job of finding the right products in the right price range so that one product could cover what it used to take two to cover. Since we have fewer SKUs, we really need to have a top down selling strategy. You need to start with our flagship Reference R7 System and then sell down from there. A retailer has every right to carry what they want. They don't have to stick with our strategy. It just doesn't work well and eventually the experience for the consumer deteriorates, and it certainly doesn't help our brand. Last year when component audio was down 15 or 20 percent, the dealers that followed our top down selling strategy grew 35 percent with Klipsch.

JG: That gives you confidence, even in a down economy, that it's really the best way for your dealers to conduct business?

PJ: Yes, we think it is the best way, because even in a down economy people are going to make buying decisions about entertainment products. The retailers have a tough job. They've got to select what brands they're going to carry, what systems they're going to display. They have sales people who are not seeing as many customers come through the door and there's a tendency sometimes to sell that little home theater in a box system that isn't as expensive. In the end, our responsibility is to bring reasonable solutions to the retailers so that they can maximize every opportunity that comes through the door. For the industry to maintain a truly viable and growing high-end audio marketplace we think that Klipsch and other manufacturers have to work more closely with retailers to find the right strategies, the right products, the right approaches to the market so we don't continue to see it shrink the way it has the past three years.

JG: Shifting gears a little bit, what about Best Buy makes that retail chain an attractive channel for your Synergy Series? What has Klipsch learned from the experience of selling its ProMedia computer speakers through Best Buy that convinced the company to expand its relationship?

PJ: We've talked to Best Buy and the other larger retailers for a number of years. Over the two and half years when we launched our products there, in the entire computer category we raised their average selling price higher than any other product that they had ever brought into their company. What we liked about dealing with Best Buy on that end was that they were the kind of retailer that said 'Look, if you guys know audio, come show us how to do this right.'

So that was a positive and then our feeling about Best Buy is that a lot of people enjoy the shopping experience that they get at Best Buy. It's a very well educated demographic, financially fairly affluent and self-educating. If you look at their demographic, I believe their numbers are something like 70 percent of their customers are making purchases over a certain amount have done research on their website and the manufacturer's website before they come in. We like that because it allows us to tell the story about these products before they get into Best Buy's store.

A lot of people who might not shop at specialty, shop at Best Buy. When it ties back to the computer speaker experience, one of the things that we were really focused on was that we reached these new consumers that are both a younger age and have different shopping habits because they're at Best Buy and not at specialists. We were very focused on reaching that new consumer base, telling them our high-end audio story and giving them their first step-up audio experience. It turns out that a lot of our dealers buy into that concept, and they've seen that work and seen that the brand exposure [from the ProMedia line] has been significant.

Originally, were going to exit the Synergy line and go to an all Reference strategy with the specialists. But, Best Buy was very much interested in a premium audio solution and a partner that could really work with them closely in developing that business. We think that they are a great retailer, as are our specialists. They just go to market in significantly different ways.

JG: you confident that Best Buy can adequately demo your speakers in their stores?

PJ: We're working very closely with them on how we set the products up and where they go, but understanding that they're in a transition mode. They plan on changing some of their audio displays in their newer format stores in addition to doing some retrofits.

Fortunately, the Synergy line demos very well for the Best Buy sales floor. The products are not finicky and fussy. People can turn them on and feel and hear the difference easily. We will work very closely with them to make sure that they're set up properly in which ever environment exists because they have several formats of stores and then as Best Buy continues to change and upgrade their audio mix and how they demo products it's just all the better.

JG: In addition to utilizing Best Buy for your Synergy Series, explain how Klipsch is planning to make up for lost volume with its Reference Series sales. Are you adding more specialist dealers?

PJ: We eliminated over 200 storefronts, particularly in the Pacific Northwest and East of the Mississippi. I think we have a direct sales team of 22, and we use one rep firm in metro New York. They will not have any involvement in the Best Buy relationship, nor do they have any involvement in our multimedia relationships. Their job and reason for existing is to go back out into the marketplace, with our new Reference Series of products, and cultivate the opportunities that exist through independent specialist retailers and CEDIA channel. We wanted to free up our sales team, reduce the number of stores that they had and allow us to rebuild our independent distribution, either through on the contracting side or specialist retail.
JG: As Klipsch expands its network of A/V specialists and custom installers, what standards will the company be using in its recruitment of new dealers and what expectations do you have for these dealers?

PJ: Before went down this road we had written a Reference dealer profile and we already have a profile for contractors. For the Reference, the dealers must have a retail storefront, they must have well-trained people and they should allow us to come in and train the people and to work closely with them.

We want to make sure that we're not repeating regional conflicts, so we want to be very careful about not setting up retailers on top of other retailers. We also want retailers that have the financial wherewithal to support the brand and the strategy. I think if we can find those kinds of win-win relationships that the new Reference brand strategy is going to work extremely well. We've already had a lot of calls and inquiries about picking up the new Reference Series as people have become familiar with what markets are becoming open.

JG: You mentioned a couple of territories, but what other specific parts of the country need to be bolstered with new dealers?

PJ: New York metro is where the Wiz was and they tend to be in kind of a deteriorating situation. They had gone from about 44 stores down to 17 and then the day that we terminated them, they announced that they were going to close all the stores. In the Pacific Northwest you're talking about Washington and Oregon, primarily. In the Northeast it's Philadelphia, Boston... basically all of the New England area. Then you've got Atlanta as another major market. But there are a lot of secondary markets that we will be going after, as well.

JG: Explain your new anti-Internet sales policies that tie into the introduction of your new Reference Series.

PJ: First of all, we have had two people work almost full time trying to fight Internet sales activity. It's not an easy battle, but we've gone to a zero-tolerance policy with the launch of our new Reference flagship line. A first offense means immediate termination. That was a big deal to the specialists. We've terminated more than a dozen significant customers. We don't really like doing that but the Internet thing creates some real disruption.

JG: Obviously the traditional PARA and CEDIA dealers overlap in some areas, but still maintain certain key differences. One difference, of course, involves the need by PARA retailers to carry inventory vs. a CEDIA custom installer's desire for just-in-time delivery of products. Explain how Klipsch plans to enhance its distribution capabilities in the coming months and how these two relatively distinct channels will be served.

PJ: The one thing that we've learned is that Klipsch does a reasonable amount of business in the contractor world, but we didn't grow up in that business. Dealing with things like having speakers on someone's doorstep in 24 hours was not something that we had done a great job with because we just weren't set up that way. Two years ago we started to go through a transition, and we knew that it wouldn't be something that happened overnight. The first thing we did was to dedicate a market segment sales manager to that area, and he's done a great job in all of the areas where he's worked. He's really helped to understand the changes that we needed to make, but he's also helped us identify where and why Klipsch should be in the marketplace and what we bring to the market.

One of the big realizations is that we've got to have a ready base of inventory to deliver the CEDIA base of contractors. There are alternatives out there to doing what we want to do but they are not good alternatives for us because we want to maintain control of our distribution. Therefore, working with logistics operations has allowed us to establish mini-warehouses in strategic parts of the country. We will now be able to give that 24-hour type delivery when it's needed. We're also adding more people, expanding our product range and bringing in unique offerings. In the end if we couldn't ship the product in a timely fashion, then some of the rest of it wasn't going to matter.

JG: As you try to bolster sales in specialty retail and custom installation do you plan more involvement in groups like CEDIA and their training opportunities?

PJ: Absolutely, our involvement with CEDIA has been rather limited so far. We haven't done any of the Regionals. We are actually putting together a larger dedicated team from which we will take away operating responsibilities except for in the CEDIA channel. We feel that this is an incredibly important part of our future. We have to dedicate the right resources to this, because frankly our core business has been specialty independent retail and so many of those dealers are shifting into the install business. Residential contracting went from being an incremental business that we did to really being part of our core, and we've got to dedicate the right resources to make it work.

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