Rhythm Musical Instruments Revolutionizing Music

Siddharth Tiwary
04CS3010 B-215, LLR Hall IIT Kharagpur

Executive Summary
Rhythm Musical Instruments faces an important new challenge. Our privileged position as the premier name in high-quality musical instruments, the choice of the concert professional, is threatened by new technology. Electronic alternatives become more important every day. Yet our most important product line, acoustic instruments, is addressing the slowestgrowing market segment in the industry. Our answer to this challenge is change and development. This 5-year business plan guides Rhythm Musical Instruments through the transition to new technology. We will continue to develop and expand our position in keyboards, speakers, and related electronic equipment, while slowly reducing our present dependence on acoustics. Our new plan is ambitious. We expect a dramatic increase in sales and profits, as shown in the chart Business Plan Highlights.

Vision
Four measurable objectives drive the changing direction of Rhythm Musical Instruments: 1. To increase sales to Rs.74 million in 2008 and to Rs.80 million in 2009, reaching more than Rs.120 million by 2008. 2. To maintain gross margins above 40% throughout the 5-year period. 3. To increase sales in keyboards, speakers, and music electronics to account for 55% of our sales for 2009. 4. To increase profits to more than Rs.2,400,000 in 2008 and Rs.400,000 by 2009.

Mission
Using the best mix of technology and tradition, Rhythm Musical Instruments empowers the music professional with the best possible instruments. We provide the medium for professional musical expression.

Company
Rhythm Musical Instruments is a privately owned corporation founded in 1987 by Mr. Vijay Malhotra, whose family still owns significant stock. Headquarters and manufacturing facilities are in Mumbai, and sales cover major markets worldwide.

Company Ownership
Rhythm Musical Instruments is a private corporation, owned by fewer than 30 shareholders. The shareholders include 14 members of the Malhotra family, who among them hold approximately 40% of total ownership. Another major block, approximately 30% of ownership, is held by Fabrionas, Inc. The

remainder is owned mainly by employees and former employees or their families.

Product Lines
Rhythm Musical Instruments has a reputation for very high-quality sound and very high-quality instruments. We are not well known to the buying public, but we are a respected name among the top concert musicians in the world. In all of our product lines, we are positioned at the top of the scale in price, quality, and reputation.

Company Location and Facilities

Headquarters and manufacturing facilities are located in Mumbai at 280 South 68th Street, Mumbai. The 10,000-sq. ft. facility is 10 years old now, but still works well for Rhythm with ample capacity in manufacturing, shipping, and office space.

Product
Rhythm Musical Instruments makes high-quality musical instruments, the preferred brand of the professional musician. Our acoustic line sticks to traditional materials without compromising sound generation. Our newer electronic lines preserve the reputation for quality, while building a bridge to newer technologies that will be important for the future.

Product Description
Rhythm Musical Instruments offers six product lines: acoustic instruments, electric guitars, keyboards, speakers, other electronic products, and other products.

Acoustic Instruments
Acoustic guitars are still our largest single line of products.

Electric Guitars
Our Rhythm electric guitars are known as the quality high-end of the market for concert and classical musicians.

Keyboards
Our keyboards are used by some of the finest musicians for practice studios and electronic studios.

Speakers
We developed a line of speakers to complement our guitars, keyboards, and other electronic products.

Electronics
These have been developed to serve the customer base with MIDI electronics, computer composing, and accessories our customers need to continue to produce the finest-quality music using Rhythm Musical Instruments products.

Other Products
We also produce accessories such as guitar straps, cords, and related products to serve our customers.

Market Analysis
Overall market growth is estimated between 6% and 8% per year, in both units and value. Distribution patterns vary a great deal by segment, from the mass retail distribution of the low end to the specialized distribution of the high-quality and high-price segments. Rhythm operates in a narrow part of the market; instruments and equipment are sold to professionals who insist on the highest-quality sound. Most of our customers are concert musicians.

Industry Analysis
The market for musical instruments divides easily into several segments. Several market segments are relevant, and for this discussion we define the segments in which Rhythm Musical Instruments operates: 1. Customers. Customers range from children learning how to play to professional musicians in concert settings. However, Rhythm Musical Instruments sells almost exclusively to professional musicians. 2. Instrument or type of instrument. Rhythm Musical Instruments manufactures and distributes both acoustic and electric guitars, electric keyboards, speakers, electronic music equipment, and related accessories. 3. Type-of-music segments. At the high end of the market, Rhythm has an excellent reputation among musicians dedicated to more traditional music. One of our challenges is to manage the transition to new technologies without losing our carefully guarded position with the devotees of traditional music. The growth segments of the market are highly competitive, technology dependent, and distribution dependent. They include a vast range of electronics-dependent products such as keyboards, guitars, sound amplification equipment, and synthesizers. Rhythm Musical Instruments is presently focused on the traditional musical segments, a relatively mature industry driven mainly by brand recognition and reputation for quality. Unfortunately, this segment is threatened as professional music turns steadily towards increasing electronics.

Market Forecast
The acoustic instruments segment relevant to Rhythm, our most important market segment, is expected to grow at a very slow 2% per year through 2011. Greater growth rates are expected for keyboards, speakers, and electronic equipment, all of which grow between 10% and 20% per year.

5-Year Total Market Forecast

HIGH-QUALITY PROFESSIONAL SEGMENT ONLY

All figures are in Rupees.

CAGR 2008 instruments Electric guitars Keyboards Speakers Electronics 2009 2010 2011 2012

121000000 97580000 71750000 41000000 56580000 387860000

123000000 106600000 82000000 41000000 67650000 420250000

123000000 117670000 94300000 41000000 81180000 457150000

128330000 129560000 108650000 41000000 97170000 504710000

8200000 143500000 127100000 41000000 116850000 559650000

2% 10% 15%

0%
20%

Total market

10%

Marketing Strategy
1. We must maintain positioning as a traditional and high-quality manufacturer, playing to our strengths and away from our weaknesses. 2. Where possible, we must position our marketing communications to emphasize good relations with specialty media and opinion leaders. We need to keep our name and reputation in the minds of the true professionals. 3. We will continue to maintain focused high-prestige channels in a few major cities. Our customers know and respect our channels.

Sales Plan
We continue to sell through selected prestige retailers in these major cities: Delhi, Mumbai, Kolkata , Chennai, and Bangalore.. The carefully selected channel strategy has worked well. There is no channel conflict, and retailers can count on maintaining their margins against competition. Our suggested retail prices allow some room for discounting programs with local professional organizations. The following tables and accompanying charts provide a detailed sales forecast, both for the next year in quarters and for the next 5 years.

5-Year Sales Forecast

TOTAL SALES
All figures are in Rupees.
2008 Acoustic instruments 2009 2010 2011 2012 CAGR

3%

36285000 18501250 10045000 2460000

36900000 18122000 12300000 3280000

31980000 17650500 16031000 4100000

32082500 15547200 27162500 6150000

31488000
9%

Electric guitars
Keyboards Speakers

12915000 44485000 8200000

45% 35%

Electronics

8036000 799500 76126750

10147500 799500 81549000

14206500 799500 84767500

19434000 799500 101175700

29212500 799500 127100000

38%

Other Total market

0% 14%

TOTAL COST OF SALES

All figures are in Rupees.
2008 Acoustic instruments 2009 2010 2011 2012 CAGR

5%

21771000 11090500 6027000 1102900 4038500 442800 44472700

22140000 10906000 7421000 1394000 5084000 451000 47396000

19680000 10578000 9389000 1845000 7134000 410000 49036000

19147000 9307000 15990000 2788000 9758000 451000 57441000

17589000
9%

Electric guitars
Keyboards Speakers Electronics

7708000 26035000 3690000 14637000 451000 70110000

44% 35% 38%

Other Total market

0% 12%

Organizational Structure
Rhythm has a successful management team that includes nine people. Sales and marketing depend a great deal on key distributors.

Management Team
Sanjay Shukla, President
Mr. Shukla was hired from Raymond, Ltd. 3 years ago. He had worked for 10 years in sales and marketing with that company, increasing its market share to a leadership position, ending his stay there as senior vice president for sales and marketing.

Anurag Tiwary, Senior Vice President of Marketing & Sales

Mr. Tiwary was hired out of college in 1981 and has been with Rhythm ever since. She has a degree in fine arts and an MBA, both from the University of Mumbai. He has held a series of positions beginning with marketing assistant. Mr. Tiwary was promoted to Senior Vice President in 2002.

Gaurav Shukla, Vice President of Finance

Mr, Shukla was hired in 1989 from Lakes & Sons, where he had been working closely with Rhythm for several years. He has an undergraduate degree in business from the University of Notre Dame. Mr Shukla serves on the advisory boards of local music organizations.

Sunny Kurian, Vice President of International Operations

Mr, Kurian brings 25 years of international business experience to Rhythm. As the former operations manager at both Parnell Aerospace, she has managed distribution networks around the world. Since joining Rhythm in 2003, he has expanded operations into four additional countries

Stephanie Jones, Vice President of Human Relations

Jones joined Rhythm Musical Instruments 7 years ago after establishing the human resources department at City Power and Light Hooper has been instrumental in establishing profit-sharing and job-sharing programs at Rhythm.

Financial Assumptions
Our plan depends on a set of reasonably conservative assumptions. If the markets continue as favorable as they have been, we should be able to borrow at better rates than assumed. Also, we believe our effective tax rate will be lower than what we show in our financial assumptions.

Financial Analysis
We plan to increase sales significantly, without losing control of cash flow or profitability. This requires careful financial planning and management. The chart of Rhythm Musical Instruments Business Plan Highlights shown here points out the major financial goals for the 5 years, and the 2004 Profits

Pro Forma Balance

The projected balance sheet, shown in the following table, indicates net worth increasing dramatically. This increase corresponds to the chart shown in the Financial Plan section.

5-Year Pro Forma Income Statement

SALES AND GROSS MARGIN
All figures are in Rupees.
2008 2009 2010 2011 2012

Sales revenue

14%
76126750 81549000 47396000 84767500 49036000 101175700 57441000 1.27E+08

CAGR 14% 12%

Cost of sales
Other sales costs

12%
44472700 70110000

5%
188600 205000 233700 254200 229600

5% 12%
44661300 47601000 34153000
41.88%

Total cost of sales Gross margin

Percent

12%
49269700 35731500
42.15%

57695200 43734700
43.23%

70339600

16%
31654050
41.58%

16%
56990000
44.84%

OPERATING EXPENSES
All figures are in Rupees.
2008 2009 2010 2011 2012 CAGR

ExpensesAdvertising/promotion

2%
5945000 6232000 6554383 6883900 6551800

Wages and salaries

2%
15785000 16564000 17402983 18273700 17400400

Leased equipment

2%
1230000 1291500 512500 205000 1722000 110700 1353000 541200 225500 1808100 110700 1423889 569572 237349 1898505 118654 1353000 541200 225500 1808100 110700

Utilities Insurance Rent Depreciation

492000 225500 1640000 108650

2% 0% 2% 0%

Payroll taxes etc

2%
2209900 2318960 2436425 2558318 2436056

Contract/consultants

2%
82000 86100 41000 41000 29124760 90200 45100 45100 30612691 94915 47478 47478 32153758 90200

Miscellaneous

2%
41000 45100 45100 30607156 41000 27800050

Other

Total Percent of sales ProfitOperating profit

2% 2%

62%
3854000 5028240 5118809 11580942 26382844

Short-term interes

20%
278800 360800 461250 1472187 2734044 410000 461250 1486660 2760899 475600 461250 3725424 6918668 574000

Long-term interest

0%
461250 461250

Taxes incurred

69%
1089903 8871662 16475932 2024088

Net profit

57%

5-Year Pro Forma Balance Sheet

ASSETS
All figures are in Rupees.
2008 2009 2010 2011 2012 CAGR

Cash Accounts receivable Inventory Other shortterm assets

3807588 8446000 6355000

6521091 9061000 6806000

9158990 9471000 7134000

14519658 11193000 8405000

20966990 13940000 10455000

53% 13% 13%

13%

1517000

1640000 24028091 984000

1722000 27485990 1312000

2009000 36126658 1845000

2501000 47862990 2542000

Total
Capital assets Accumulated depreciation

20125588 512500

24% 49% 47%

123000

246000 738000

328000 984000

451000 1394000

574000 1968000

Total

389500

50%

Total assets

25%
20515088 24766091 28469990 37520658 49830990

DEBT AND EQUITY

All figures are in Rupees.
2008 2009 2010 2011 2012 CAGR

Accounts payable Short-term notes

36%
5084000 5453000 5699000 6724000 836400

20%
3485000 4510000 5125000 5945000 7175000

Other shortterm liabilities

13%
1517000 10086000 1640000 11603000 1722000 12546000 2009000 14678000 2501000 10512400

Total Long-term liabilities

1% 0%

6150000

6150000 17753000

6150000 18696000

6150000 20828000

6150000

Total liabilities EquityPaidin capital

1%
16236000 16662400

0%
1845000 1845000 2434088 2734044 7013091 1845000 5168091 2760899 9773990 1845000 7928990 6918668 16692658 1845000

Retained earnings Earnings

145%
410000 2024088 4279088 14847658 16475932 33168590

Total Total debt and equity

69% 67% 25%

20515088
Check line

24766091 0 7013091

28469990 0 9773990

37520658 0 16692658

49830990 0

Net worth
4279088 33168590

67%

This is just a precursor to the revolution that is going to take the musical world by storm when we launch our product, which is currently under development, within a few years