Big bang theory

BANG & Olufsen is innovating at the upper and lower ends of its product spectrum to attract new and younger customers.

electronics

BANG & Olufsen, the electronics company founded by Peter Bang and Svend Olufsen in 1925, is one of Denmark's most famous brands.

The company's minimalist sound systems and television sets grace the walls of the world's design-conscious rich, luxury hotels and even the Museum of Modern Art in New York; but the maker of such coveted products as the BeoVision 11 - a television set that sells for just shy of $10,000 - is not exactly in great financial shape at the moment. Bang & Olufsen reported a pre-tax loss of DKK45 million ($8.7 million) for the 2013 fiscal year, after achieving a DKK77 million profit the previous year. A weak economy in Europe, stiff competition from Asia-based rivals and a slow entry into emerging markets have fanned strong headwinds for the 88-year-old brand. But under Tue Mantoni, chief executive of Bang & Olufsen since 2011, the company is attempting to turn things around and regain its place as the pre-eminent manufacturer of the most stylish sound and vision systems. And the 37-year-old Danish-born Mantoni might be just the man to do it, having previously returned the British motorcycle brand Triumph to its former glory.

WISH spoke to Mantoni at Bang & Olufsen's offices in Copenhagen earlier this year before the company had released its full-year financial statement last month, but after it had issued two profit warnings to the market. Mantoni's mood was pragmatic. "If you look at this financial year just ended, we lost money," he says. "We lost money because the market is difficult but we also lost money because we have taken a really long-term approach and we have invested around 15 to 16 per cent of sales into new products and this is very high. [Mantoni says that the industry standard is about 3 per cent.] We are in a phase right now in the company where I believe that the investment into new products is fundamental to our long-term success. The good news is that the board believes that as well and the board also takes a long-term view. The board believes this brand is too precious to make short-term decisions. It's about doing the right thing for this brand as opposed to doing what is optimal for short-term share price maximisation."

Bang & Olufsen is in the second year of a five-year strategy by Mantoni to restore its profitability to pre-GFC levels and, he insists, it's all going according to plan. One of Mantoni's biggest initiatives has been the introduction of the B&O Play brand, a sort of diffusion line or sister brand to the Bang & Olufsen main line. One of the problems Bang & Olufsen had was that the average age of its customers was going up by one year every year; "and we weren't getting a lot of new people into the brand", says Mantoni. Coupled with the fact that Bang & Olufsen's products are built to last and therefore trade well on the secondary market, something was needed to lure new and younger customers in.

B&O Play is a range of more affordable Bang & Olufsen products that include portable sound systems, headphones, wireless speakers and televisions. (B&O Play prices start at $299 for a set of earphones and go to $3250 for a television.) The idea behind B&O Play is that the products are "plug and play" - easy to use. They don't require technicians to install them; the consumer can walk out of the store with the product - or buy at a dedicated B&O Play online store - take it out of the box and start using it immediately. They look good too, and in keeping with the Bang & Olufsen design ethos established over decades the B&O Play range of products look unlike any other consumer electronics products on the market. In its first year the B&O Play brand had sales of more than DKK600 million ($117 million). According to Bang & Olufsen, 75 per cent of people who bought a B&O Play product had never bought Bang & Olufsen before and the average age of the B&O Play customer is 10 to 15 years younger than the Bang & Olufsen main-line customer.

Bang & Olufsen is also innovating at the upper end of its product spectrum. The television market is one of the most competitive in consumer electronics. Brands such as Samsung, Sony and LG are all making televisions that are getting bigger, thinner and cheaper. Mantoni, however, thinks there is still room for improvement at the top end of the market. Televisions account for 40 per cent of Bang & Olufsen's business and downward pressure on prices driven by competitor brands has forced the company to lower the average price of its televisions. "I would say that our TVs now are better value than they have ever been," says Mantoni. "We are still premium compared to the rest of the market, but we wanted to reflect that the market has changed and at the same time invest a lot into the technology, so you now get all of the same features that you get in the competitor televisions. Some of them will have new gimmicks that we don't have yet, like gesture control, but we believe that we should be fast followers on technology and not necessarily be leaders on new gimmicky features. Once new features are proven to have value for the consumer, we will go and improve them and make them even better and easier to use."

Where Bang & Olufsen's televisions really stand out is in the quality of their sound. The concept of a cinema-sized television in a living room is something of a paradox. When we're watching television we want it to be huge, but when it's switched off we don't want to notice it at all. Bang & Olufsen recently employed the services of a perception psychologist to better understand how people relate to their television sets. They conducted a study with about 50 people. In one room they placed an unbranded Bang & Olufsen television with great sound and in the other a competitor's product with the same screen size but mediocre sound. The participants were shown a range of programs and at the end were asked which television set was bigger. According to Mantoni, overwhelmingly the participants thought the one with better sound was bigger. "Sound is half the picture," he says. "By designing the speaker into the TV, the TV obviously becomes more expensive but by integrating sound into the TV you ensure a couple of things. First of all, you get a better viewing experience, but great sound integrated into the TV also controls the design of the interior of your house in a good way. You don't need to add additional speakers and you don't have cables going everywhere."

If you've ever switched on or off a Bang & Olufsen television you'll know it does something that other televisions don't do. The sound rises or fades gradually and the picture appears or disappears as a "curtain" parts or closes. At first it seems a cute touch but it's what Mantoni refers to as "mechanical magic". "There is a feeling with our products that there is a connection between you and the product. You go over to [a sound system] and the doors open automatically; as you interact with the product something happens. It means it's not a static product ... and we are bringing that mechanical magic back into all our products and everything we launch from now on."

When Peter Bang and Svend Olufsen started Bang & Olufsen in the attic of Olufsen's parents' house in northwestern Denmark, both men were engineers. Bang had worked at a radio factory in the US after graduating from university in 1924 and one of their first products was a radio that worked with alternating current rather than batteries. They made loudspeakers for the circus and for army vehicles as well as a sound recording system for the film industry. Their breakthrough product was the famous Beolit 39 Bakelite radio, but it would be many years before the company was profitable. In World War II, the Bang & Olufsen factory in Struer was burnt to the ground by Nazi sympathisers as revenge for the company's failure to collaborate with the Germans. Its heyday in terms of design was the 1970s and 80s when its products - some still highly sought after today - were designed by Jacob Jensen and then David Lewis. Today Bang & Olufsen also has a strong business-to-business division that makes audio systems for luxury car companies such as Audi, BMW, Mercedes-Benz and Aston Martin. "Automotive grew this year by more than 20 per cent," says Mantoni. "That business is also doing about DKK600 million, so it's on track and actually moving a bit faster than we had hoped for."

What's not moving fast is Europe, which until recently accounted for 80 per cent of revenue. By contrast, revenue from China and the US has accounted for just 3 and 5 per cent respectively. "My ambition is that we will have a situation where maybe half of our sales are in Europe, and I am trying to do this by growing outside Europe rather than shrinking Europe," says Mantoni.

However, one of Mantoni's strategies has been to reduce the company's European dealer network by a third. "So shops that were not living up to the expectations that the customer has in terms of quality and service will not be part of our dealer network. The rest of the network said that if you support us we will step up, we will invest in our stores, and I think that's the right thing to do for the long term. It has hit our top line a lot this financial year and therefore we see a situation that is not as strong as we had hoped for. But long term, with what I see going on in China and what I see going on in the US and the fact that we have taken a short-term hit in Europe ... I think we are on a good track."