Recoton Corp.

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Recoton Corp.

145 East 57th Street
New York, New York 10022
U.S.A.
(212) 644-0220
Fax: (212) 644-8205

Public Company
Incorporated: 1936 as Record Town
Employees: 850
Stock Exchanges: NASDAQ
Sales: $164 (1994)
SICs: 5064 Electrical Appliances, Television & Radio Sets; 5065 Electronic Parts & Equipment, Not Elsewhere Classified

Recoton Corp. is a leading U.S. manufacturer and distributor of consumer electronics products and accessories. Under various brand names, the company markets wireless stereo speaker systems, audio/video editing equipment, and thousands of accessories for car and home stereos, home office equipment, televisions, camcorders, and other electronic products. The enterprise expanded rapidly in the 1980s and 1990s, primarily by acquiring other companies.

The roots of the company that would become Recoton can be traced back to two companies: Record Town, whose name was later abbreviated to Recoton, and a pre-World War II German concern named Polydor Records. Polydor was run by Herbert Borchardt. Borchardt, who was in his twenties at the time, was the scion of a wealthy German industrialist: “Before Hitler, my uncle was one of the richest men in Germany,” Borchardt said in the December 4, 1995, Forbes. By the 1940s, though, the political situation in Germany had become intolerable. Borchardt and his family fled the country in 1941. They arrived at Ellis Island, New York, with a $500 nest egg.

In Germany, Borchardt had made the first and some of the best recordings of the internationally renowned singer Edith Piaf. Piaf, the daughter of an impoverished Parisian acrobat, had been discovered in 1935 and quickly achieved international fame with her sentimental ballads. Although he had lost his successful recording business in Germany, Borchardt hoped to build a new record company from scratch in America. He started out by recording two fellow refugees, Kurt Weill and Lotte Lenya. Unfortunately, the shellac that he needed to make their records was unavailable because of the U.S. war effort. After only three years Borchardt was forced to shutter his fledgling recording venture.

Borchardt found a job running a tiny manufacturing company called Record Town. The company had been founded in 1936 to manufacture long-lasting steel phonograph needles— its high-tech ’cactus needle stylus’ could be used for a whopping 10 record plays. Borchardt eventually purchased the business and ran it throughout the 1950s and 1960s. He kept the company small but profitable, and assumed little debt. In 1969 Borchardt took the company public with a stock offering that helped to raise growth capital. He gradually added other record-related products like brushes, cloths, and record-care items. When eight-track tapes were introduced in the 1960s, Recoton began selling carrying cases for the cartridges. Then, in the 1970s, Recoton started offering cassette storage and maintenance products as well as accessories for the then-red-hot citizens band (CB) radio market.

Borchardt had brought his 23-year-old son, Robert, into the business in 1961, and fifteen years later he handed over to Robert control of day-to-day operations. When Robert Borchardt was named president in 1976, he began to slowly add new accessories to Recoton’s product lines. Indeed, Robert Borchardt recognized that over the years Recoton had developed a very fluid distribution network that wasn’t being utilized to its fullest potential. Most of Recoton’s products, such as the inserts that kept 45-rpm records from sliding on the carousel, brought measly profit margins of two percent or less. Thus, Recoton was competing in what was essentially a commodity industry. Robert Borchardt wanted to expand the company’s product offerings and add items that gleaned higher profit margins.

Not all of the new goods that Recoton added to its line-up during the late 1970s and early 1980s brought profits to the company. For instance, the CB radio market eventually went bust and Recoton was left sitting on a pile of devalued inventory. Similarly, Recoton tried to get in on the home video game boom when Atari and Intellivision computer games were introduced. That market also bombed, leaving Recoton’s warehouse full of unwanted joysticks, dust covers, and other accessories. At the same time, Robert Borchardt enjoyed a number of major successes from the myriad items added to Recoton’s product portfolio. By the early 1980s, in fact, the company was selling hundreds of different accessories for consumer electronics ranging from telephones and personal computers to stereos and televisions.

Of import was Recoton’s move into the video cassette recorder (VCR) market in the early 1980s. The VCR market exploded, and Recoton was able to profit handsomely from a full line of accessories. “We were the first to come out with a comprehensive line,” Robert Borchardt said in the August 27, 1995, Newsday. Among its best-selling product introductions was a gold-plated connector cable, which was touted as a seamless link between a television and a VCR. That and other products helped Recoton to establish a reputation as a dependable and innovative supplier within its niche. In fact, by the mid-1980s Recoton had become the clear leader in the consumer electronics accessories industry.

Besides diversifying and increasing Recoton’s offerings, Robert Borchardt improved returns by tweaking marketing and manufacturing strategies. For example, he began contracting out much of the company’s manufacturing activities to low-cost foreign producers; by 1985, about 75 percent of the company’s goods were being made overseas. He also cut costs by simplifying the company’s sales approach. Salespeople had previously sold individual items to buyers. Because most of the goods were priced at less than $10 each, that practice was tedious and labor intensive. Under Robert Borchardt’s direction, salespeople began bartering for space in retailer’s stores. Recoton would find out how much space the retailer could devote to its products, and then design a display to fit the space.

The result of Recoton’s overall efforts during the late 1970s and early 1980s showed up on its bottom line. Indeed, profits spiraled as sales surged. Annual revenues bulged more than five-fold between 1981 and 1984 to nearly $25 million. Average profit margins on individual products more than tripled during the same period, pushing Recoton’s annual net income to $1.6 million. Hoping to push margins even higher, Robert Borchardt launched a product development initiative that he hoped would allow Recoton to begin marketing high-tech proprietary products. In 1985, for example, Recoton unveiled its Friendly Recoton Entertainment Decoder (FRED), a device designed to decode television stereo signals and synthesize stereo from regular signals. Priced at $150, the decoder was the only one on the market that could operate with any brand of television—other decoders were designed to work only with the manufacturer’s own television brand.

Despite a dip in profitability, Recoton continued to post steady sales gains throughout the late 1980s as it bolstered its product line and broadened its distribution network. Sales rose to $30.9 million in 1987, $39.7 million in 1988, and then to more than $41 million in 1989. The rapid rise in the late 1980s reflected Recoton’s new growth strategy, which was implemented under the direction of Robert Borchardt (Robert was serving as president, but sharing the chief executive and chairman posts with his father). Borchardt recognized that the consumer electronics accessories industry was becoming increasingly consolidated. Only the most efficient and best-financed companies, he reasoned, stood a chance of surviving in the long term. Armed with that philosophy, Borchardt initiated a strategy of aggressive growth through acquisition.

In 1988 Recoton issued $15 million in debt, which it used to begin purchasing competing accessories manufacturers. The strategy was well timed because the economic recession of the early 1990s allowed Recoton to purchase companies at relatively low prices. Recoton’s first acquisition was Transcriber, a small manufacturer of record needles and accessories. Armed with its $15 million war chest, the company then bought a manufacturer of stereo headphones named Calibren. Importantly, that 1989 purchase gave Recoton an 80,000-square-foot warehouse and a factory in central Florida that eventually became a major manufacturing and storage hub for Recoton. Borchardt followed the Calibren purchase with the buyout of Rembrandt, a television antenna manufacturer. Those takeovers pushed Recoton’s 1990 sales to $46.6 million.

In 1991 Recoton acquired Discwasher, the well-known manufacturer of album, tape, and CD cleaning kits. It also purchased Parsec, a maker of television and AM/FM antennas. After buying the companies, Borchardt consolidated most of their manufacturing and warehousing operations in the Florida unit, which was expanded to meet increased production requirements. The result was lower operating costs and higher profit margins. In 1992 Borchardt added Ambico Inc. and Proturn Inc. Ambico, an audio/video editing company, cost Recoton about $6 million. Proturn, a Canadian company that manufactured carrying cases and storage units for audio and video products, was converted into a wholly owned subsidiary called Recoton Canada. Sales grew to $76.7 million in 1992, $3.66 million of which was netted as income.

Recoton sustained its acquisition drive in 1993 and 1994, first with the purchase of SoleControl, a producer of universal remote controls. It next picked up Sound Quest, a car audio components and accessories maker, and Ampersand, a manufacturer of equipment used by car audio installers. As Recoton found new additions for its growing portfolio, it maintained its efforts to develop and patent its own proprietary products. In the late 1980s, for example, the company’s 12-person research and development team invented a device that allowed consumers to play portable CD players through the tape decks on their car stereos. More importantly, during the early 1990s Recoton developed advanced wireless technology similar to that used to operate cordless phones. Recoton invented wireless speakers that could be connected to stereo and television units by miniature transmitters, thus eliminating the need for wiring. The breakthrough proved to be a major boon for Recoton, as sales of the company’s wireless products surged in the mid-1990s.

Indeed, revenues grew to $121 million in 1993 and then to $ 164 million in 1994, largely as a result of increased sales of its patented wireless audio devices. Sales gains were also achieved in international markets, where Recoton managed to boost revenues more than 100 percent to about $28 million. More importantly, Recoton’s net income for 1994 ascended to a record $11.84 million and the price of its stock soared. Recoton had managed to post that growth while accruing very little debt; in fact, during the mid-1990s the company repurchased much of its stock in order to increase its equity stake in the company. Recoton cashed in on the buyback in April 1994 when it raised $46.5 million in growth capital with a stock offering.

By 1995, Recoton had become a global leader in the consumer electronics accessories industry. Sales and profits continued to rise, and the company was planning for continued expansion. Toward that end, Recoton was setting its sites on global markets where it could funnel its venerable product line into new distribution channels. “We want to maximize our return without making major investments,” Borchardt explained in the September 1995 International Business. “We get faster returns by building distribution in markets that are less mature.” Those markets included Western Europe, South Africa, Russia, and South America. In 1995 Recoton acquired STD Holdings Ltd. (Interact/STD), a Hong Kong-based international manufacturer and marketer of multimedia and computer accessories, including video game joysticks, controllers, and computer speakers.

Going into 1996, Recoton was marketing about 3,500 different products through several divisions and subsidiaries. Its latest addition was The Audio Group, an audio speaker company in Chatsworth, California, which was headed by loudspeaker designer Gary Christie. Borchardt planned for the unit to design and produce speakers for Recoton, as well as for other manufacturers. Company-wide sales were expected to top $215 million for 1995. With its aggressive move into international markets, new products, and efforts to penetrate new marketing channels like the discount superstore chains, Borchardt hoped toachieve $1 billion in annual revenues by the year 2000.