Turn it up: Koss Corp. fine-tunes its global business model

Last updated on May 13th, 2019 at 02:41 pm

John Koss Sr., a trumpet player in a big band and an entrepreneur who went on to invent the first stereo headphone, launched Koss Corp. in 1953 as a television rental service catering to Milwaukee-area hospitals. By 1973, the company had grown to provide headphone jacks in all portable electronics and to create the industry standard high-fidelity headphone.

Over the past 53 years, Milwaukee-based Koss Corp. has dealt with its share of competition, cheap imitations and the constant need for rapid innovation.

Koss Corp. is bringing in $50 million in annual revenue, has streamlined 80 percent of its manufacturing to China and India and has 15 to 20 new product launches per year.

For the company’s past fiscal year, which ended on June 30, Koss Corp. had $6.2 million in net income, up from $4.5 million for the previous fiscal year.

Still, Michael Koss, John’s son and now the chief executive officer of the company, is facing obstacles similar to those his father confronted when the world was on the forefront of technological innovations.

“We have some real challenges,” Koss said.

The company’s challenges include: stiff competition in the U.S. retail market; increasing energy costs in countries popular for outsourcing; and declining levels of protection for intellectual property.

Retailers in the U.S. market will be under pressure in 2007, mainly because of Bentonville, Ark.-based Wal-Mart Stores Inc. Other large retailers are in a frenzy as they attempt to compete with Wal-Mart, which has more than $315 billion in annual sales, Koss said.

“They (Wal-Mart) are so incredibly efficient, everyone has had to step up the way they operate their business in order to make sure they are a supporter of Wal-Mart and whatever Wal-Mart does,” Koss said. “As a supplier over the last couple of years, they have really raised the bar. But as other retailers have struggled to compete with Wal-Mart, one of the unfortunate byproducts of that is a misunderstanding of what makes Wal-Mart so successful.”

Wal-Mart is successful because of low operating costs and low distribution costs, not because it receives discounts from manufacturers, Koss said. Yet many retailers continue to demand discounts of as much as 15 percent from manufacturers such as Koss Corp., he said.

In some cases, Koss Corp. is forced to decide between lowering the cost of its products, losing money on some products or not being able to sell to certain retailers.

“This has caused a cascading effect of price reductions and has had a very profound effect on brand positions and brand improvement,” Koss said. “Because if you are a great supplier, you listen to everything your customer tells you, and before you know it, your product is perceived as being very inexpensive, and some people equate value with something that is cheap. It becomes this very fine line that you have to walk.”

Some of the largest retailers are under intense pressure to compete with Wal-Mart, and if taxes continue to increase, Koss is predicting some shakeouts or consolidations in the retail industry.

Overseas, where most of Koss Corp.’s products are manufactured, Koss is preparing for increased production prices that may be an issue for many companies outsourcing to China or India.

“We’ve had some really great opportunities there to help streamline our business, reduce our costs and increase our efficiency by getting all of our products assembled in other parts of the world,” Koss said. “On the other hand, as more and more of those opportunities are presented throughout China and now India, the more you see greater stress based on raw materials and energy than you have ever seen before.”

As China and India build stronger economies and also partake in mass consumption of products, the costs of energy will increase, and commodity pricing will be under a lot of pressure, Koss said.

Commodity prices impact the costs of food, manufactured goods, fuel and transportation.

The global economy also has an effect on intellectual property protection, which is something that Koss Corp. depends upon for recovering its costs of research and development.

“It’s kind of an interesting situation that we have,” Koss said. “With the world becoming so small, the question of whether or not the rights to intellectual property are going to be protected … I think we all have to take a look at and start realizing that in the global economy, it is going to become more and more prevalent to have things ripped off.”

In the past year, Koss Corp. has found four or five instances of copies being made of its products. Also, the advent of the computer chip, which drives most of Koss Corp.’s innovation, is allowing the copies to be equivalent in quality without the time and cost of developing the products.

“I could have some very big challenges because the U.S. is still driving so much of the research and development and so much of the technology, but with the world market being such an important part of it, it may become less profitable to us overall because (our products are) going to get ripped off,” Koss said.

Despite increased pressure on U.S. retailers and the possibility of shakeouts, the increasing costs of energy worldwide and the loss of respect for someone’s hard work and monetary investment, Koss Corp. carries on and remains as innovative as it was when John Koss invented the stereophone.

Koss Corp. lately has focused on melding different technologies with their stereophone innovations to create cutting-edge products.

The company is rolling out a wireless stereophone with an MP3 player inside the headpiece that can be uploaded from a computer, called the Koss MP3 Tügo. Another device is a Bluetooth headset with stereo sound, which is also wireless and can be used within 25 feet of a computer or mobile phone, Koss said.

To survive, the company will need to continue to innovate and streamline its costs, he said.

“Right now, people don’t realize what is going on and how big it is,” Koss said. “There is a dynamic at play, and it is all happening at once.”

Michael Koss

Title: President and CEO
Education: Bachelor of arts degree, Beloit College
Residence: Milwaukee
Hobbies: Music, photography

Koss Corp.

Location: 4129 N. Port Washington Ave., Milwaukee
Industry: Consumer electronics
Number of employees: 89
Annual revenue: $50 million
Web site: www.koss.com

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