"I tell My Dealers I want to impress them with our headphones, not our offices" says John Grado, owner of Grado Laboratories. He isn't kidding. His headquarters and factory are in the basement and the first two floors of a cramped three story row house in the tidy working-class Brooklyn neighborhood of Sunset Park. His Grandparents, immigrants from Sicily, ran a fruit stand from the house from 1925 until the early 1950's.

This is small-scale capitalism at its smallest. In the cellar an injection molding machine turns out plastic headphone housings. Another machine churns out the precisely calibrated metal parts needed for the tiny speakers that go into headphones. On the first two floors 17 women from the neighborhood assemble the parts and pack the finished products into boxes that are stored in a parlor. Grado, his wife, Loretta, and their son Jonathan, 4, live on the top floor.

A headphoned John Grado of Grado Labs, beneath a portrait of Uncle Joe as Verdi's Othello (painting by: Angelo Grado) After working for his uncle since the age of 12, John Grado finally took over the business five years ago.

Grado Labs' premises may be dingy but its profitability is not. Last year the business earned over $650,000 (pretax) on revenues of $2 million. It has no debt, not even a credit line.

Grado's products get rave reviews. Stereophile magazine ranks Grado Lab's $595 (retail) headphones among the world's best, equal to headphones costing between $990 and $12,000. Grado's $69 headphones go head to head with models costing $200 to $999. Says Andrew Singer, whose Manhattan based Sound by Singer specializes in fine audio equipment: "There is no competition (to Grado)."

This is a turnaround story. Five years ago Grado Labs was on the edge of extinction. It had been founded in 1953 by John Grado's uncle, Joseph Grado, a former master watchmaker who began making high quality cartridges for record players on his kitchen table. John Grado began working for uncle Joe when he was 12; with time out for school and college, he has been with the business ever since.

At the company's peak in the early 1980's Grado had 70 employees working out of seven Brooklyn storefronts: annual earnings topped $1 million (pretax), on $4 million in sales.

But then came cassette tapes and compact discs, and with them the death of the record player and phono cartridge. By the late 1980's Grado Labs was down to John Grado, three part-time employees and one full time engineer, John Chaipis. By then, founder Joe Grado was spending most of his time pursuing his hobbies: singing opera and making violins.

Uncle Joe wanted to close the business, but John Grado, then 37, thought the Grado Labs name still carried some cachet among audiophiles.

As soon as I took control, I cut(costs) wherever I could", says Grado, who began by cutting his salary to zero. "I made sure all the lights were out and the adjustment on the thermostat was correct. We had a Pitney Bowes postage meter that maybe cost $15 a week. We got rid of it and licked the stamps".

Grado continued to make a few phonograph cartridges for the replacement market, but he thought another of his uncle's products had much more promise: stereo headphones. In 1988 his uncle began selling two models of high quality headphones, priced at $500 and 600, through a separate company. John Grado decided to get into the business for himself.

Working with Chaipis, John Grado spent the next six months experimenting with acoustic shapes and materials for a new line of headphones. "We do something, and we'd listen" says Grado, "God blessed me with good ears, and my uncle taught me how to listen."

When Grado came up with the prototype of the headphones he wanted to produce, Chaipis, now 71, produced all of the tooling himself in the basement machine shop. This held the cost of getting the new production to a mere $5,000, a small fraction of the tooling cost had Grado contracted the work out.

Chief Engineer, John Chapis A former watch maker, like founder Joe Grado, he helped design the headphone line and did all of the tooling for it as well.

In September 1991 Grado Labs introduced it's first line of headphones: three models priced to retail between $150 and $275. Dealers were impressed with the quality, but most chose not to carry the line because Grado didn't have a headphone at the low end of the price scale.

With Chaipis manning the machine tools, Grado was able in January of last year to produce headphones that could be priced to retail at $69 a pair. With that orders began flowing in. Last year Grado's $69 headphones accounted for half of Grado labs' $1.5 million in headphone sales (the company sold another $500,000 worth of phono cartridges). This year Grado says sales are running at better than double 1994's. He sells 37% of his products abroad.

"God blessed me
with good ears,
and my uncle taught
me how to listen."

Having reestablished the Grado Labs name, John Grado is now trying to expand his U.S. distribution, which currently numbers some 500 specialty dealers and small audio-equipment chains. This network is central to his long range plan: forming joint ventures with a series of small exacting European audio-equipment manufacturers, and then using his U.S. distribution base to market a full line of high-end audio products under the Grado name.

Recently, Grado has begun paying himself $500-a-week salary, but he has no plans to look for better housing. The current set-up is too convenient."If I wake up at 4am and can't sleep" he says "I'll go downstairs in my underwear and start calling my distributors in Europe".

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