So, what if Guitar Center DOES go under...

[JennySuzuki]

Actually, at this point, I believe most states have those laws on the books... it's just difficult for them to enforce them. The big frufarah on internet shopping will come when / if legislatures make the online retailer responsible for collecting that use tax.

 

[Holdsg]

A couple of thoughts from a former-life retail analyst on Wall Street...now lets see how many of you I can piss off.

First of all, the Music Instruments (MI) industry is a dinosaur industry that does not exhibit the kind of growth needed to attract anything but "high yield", i.e. speculative investment.
It was a blessing in disguise for Bain to have LBO'd GTRC, because as a public company, it was a low-growth, low P/E basket case of a stock.

Why do I say dinosaur?
- low profit margins, that get particularly stressed in times of economic crisis (which we've experienced going on about 7 years now)
- highly fragmented manufacturers - biggest company Yamaha has maybe 10% of the overall MI industry, Fender maybe 8-9%. Those are hunch numbers, I haven't looked at the real numbers in years.
- Low barriers to entry - Just go to NAMM and see how many companies make "fender shaped objects" and a basement full of low-priced copy-cats from China that just want to get a toehold
- like it or not, guitar (not bass) sales drive industry sales. At best, guitars are a GDP-single digit growth industry, and at worst, have been falling for years even before the Great Recession. That is because the best market demographic with the highest disposable income, baby boomers, are aging. They are retiring from bands and cutting back on buying gear faster than new kids are entering and buying gear. When you combine this with competition from video games, and huge cuts to arts and music education in nearly every school district in the country, there is a dearth of new buyers entering the market. Only things like Guitar Hero/Rocksmith and School of Rock have kept most of the chains in business.
- all the other "stuff" in the M&I industry, like pro-audio, software, keyboards, drums, band instruments, pianos, are all impacted by the same factors that impact guitar sales, and at best are GDP-growth (single digit growth) kind of sub-sectors.
- lack of innovation - other than home recording gear, I can't see that much of the stuff you use to make music has dramatically changed in the past 50 years. Sure there are new things at the margins, but the Beatles got by with guitars, bass, drums, mics, amps,...and a little help from their friends, little has changed in 50 years.

If the MI business is not that great, the retail MI environment shares many of the same faults. GC/MF/M123 is the big dog and dominates the market for most MI stuff, but its market share is still probably less than 33% because of fragmentation with Sweetwater, Sam Ash, online retailers like Amazon, crap sold by Best Buy and Target, and all the local music stores making up the rest. It's usually good to be the big dog, if you have muscles that you can flex. GC has been buying up competitors for years, and they have a lot of clout with manufacturers (both need each other in this dinosaur industry). Normally, that would lead to better results, more ability to charge monopoly-like profits. But that's not been GC's model. GC's model is big-box category killer, make it up in volume model. So GC is the Wal-Mart of MI.

This has left GC to abandon the boutique type of gear, and generally sell only the entry level stuff with any velocity to it, because that's where the revenue is (not necessarily profit margin, but velocity is the key to big box retail).

This is actually a blessing in disguise for the few mom & pop stores that "get it". Mom & pops can survive by not trying to fight GC, but doing the things that GC can't do very well. Which is catering to high-end customers wanting high-end gear (like many of us on TB), and providing after sale services. I suppose the "music lessons" model works somewhat, although I've never really seen it work as well as most retailers think it does (the foot traffic sells more things like accessories at tiny margins but that's about it).

Being a boutique requires capital in the form of high priced inventory, and relatively high-priced service techs, but can work if the real estate is cheap, and you're selling in a relatively affluent market with few boutique competitors. And of course, you need an online presence, to allow your affluent customers to find you.

So with all that rambling, I hope its clear to you all, that 1) the market for gear we love is just not that great a business, and 2) GC deserves its fate because it chose to become the Wal-Mart of music.

 

[Troph]

A couple of thoughts from a former-life retail analyst on Wall Street...now lets see how many of you I can piss off.

First of all, the Music Instruments (MI) industry is a dinosaur industry that does not exhibit the kind of growth needed to attract anything but "high yield", i.e. speculative investment.
It was a blessing in disguise for Bain to have LBO'd GTRC, because as a public company, it was a low-growth, low P/E basket case of a stock.

Sounds like a good analysis to me.

 

[Troph]

Actually, at this point, I believe most states have those laws on the books... it's just difficult for them to enforce them.

The big frufarah on internet shopping will come when / if legislatures make the online retailer responsible for collecting that use tax.

Not all states have a use tax, and obviously some states don't even have sales tax.

As far as enforcement is concerned, several states have already begun enforcement by including it as part of their state's income tax returns. So you can get audited by your state if you fail to comply.

Enforcing and collecting use tax this way has allowed states to phase it in virtually "unnoticed". Fewer and fewer people do their own taxes each year, and they don't pay attention to the specific allocations of the tax amounts. They usually only care about the final bill. The vast majority of people don't even realize they're paying it, or give it much thought. That's exactly how the state tax collectors want it.

WA however happens to be a state with no income tax, so it's much harder to "hide it" in the income tax system.

Politicians are hesitant to force retailers to collect such use tax on individual sales transactions, precisely because such a collection mechanism would be much more visible to individuals, and would likely cause a public backlash. "Why did my TV cost me 10% more than I thought it would!?!"

 

[Haji]

That's spot on, Holdsg.

When I was first playing bass maybe 20 years ago, I was in San Diego that had a very strong music scene that was well supported by a ton of retailers. On top of that, LA was only a couple hours away, so my brother and I would head up on a Saturday and hit every store we could find. The CG there was always packed and the registers were constantly ringing.

I took about a ten year break from being a bass player, or a musician at all, because I was fed up with other musicians. Lately I've found I've got time to get back into it, and snagged a GSR200 for $79 at a pawn shop. Now I live about an hour north of Nashville, who it turns out also has some good guitar stores. The GC here isn't stocked like the GC in San Diego was, and certainly can't hold a candle to Hollywood. But they serve a purpose and are usually pretty busy...just not packed like GC used to be. My current favorite is Corner Music, but like I said, I've been blessed to be near lots of big stores. It's gotta be tough for GC to be the only game in town, but because of musical instruments being such a personal thing, the Intardweb will never fully drive a specialty store out of business. The model won't work everywhere, but it does in LA, Music City (where its surprisingly easy to find a 50's P but really hard to find more...modern stuff) probably NY and a few other markets like Seattle.

 

[Buster Brown]

A couple of thoughts from a former-life retail analyst on Wall Street...now lets see how many of you I can piss off.

First of all, the Music Instruments (MI) industry is a dinosaur industry that does not exhibit the kind of growth needed to attract anything but "high yield", i.e. speculative investment.
It was a blessing in disguise for Bain to have LBO'd GTRC, because as a public company, it was a low-growth, low P/E basket case of a stock.

Why do I say dinosaur?
- low profit margins, that get particularly stressed in times of economic crisis (which we've experienced going on about 7 years now)
- highly fragmented manufacturers - biggest company Yamaha has maybe 10% of the overall MI industry, Fender maybe 8-9%. Those are hunch numbers, I haven't looked at the real numbers in years.
- Low barriers to entry - Just go to NAMM and see how many companies make "fender shaped objects" and a basement full of low-priced copy-cats from China that just want to get a toehold
- like it or not, guitar (not bass) sales drive industry sales. At best, guitars are a GDP-single digit growth industry, and at worst, have been falling for years even before the Great Recession. That is because the best market demographic with the highest disposable income, baby boomers, are aging. They are retiring from bands and cutting back on buying gear faster than new kids are entering and buying gear. When you combine this with competition from video games, and huge cuts to arts and music education in nearly every school district in the country, there is a dearth of new buyers entering the market. Only things like Guitar Hero/Rocksmith and School of Rock have kept most of the chains in business.
- all the other "stuff" in the M&I industry, like pro-audio, software, keyboards, drums, band instruments, pianos, are all impacted by the same factors that impact guitar sales, and at best are GDP-growth (single digit growth) kind of sub-sectors.
- lack of innovation - other than home recording gear, I can't see that much of the stuff you use to make music has dramatically changed in the past 50 years. Sure there are new things at the margins, but the Beatles got by with guitars, bass, drums, mics, amps,...and a little help from their friends, little has changed in 50 years.

If the MI business is not that great, the retail MI environment shares many of the same faults. GC/MF/M123 is the big dog and dominates the market for most MI stuff, but its market share is still probably less than 33% because of fragmentation with Sweetwater, Sam Ash, online retailers like Amazon, crap sold by Best Buy and Target, and all the local music stores making up the rest. It's usually good to be the big dog, if you have muscles that you can flex. GC has been buying up competitors for years, and they have a lot of clout with manufacturers (both need each other in this dinosaur industry). Normally, that would lead to better results, more ability to charge monopoly-like profits. But that's not been GC's model. GC's model is big-box category killer, make it up in volume model. So GC is the Wal-Mart of MI.

This has left GC to abandon the boutique type of gear, and generally sell only the entry level stuff with any velocity to it, because that's where the revenue is (not necessarily profit margin, but velocity is the key to big box retail).

This is actually a blessing in disguise for the few mom & pop stores that "get it". Mom & pops can survive by not trying to fight GC, but doing the things that GC can't do very well. Which is catering to high-end customers wanting high-end gear (like many of us on TB), and providing after sale services. I suppose the "music lessons" model works somewhat, although I've never really seen it work as well as most retailers think it does (the foot traffic sells more things like accessories at tiny margins but that's about it).

Being a boutique requires capital in the form of high priced inventory, and relatively high-priced service techs, but can work if the real estate is cheap, and you're selling in a relatively affluent market with few boutique competitors. And of course, you need an online presence, to allow your affluent customers to find you.

So with all that rambling, I hope its clear to you all, that 1) the market for gear we love is just not that great a business, and 2) GC deserves its fate because it chose to become the Wal-Mart of music.

I'd say you hit the nail directly on the head. Frankly, I don't have a clue as to why ANYONE would want to open a "music store".

 

[tbz]

It was a blessing in disguise for Bain to have LBO'd GTRC, because as a public company, it was a low-growth, low P/E basket case of a stock.

This is the one point I'd disagree with you on. How was a LBO good for their long term viability? Going from a 1.9 billion valuation with .2 billion in debt (IIRC) to a 1.9 billion valuation and 2.1 billion in debt is going to kill anyone's bottom line.

I'd agree that a slow death was inevitable, but the difficulties caused by the LBO, combined with the odd actions taken by management to raise enough revenue to cover the LBO debt interest, has quickened things IMHO.

 

[Holdsg]

You make a good point, it was a blessing for existing shareholders that got a premium price from the buy out, otherwise, they weren't getting much value attributed to the depressed stock price in the market. Was it good for the company and employees? probably not, as you suggest.

 

[PWRL]

GC deserves its fate because it chose to become the Wal-Mart of music.

This right here.


In ages past, I used to walk into a GC in awe of the smorgasbord of beautiful gear all over the place. Absolute Candyland. But for the last ten solid years, every time I've walked into a GC it's been more of a let down than the last time, and for less and less of a purchase than the last time. Now, I skip it entirely and head to Music-Go-Round for a quick peek before I head to the independent store that never lets me down.

I would say that if GC does go under, the worst that could happen is that I don't get those crappy catalogs in the mail anymore.

 

[bigfatbass]

I think GC will "go under" in the sense that Fender is eventually just going to eliminate the middle man for EVERYTHING, in their attempt to become the new Yamaha. Seriously. Look for them to purchase a major manufacturer of orchestra instruments in the next few months/years. I wouldn't be surprised if they already had. It's the only piece missing, save for maybe a better PA/live sound wing.

They already own: Charvel, Jackson, Gretsch, Guild, Tacoma, SWR, Benedetto, Rodriguez, Orpheum, Olympia, Genz-Benz, DeArmond, Ovation, Groove Tubes, Takamine, Hamer, Ventura, LP Music, Gibraltar, Toca, Heartfield, Sabian, Vic Firth, even Hercules Stands, Lee Oscar harmonicas, and more.

Then they bought the biggest brick and mortar retailer, which was GC. Then it was on to purchasing MF, Music123, Zzounds, and now their hand is in most of the online retailers except for the few diehard indies like Sweetwater, Northern Sound & Lights, 8th St. Music, etc.

To the monster that is now Fender, GC is just a silly brand name in the way. I expect they'll fix that in some fashion, and close a bunch of under-performing stores on the way.

As far as who makes money off the restructuring, that has already been explained by people far more knowledgable about the LBO process than I will ever be. I just thought this conversation needed a little speculation on WHY it was happening.

Here's my crazy conspiracy projection: Fender and Gibson have become the warring XM vs Sirius of musical objects. They are buying every brand they can, the same way XM/Sirius bid well beyond their means for Howard Stern and all the sports leagues. By the time they were done betting borrowed money in the great programming grab, they were so over-extended/leveraged in debt, it was merge and downsize, or both would perish. The result for the consumers was terrible. Nothing but higher prices, shallower playlists, more homogenized "star" driven canned radio, less station choices, and less service.

The music industry is already price fixed at every level, with retailers forbidden by their retail contracts from straying too far from the collusion-dictated price range.

It's as crazy as if ClearChannels owned all the radio stations, music stores, concert venues, and ticket sellers.

 

[sound of bass]

This right here.


In ages past, I used to walk into a GC in awe of the smorgasbord of beautiful gear all over the place. Absolute Candyland. But for the last ten solid years, every time I've walked into a GC it's been more of a let down than the last time, and for less and less of a purchase than the last time. Now, I skip it entirely and head to Music-Go-Round for a quick peek before I head to the independent store that never lets me down.

I would say that if GC does go under, the worst that could happen is that I don't get those crappy catalogs in the mail anymore.

YES! No more catalogs. I find much better models, selections, and prices at my local Music-Go-Round also. Die GC!

 

[Munjibunga]

Yeah the smaller shops have pretty uninteresting inventory. One of many reasons I don't need to walk in the door.

I hang out at a small shop that has very interesting inventory. It can be a bit of fiscal drain though, once you get bitten by the bug.

 

[teleharmonium]

First of all, the Music Instruments (MI) industry is a dinosaur industry that does not exhibit the kind of growth needed to attract anything but "high yield", i.e. speculative investment.
It was a blessing in disguise for Bain to have LBO'd GTRC, because as a public company, it was a low-growth, low P/E basket case of a stock.

This is an analysis of them as a publicly traded stock. Your perspective is keeping you from seeing that a business that sells something with widespread but modest use like guitars, shouldn't and needn't attract speculative investors.

There is nothing wrong with a business that employs lots of people and serves lots of customers, making consistent (but not huge) profits and growing steadily, as GC did for a long time - except to Wall Street, and every greedy person behind it (which includes a lot of us with our 401Ks).

What did Bain think was going to happen ? Did they crunch some numbers and determine that Rock and Roll was going to come back ? Of course not. They saw a company that they could pillage and dump, as per usual. Long term survival of the company or well being of the employees or consumers are not their concern.

 

[Troph]

What did Bain think was going to happen ? Did they crunch some numbers and determine that Rock and Roll was going to come back ? Of course not. They saw a company that they could pillage and dump, as per usual. Long term survival of the company or well being of the employees or consumers are not their concern.

Disagree completely. If they wanted to liquidate it, they would have done so years ago. But GC never had the assets necessary to make it worth liquidation. It was purchased to flip, which depends on its value going up, not down. Potential private buyers aren't as dumb as you think, and they typically have teams of analysts looking at long-term growth prospects, so flipping on the private market requires value-add.

People act like Bain and other Wall St investment firms have super-villain powers and play a rigged game where they don't lose money. In reality, they make mistakes all the time, and lose lots of money regularly. Especially on assets acquired at the top of the market in 2007, like this one.

 

[NWB]

I think GC will "go under" in the sense that Fender is eventually just going to eliminate the middle man for EVERYTHING, in their attempt to become the new Yamaha. Seriously. Look for them to purchase a major manufacturer of orchestra instruments in the next few months/years. I wouldn't be surprised if they already had. It's the only piece missing, save for maybe a better PA/live sound wing.

They already own: Charvel, Jackson, Gretsch, Guild, Tacoma, SWR, Benedetto, Rodriguez, Orpheum, Olympia, Genz-Benz, DeArmond, Ovation, Groove Tubes, Takamine, Hamer, Ventura, LP Music, Gibraltar, Toca, Heartfield, Sabian, Vic Firth, even Hercules Stands, Lee Oscar harmonicas, and more.

Then they bought the biggest brick and mortar retailer, which was GC. Then it was on to purchasing MF, Music123, Zzounds, and now their hand is in most of the online retailers except for the few diehard indies like Sweetwater, Northern Sound & Lights, 8th St. Music, etc.

To the monster that is now Fender, GC is just a silly brand name in the way. I expect they'll fix that in some fashion, and close a bunch of under-performing stores on the way.

As far as who makes money off the restructuring, that has already been explained by people far more knowledgable about the LBO process than I will ever be. I just thought this conversation needed a little speculation on WHY it was happening.

Here's my crazy conspiracy projection: Fender and Gibson have become the warring XM vs Sirius of musical objects. They are buying every brand they can, the same way XM/Sirius bid well beyond their means for Howard Stern and all the sports leagues. By the time they were done betting borrowed money in the great programming grab, they were so over-extended/leveraged in debt, it was merge and downsize, or both would perish. The result for the consumers was terrible. Nothing but higher prices, shallower playlists, more homogenized "star" driven canned radio, less station choices, and less service.

The music industry is already price fixed at every level, with retailers forbidden by their retail contracts from straying too far from the collusion-dictated price range.

It's as crazy as if ClearChannels owned all the radio stations, music stores, concert venues, and ticket sellers.

You do realize that Fender does not own GC don't you?

It's been noted throughout this thread that GC is owned by Bain Capital.

 

[teleharmonium]

Disagree completely. If they wanted to liquidate it, they would have done so years ago. But GC never had the assets necessary to make it worth liquidation.

That's one possible explanation. Another is that their plan to flip it was killed when the economic downturn hit. The fact that they've held onto it does not necessarily mean that they saw the core business as having long term high growth potential.

After all, if they would have seen some sort of coming boom in the guitar, drum, or low end home recording businesses (...why ?...) , presumably a lot of other people would have had the same expectation, and the stock price and their competition would have reflected that.

It also doesn't necessarily equate to a loss for them, due to their multi million dollar management fees, often coming from the difference when an employee pension plan is converted to a lower value fixed benefits package.

 

[CJAZ]

GC started their own demise by concentrating on selling to the bottom feeders, starter packs, entry level instruments and such.
They did this successfully for years, but by focusing on these customers they effectively alienated the mid level and high end customers.
In the 90's my hometown GC had a high end guitar room, a PRS wall, a Gibson wall, a bass department with multiple custom shop Fenders, rickenbackers, warwicks, Zons, cool amps, lots of vintage gear, etc.
The starter packs and cheapo guitars can be bought online just about anywhere for the same price, without leaving your desk.
I think GC painted itself into a corner that eventually leads to a dead end.

+1 on this.

Although I do not think it is the sole reason for their problem(s) it is something to be considered. I made my first GC purchase in 1983 and it was a different store back then. They had lots of high quality gear and remember how awesome the wall of guitars and basses was back then? If you wanted an entry level instrument or knock off, you could go to a small store (I dislike the term mom and pop as it is more likely a small entrepreneur...) and buy an Aria Pro, Hondo, Harmony, Takamine (electric) etc. Even in the early 2000’s I bought three Taylor acoustics, none under a 600 series and one of them a custom shop order and was able to negotiate the price with a knowledgeable sales person. Now you go in and there is a lot of low end gear and not as much of the high end gear.

Gen y’ers and millennials are generally more comfortable buying an item without holding it and are more comfortable “communicating” with people who are not in front of them so brick and mortar businesses of all types are going by the wayside and will continue to do so. Personal interaction is less important than immediate gratification and low price. There are always exceptions so no need to respond and telling me that you are young and not this way or old and this way etc. It is a general trend of consumerism.

Capitalism feeds on itself and that is in part what GC has done. The people who profited from the expansion are long gone, but one of the things they had a hand in was keeping their brick and mortar competitors prices down which we have all benefitted from. I like GC for certain items and do not take anything that happens in there personally so I don't care if the salesperson doesn’t know squat because I will learn what I need to prior to buying. I can check out an item there, get a lower price elsewhere, then get a match from GC online then go to MF and get the reduced price minus shipping or tax (cannibalism). On the other hand if I build a relationship with another seller and the service and quality are great, I don't mind paying a little bit more. Alas, I am an old guy.

The market and the way the world does business is changing and gigantic brick and mortar stores of any type are for the most part becoming a thing of the past. That is just the way it is. Human kind survived the agrarian revolution and the industrial revolution we will survive the technological-economic revolution as well.

 

[kenneffdupriest]

the only thing good about GC is that theres one next door to Sprint Campus where ma girl works. So I stop by and play bass sometimes during the week and wait for her to pick me up for lunch. So I do go in there and if the Overland Park Store is to close I will be slightly heart broken cuz I have friends who work there. However....

I haven't bought anything from there in ages. I get gift cards for Xmas and I'm like "What do I do with this?" Re-gift?

When I have had to get emergency stuff, they didn't have it in stock. fortunately for me I live in KC where the GC/MF warehouse is and you usually get online stuff within a day.

Irregardless, there are always folks in there. Maybe they aint spending all of that tax refund, maybe they're just browsing, maybe they're just hanging out, maybe they're just there to talk to Broseph.

But they are there. I member back when we wud day trip to Dallas just to goto GC. Tons of very cool, high end ship. Not so much anymore. But I'm pretty sure they are gonna scrap by. They have had three bad fiscal years but lets face it folks, we are in a recession and the arts are the first to suffer. Not sure where I'm goin with this but its makin me very hungry.

lets go get a taco,

 

[Melonthief]

I have never found anything of interest in GC. The stock is extremely predictable. If I want a Fender or Gibson or Squier or Epiphone- I know what those are and I can order online cheaper. GC is like going to McDonalds.

 

[tbz]

This is an analysis of them as a publicly traded stock. Your perspective is keeping you from seeing that a business that sells something with widespread but modest use like guitars, shouldn't and needn't attract speculative investors.......There is nothing wrong with a business that employs lots of people and serves lots of customers, making consistent (but not huge) profits and growing steadily,....What did Bain think was going to happen ? Did they crunch some numbers and determine that Rock and Roll was going to come back.......

Holdsg, in his reply to my earlier comment, conceded this point (like the gentleman/scholar that is his.) Tbh I think anyone paying attention to this problem at the financial level has to come to the same logical conclusion that you have.

GC would have had no problems sustaining modest growth, with the level of debt, and overall company value they had pre-Bain buyout.

Bain saddled them with 1.9 bil in debt, then started 1) building more stores and 2) modified their inventory in order to try and move more instruments (e.g. you could find $3000 non-Fender basses, new in GC retail locations in 2004; now, even in Los Angeles, almost everything is sub $500.)

The "WalMart" effect folks are complaining about was really due to Bain's fervent desire to recoup the 1.9 billion in debt they had saddled GC with, in the course of buying it. GuitarCenter, if it had not been bought by Bain, would have not expanded as quickly in the past 8 years. They would have likely retained their old inventory style (e.g. mix of low and high priced instruments.)

Really a shame when you break it down. Big finance tries to take a piece of our industry, gets greedy, and potentially causes a collapse.