Official Luthiers Forum!

Just read an excellent analysis in Forbes of G*itar Center's continuing and current financial woes.

A couple of things that the author addresses in this piece are pretty important and in my view right-on in terms of the analysis.

First he speaks of the propensity for vulture capitalists such as Bain Capital... and their business model of acquiring controlling interest, raping the company of cash and assets, and then loading it up with strangling debt while seeking another chump to dump it on just doesn't fly well in an industry as small as musical instrument sales.

He also suggests that G*itar C*nter's possible demise is good for the industry as the Mom and Pops will be sure to step-up and return to doing what they did best, personal service, better understanding of support, and even in my view often some stake in the success of their valued clients.

I would not be a Luthier today had not a Mom and Pop music store owner trusted me when I was a little kid and let me have free run of the store.... Hey, not everyone always has great judgement....

I've said for some years that I believe with the advent of GC and even Internet resellers that this will at some point come full circle when the honeymoon ends and musicians begin to understand that there is a reason why quality music stores did so very well for so very long - value!

http://www.forbes.com/sites/bobbyowsinski/2015/05/11/more-evidence-of-big-changes-coming-to-guitar-center/

In my way of thinking as GC struggles to even pay the interest on their gift from Bain, crippling debt... we are in the doldrums of the summer retail season a time when traditionally folks purchase the fewest musical instruments. Could it be that Jim Morrison and the Doors had it right - "This is the end...."

Hope so!

Thoughts please?

While I object to your characterization of Bain Capital, I share your distaste for Guitar Center (and its owner - Musicians' Friend). Guitar Centers' demise has been foretold by several writers in business and music areas, and yet they haven't folded. We want them to go away, but they won't.... just yet. Fingers crossed?

_________________
"Act your age, not your shoe size" - Prince

I hear ya Hesh. I've thought the same thing. Back around 2003-ish when i was doing repairs for 5 music stores and business was at an all time high I saw each one of them go one by one as Internet started to take over. For sure you could could see it in the young Millennials that would walk in with their smart devices and pick up a guitar just to check it out and walk out the door and go and order it online to save $15 bucks not realizing that the extra pittance would go to personal customer service, no hassle returns, free set ups and so on.

I can to some extent understand buying an electric guitar online, a Strat is a Strat is a Strat... is a Les Paul. But never could I understand how anyone would want to buy an acoustic guitar online. But it's a different generation where music is free and products are cheap and just show up on your door step.

So lets just see if and when the chickens come home to roost

While I whole-heartedly agree with your characterization of Bain Capital, I am less ebullient about the demise of Guitar Center (and it's owner - Musicians' Friend). On the one hand, the WalMart effect of making consumers expect the kind of prices that can only come from the production abuses to land and people that exist in China has made both craft lutherie and the neighborhood musical instrument store very difficult. On the other there is an argument that it has helped make guitars must have paraphernalia for vast numbers of people who otherwise may never had thought to buy an instrument, thus greatly expanding the market.

That being said, I do think that the end of Guitar Center will be overall a good thing. Everything about that place felt toxic.

Chris - sorry if I offended you with my characterization of Bain that is not my intent here but I am glad that we both agree that GC needs to go.

My motivations for the disdain over Bain... is that when I was at GE slightly more than half of the company under my boss was in the VC biz. GE's approach was not rape and pillage, fire middle management, pocket the take and load the concern with such debt levels that it's days were numbered. Instead GE only invested on companies that were number one or number two in their respective markets, had a bright future as a possibility if properly capitalized, and who could also benefit from the plethora of experts, supply chain, manufacturing, etc. that GE would loan who they invested in. GE was also not looking for a 16% return in 18 months or it's end of days for the company. Instead we looked for long term relationships with synergies that would benefit all especially the company we invested in.

If you are a fan of Taylor Guitars and I most certainly am Taylor is a company that GE partnered with and also invested that human expertise that I speak of and Taylor has benefited and continues to do very well. GE benefitted as well by investing in winners like Taylor.

VC (vulture capital) does not always have to be strapping that burst Les Paul to the family station wagon roof and then driving off on vacation without a care int he world.... Instead a win/win can be had in some circumstances if that is what the organization's (the VC firms) goals really are.

So as you can see I speak from experience here and my issue(s) with Bain remains their track record. For more on this you can read what a Nobel Laureate economist had to say about Bain and killing jobs. I speak of Paul Krugman and his point was that Bain was not just a job killer.... Instead Bain was a massive killer of well-paid, middle class jobs.

For the record I'm not trying to be political but I am trying to discuss the continued existence of the largest reseller of guitars the world has ever seen. Seems right up our alley since this also has ramifications for anyone and everyone who builds guitars.

JF the store that we took over the repair side for when it went teats up after 52 years of having clients like Capton, John Lennon, etc... credits their demise to GC.... So do a lot of independent repair pros who were afforded the opportunity to walk away from that $40 - $80 an hour rate they could charge as an independent when their business and all the oxygen in the market was sucked up by a mother ship GC moving into the area. Now they could work at GC for $8 an hour, have unreasonable promises made by ignorant others that they have to deliver on, and try to survive and perhaps support a family too....

I've yet to meet or know a single Luthier who believed that GC is a good thing.

Hopefully with that new shop you have been working on and the demise of GC if they are a player in your area it might be good for business and that's my hope. It should be good for our business as well and the day they fail I may start drinking again....

rirhett - good point on the demand that is indeed created by the availability of inexpensive instruments. Many of these folks will at some point be humming that old sit-com theme song "movin on up" but this time from a Yamaha to a north American made, quality instrument.

I liked the rest of your comments too you hit a lot of bases that I subscribe to as well sensitive as they may be.

Anyway my intent here is not to be political but instead examine GC, it's impact on us.... current and past, and what we might benefit from going forward.

Great posts guys!

They've been on the edge of certain death for a lot of articles now, yet here they are.

Hesh, I would speak on behalf of guitar center. In an era dominated by electronic music, they continue to promote the guitar as an instrument, to the next generation across media platforms non of us small guys would dream of accessing. Aside from promotion, they retail a lot of lower end guitars that all need work, creating new customers for all of us in the form of repair or future sales. I'm not sure the days of big box retail of guitars is over, be it in the form of gc or the next retailer that will fill the space left by gc, and I'm not really sure if it would be a good thing overall for the guitar biz n general for there to not be enough sales volume to justify a retailer of that size. Even though I don't like their practices, GC acts as a barometer for the health of our industry, and if they go under, even if through intentional mismanagement, we will all feel the ill effects

I have to agree Hesh. Holding companies do tend to hang on to companies to take things as far as they can to try to find a buyer or turn it around. In the case of Bain, they have so much money invested that letting it go under is a huge loss to their assets. I have seen the demise of many small music stores over the years, but oddly enough, not so much because of GC, but because they didn't really have the capital to grow the business, or were forced to focus on only one or two lines of instruments. Often because they were family businesses, they lacked expertise in anything other than making as much profit off every item that they could, rather than trying to move volume with less profit per item. Getting quality instructors was always a problem for many places, and that often keeps students out of stores. In my home town, a young kid started a store, and would sell strings dirt cheap, and dealt with some new and a lot of used instruments. You could get great deals, and before you could blink, they had grown to the be the largest music store in the area. They didn't sell some of the better lines of instruments, but they found a niche and grew. I'm not sure how much bad management was involved in the GC collapse, but they obviously made a lot of poor decisions over the years.
I think that when they are gone, perhaps a number of smaller, specialized shops will open and do a better job of meeting the needs of the local customer base. I for one wish I had enough $$ to open a small shop once they are gone to specialize in acoustic instruments. There are none in my area, and one has to go to Boston for the one good shop in the region.

_________________
"I want to know what kind of pickups Vince Gill uses in his Tele, because if I had those, as good of a player as I am, I'm sure I could make it sound like that.
Only badly."

Hey Sam!

Don't you think that a reemergence and rebirth of local Mom and Pop stores also would and does create demand down the road for higher end instrument sales with those who get hooked? I do and that's exactly likely how any and all of us got to this forum except the younger participants who were introduced to guitars by GC.

I also think that the demand that you speak of being created may in fact be created much more in earnest meaning for folks who will stick with it and one day graduate to being a prospect for a custom instrument by that music store owner who let folks hang out, try things, encouraged them, had bulletin boards to post requests for gigs and even a ........dr*mer.....

We can disagree on who created more demand independents when they were not unreasonably and unfairly competed with by a giant who can coral 1/4 of Fender's annual production as GC does and did... and also pay far less for inventory than the Mom and Pops or GC. My money is on the independents who gave many of us our first crack rock (Fender Mustang, 1966) with a smile, a personal relationship and backed it up ensuring our success setting the stage for a lifetime of GAS (guitar acquisition syndrome).

I don't see how GC will be missed nor do I believe that it would hurt the market beyond maybe the time required for folks to entertain the idea of opening a local music store once again. At worst it might be a wash but again my preference will always be with the independent because they earned my support throughout my lifetime and I owe it to them. Hey Ernie!

If you want a barometer I have a really good one and the next time I am at work (off for two days here) I will PM you a link. It's the industry census done annually showing all market segments of guitar purchases broken down into price ranges, etc. 2014 IIRC correctly shows the first increase, about 6% in guitar sales in some years with of course the great recession being the bad guy here. These data also will answer questions on where the sweet spot is with pricing something that if I were still building would be all over.

Thanks for speaking on behalf of GC and that needed to happen for balance and fairness.

Interestingly Best Buy came and went in only several years attempting to be a mini GC. What's interesting about this is that their model, sell on price only, no support etc. didn't get them where they wanted to go.

Ed: Yeah, yeah right you are we have been to this movie before but there is no relief for GC in sight AND they just took on more debt with new stores one in the most expensive retail real estate in the US, Times Square. They also now have union problems, a new issue for them and likely an expensive one as well. I'm at the point that I would bet on failure for GC I just can't know when those that hold the levers will see fit to suck the last bit of blood out of the thing.

Related is G*bson and their dealer practices demanding a certain level of stock, preference with promotion, etc. to the point that many very fine music stores booted them.... Elderly comes to mind, no longer a G*bson dealer.

Seems to me in my best Columbo imitation voice that big business Gorilla marketing and predatory practices in the case of both G*bson and GC came to our industry and in either example neither company is doing well. G*bson announced something like 27% price increases just this year....

Fender has also been on the ropes for a long time and their largest client is GC....

One last thought since it was brought up that Musicians Friend is also under the Bain umbrella with GC, GC and MF (perhaps I should not abbreviate.... ) are different P&L centers for the overall concern meaning one can go completely down with little impact on the other. Interestingly it's very possible that GC greatest competitor or one of them is in fact MF.... Wouldn't that be a kicker and exactly why GM nixed Pontiac - they had so many brands they were competing with themselves in some circumstances....

Thanks guys!

Hey Don Bain has no real risk here at all either way and that's how VC often rolls. The initial investment has more than been recovered by the rape and pillage leaving only the debt. Bain found another chump and sold much of the thing to was it Apex, I'm not remembering but there is now a second VC company that specializes in taking companies to end of days....

In the Krugman article he details how the MO is to buy control, write checks back to yourself exceeding the investment to buy control, fire middle management, write checks to yourself from the savings gleaned by firing middle management, etc. Next it's "lean" manufacturing, JIT inventory control, electronic commerce, EDI (electronic data interchange) to further cut costs and then write more checks to yourself. This dance is repeated until nothing is left and Bain's share holders make some money but Bain's principals or any VC firms principals make the really big bucks as they walk away. It's divorce for profit - imagine that...

In the carnage the creditors such as Fender get shafted and in Fender's case this is a loss that could sink them too.... Leases get broken, anchor stores in shopping centers like GC often is located in have less draw for the entire shopping center. Of course the employees are SOL... and if you need any of those store return privileges you are SOL too.

Can't remember which one but one of the major pup houses has GC on a cash only basis now an indication of either not being paid in the past or the creditor being near death.

It's a huge mess, there will be lawsuits..., our tax dollars will provide the venues for the dysfunction (the courts), we get nothing but the tab of course and the VC firm skips off into the sunset to do it all over again with the next struggling national chain that they fancy.

Such a deal.... And if this is not bad enough.... it was all done by the VC firm with OPM (other people's money....) the VC investors and share holders. Murder by remote control with no chance of getting any of it on ya.....

Me, I'm not opinionated....

If GC dies, sadly, I don't think it will bring back the the Mom and Pop
music stores.
I know owners of these small operations and they agree on one thing, they make zero profit on their investment in the store.
Yes, they and a few employess make a modest living in some (but not in all) cases, and one is still open only because he owns his building and stock.
Sadly, once they are ready to retire (all of them are 66-70 years old) who is going to buy a store that makes zero profit on an investment?!? About the only alternative is the slow "fade away" option. Under these conditions
who in their right mind would actually start a new store?
If GC does go down, the independants, both larger and smaller will simply continue to limp along I think.
The smaller stores though will be hurt by their lack
of capital and inability to fufill the requirements of the large manufacturers to order and maintain stock to the level required of them while on-line and other larger retailers will continue to inhale what little oxygen is left in a
(demographically) shrinking market.

Have to admit, you lost me when you offered Krugman as an authority,
Mike

One thing is certain, the traditional model is broken. My fear is that the demand for instruments, particularly guitars may be waning. As of yet, that is not true. Guitar sales are still very strong worldwide but the consolidation of musical instrument retailers has destroyed the grass roots infrastructure that most of us grew up with, making the capital investment needed to restore it unpractical. So we may lose our industry's largest retailer and not be able to replace the volume of sales not due to lack of demand, but due to an ineffective method of delivery of product. Don't get me wrong, I hate going to gc but they fill a vital role for our industry. The question is will a a medium level player step up and grab the market share or will the market contract due to the absence of capital at the top.

I know it's anecdotal, but there are three mom and pop places short drives from my house that are booming. Parking lots are packed. One is a very large Taylor dealer that people drive from Dallas to buy from. They drive right past the GCs there.

I may be overly pessimistic, but I don't see as many young people willing to put out the many hours of practice to play an instrument. There are so many things competing for their time. I think there will always be musicians, but each generation seems to be producing fewer of them, and guitars/accessory sales will necessarily suffer.

I will be delighted if events prove me wrong,
Mike

There are a lot of folks who want to play the guitar, though I'm not sure how seriously. Hang out on the Acoustic Guitar Forum a while, and everyone wants to buy a guitar, but no one has more than $1000 to $1,500, and most want a guitar for less than $500. I doubt those folks are going to practice and/or study the instrument.

On the other hand, I go to a number of guitar competitions every year, classical guitar, that is, and I see a lot of young folks who are really putting in the hours of practice. It's an interesting mix. Some started when they were very young. Others, came up playing electric, and in a band, and decided to really learn music and guitar and feel like classical guitar is the route. They still play electric and acoustic guitar on the side, but study classical seriously. The playing at these competitions is fantastic. The down side for the Mom & Pop music store is that they won't be carrying the custom guitars these folks will be looking for.

_________________
Waddy

Photobucket Build Album Library

Sound Clips of most of my guitars

My completely unqualified forecast - GC will file for chapter 11 within the next 3 years (wouldn't surprise me if it happened sooner). Whether they succeed in this or follow like Borders did and get converted to chapter 7 if debt negotiations fail, that's a tough one to forecast. If they succeed in Chapter 11 they'll probably axe half their stores (does The Michigan market really warrant 6 GC's?), and other local vendors will find some opportunity to recover some small share of the market. Or if they can't reach terms that look better than liquidation, it could be converted to Chapter 7 and go to auction.

In either case, I don't think the general buying public will feel much of a bump. Buyers will still find vendors to meet their needs, Sweetwater and a few others will see a nice bump in market share, and manufacturers are going to go through a very painful period where some will make it through, others won't. Either way, it's the suppliers who are the ones likely to hurt the most. I imagine they would be the ones most amicable to taking heavy losses in a chapter 11 deal, as they're going to get a painful wedgie from this either way, and I think chapter 7 liquidation would hit them much harder. Not only would they only get pennies on the dollar for the inventory stocked on credit, but liquidation would flood the market (whether directly to consumers or a mass overstock buyout to other vendors), and they would not be getting much in orders from remaining dealers for some time.

Of course many have contracts where they can pressure dealers to meet minimum orders whether the market demands it or not, but are they going to enforce this at risk of damaging their distribution network even further by cutting even more retailers out?

As much as I think the market would eventually recover to a better state if GC disappeared, while a chapter 11 reconstruction would make waves in the market, I think chapter 7 liquidation could be a tsunami. But while the inventory supply side would likely bend over and lube up quite generously to keep within chapter 11, there may be a lot of other voices who would prefer to take what they could get in liquidation and move on. I'd say it's a toss up, but one or the other (restructure or liquidation) seems inevitable.

If I were a manufacturer, I would be heavily courting alternate dealers with very favorable terms right now. Behringer was wise to do this already - they basically pulled any credit or payment options, and if GC wants to deal their products they can pay COD. GC dropped their products of course, which means That while Behringer may take a short term hit from not being represented by the one-stop-superstore, they are at much less risk when the checks inevitably start to bounce. In addition, they can focus on building their presence in retailers more likely to survive the turmoil. So while others are dealing with a market swamped with their products by liquidation, or being left under-represented and overstocked by a smaller restructured GC, Behringer is at much less risk of being harmed, and a better position to have a larger presence in whatever market follows.

The market will still go on, and guitars will still sell at a similar rate whether GC restructures or goes up in smoke. The manufacturers are the ones who need to prepare for some serious butt hurt though.

_________________
Eschew obfuscation, espouse elucidation.

Krugman is a turd. That is all.

_________________
"Act your age, not your shoe size" - Prince

Krugman is realistic and more than anything pragmatic, which can ruffle those with (unrealistic) ideals of free market capitalism being capable of healthy self-regulation the wrong way. It's fine if you don't like him, but broader ideals aside, the appraisals of typical VC strategies cited in reference to this specific topic are objectively accurate.

Related to this specific topic, if you follow the shell-game of shuffling leveraged debt and debt to equity conversion, I think it will demonstrate quite effectively (on a relatively small scale) how self-regulation fosters opportunistic looting by a few sly coyotes, at the expense of both other individuals as well as a broader economy. When this saga has played out, the only ones walking away with a bonus will be Bain (and perhaps Ares, depending on what cards they still have left up their sleeve).

_________________
Eschew obfuscation, espouse elucidation.

Profound words...

Mom & pop stores will not rebound......there are too many internet discount retailers out there like Sweetwater, AMS, Sam Ash. ZZounds & of course E-bay. Almost all of the new guitars I see for initial set up were purchased online without the person ever playing them beforehand. And they seem to be OK with the fact they have not played them beforehand. And if you want new higher end gear, at least in these parts, the net is really your only choice. No one in the area except GC is a Gibson dealer. in fact out of the aproximately 10 local shops in a 30 mile radius ( not counting GC) none sell Taylor, any subsidiary of Gibson (Epiphone, Kramer, etc..)and only one is a Fender retailer, one Martin dealer, one Prs dealer and none of those three brands are under the same roof......The days of walking into the local guitar store and sitting down and playing a LP Custom beside a PRS C-24 and anything relatively cool like a G&L or Suhr have been over a long time now. I have watched as all the cool stores with all the cool gear have folded up and disappeared in my area.

How could a M&P compete with the vast selection available right on your smartphone? Not to mention the overhead of an actual retail store in a decent traffic area as opposed to that of simply warehouse space. There is no way a small shop can offer the type of price point on the same gear as an internet retailer and most people these days do not see any added value in making the purchase from you for more money. This is the new way, this is the new economic model, the Amazon model if you will. And now that Fender has started selling direct at a price point competitive with the cut throat web market place how long do you think it will be until the other major manufacturers are forced to follow suit? How could a small shop possibly compete when the brands they are trying to sell will sell direct? and at a price that doesn't leave much mark up to cover all the overhead. The only niche that may survive is the boutique store, but they run the risk of becoming more a museum than a viable store. Music row's demise in NYC is proof of that.

This is why I stay as far from retail as possible and concentrate on service. I carry, strings, parts and a few small accessories that my customers want it is all based on what I actually use. I have no want to try and sell guitars (except those I build), I'm not that brave or foolish.....I have no love for GC and find there long and painful death both fitting and amusing but I also do not like what I see coming afterwards any better.

_________________
Brian

You never know what you are capable of until you actually try.

https://www.howardguitarsdelaware.com/

I tend to agree with Brian -- if the big boxes fail I see the next step to be -- the manufactures including Martin and Gibson cutting out the Monster Centers all together having retail distribution directly through Amazon, Alibaba etc.

How many auto dealerships have vanished since 2008 -- 50% ?

Of course this is just my passing thought.

_________________
Ken Cierp

http://www.kennethmichaelguitars.com/

Brian's post mirrors my feelings about this to the letter. It's a brave new world and like it or not, as long as Gore's Internet (cough, cough) is up and running, I think Mom and Pop retail musical instrument stores will continue to go the way of the dodo, or doo-doo if you prefer.

I don't like it either but let's be honest, do any of you actually shop and purchase many goods today other than food or clothing locally without first searching online and comparing prices with shipping included? The materials that I use in my little shop alone come from every corner of the US and in most cases at 1/2 the price I would hope to pay locally IF, (and that is a huge if) I could even find a local supplier that had the materials I use. How can we expect the latest generation of music hobbyists, musicians, shredders and what-nots, to take a step backwards in how they purchase gear. They're not going to, they've grown up with this and it's all they know.

I actually have always thought that Guitar Center did everything they could to push away the "real" musician anyway. The ones I have visited would be staffed with kids that knew nothing about the products. They often play offensively loud music that to many, is just not necessary and very few even try to keep the acoustic instruments in a properly RH monitored room.

I came up as a musician in the 80's and have fond memories of hanging out at the local Mom and Pops but I really don't see how they can even survive let alone be profitable today.

_________________
jw ( o)===:::

Most people normally shop price first. These 3 local shops I mentioned, all BEAT any internet price. One of the M&P shops advertises on TV, they have a guitar with two signs on it... one is the lowest internet price they found and the other is theirs (lower). One time at the high volume Taylor dealer I went in and all his Taylors no longer had price tags hanging off of them. I asked "what's up?". The owner told me Taylor has a "minimum advertised price" policy that they started enforcing. He can't put in print any price below that.... and he sells below the minimum so he can only give a price when asked verbally.

When I lived in the Toledo area I hung out and took lessons here

http://www.durdels.com/

The store has been around since 1946 -- combination of knowledgeable owners and staff, great service, along forward thinking certainly has made it a success. The building itself is a smart idea since it has living quarters above -- something very common in the day and now it seems that very smart financial asset has been mostly forgotten.

I can tell you that high exposure strip mall leases are simply a business crusher --- the property owners get their pound of flesh first and to boot most leases have a clause that will increase your rent if your "gross income" hits certain levels. Plus of course you are paying for snow removal and other maintenance. What I am saying is that brick and mortar retail sucks the life out of a business.

_________________
Ken Cierp

http://www.kennethmichaelguitars.com/