It always starts at NAMM
Depending on who’s doing the talking, NAMM 2013 was either the greatest it’s been since before the recession, or it was packed full of cautiously optimistic manufacturers that had nowhere else to look but up. TheToneKing.com’s own experience at NAMM was just as ambivalent. Amongst the deal making and the shaking of hands, there were whispers, grumbles, and furrowed brows all pointing to some unnamed threat to what may otherwise be a festive celebration.
I myself was plagued as to what people were talking about under their breaths until I read this from Musical Merchandise Review:
Fender CEO Larry Thomas spoke on looking at the larger retailers and learning from their mistakes and experiences. His biggest disappointment was pulling the Guitar Center IPO on the final day – MMR. March 2013, page 50
In case you missed it, MMR really meant to say the “Fender IPO” and not the “Guitar Center IPO.” Remember when Archie Bunker accidently asked Sammy Davis Jr. if he wanted some cream or sugar in his eye? Yeah, MMR just did something like that. Besides for being damn funny, the error pointed out the white elephant in the room.
Devoted readers of TheToneKing.com already know that Guitar Center is in trouble.
And the manufacturers know it too. Now, I’m not here to harp on GC, but manufacturers get just as worried about unstable retailers as they do with unstable markets. Even more so. Unstable markets can be weathered if manufacturers have a good relationship with their retailers. But if things aren’t working out with your retailer, you’re pretty much screwed.
The Best Guy From Best Buy
The most recent news about GC is that they have themselves a new CEO.
Marty Hanaka was acting as the interim CEO after Greg Trojan pulled out for BJ’s Restaurants. Seriously. Trojan pulled out for a BJ. You can’t make this stuff up. Mr. Hanaka, it turns out, is an avid reader of TheToneKing.com. We found this out at NAMM when he introduced himself to The Tone King crew on the floor and threatened to sue. Presumably, he was talking about our article titled: Life Support: How Long Until They Pull The Plug On Guitar Center. Everything that we reported was sourced from other articles and publications, but he still wasn’t thrilled about it. We did make it clear that if any information was incorrect, we would immediately retract it from the article. We haven’t received any formal edits or corrections from them.
Nerve racking encounters with angry CEOs aside, as of April 1st, Marty Hanaka was replaced by a dude named Mike Pratt. Mike Pratt has been the CEO of Best Buy Canada and Future Shop since 2008. Right away that gets most of us thinking that Best Buy hasn’t been in the best of shape lately. Well, that extends to their Canadian stores. In fact, Mike’s move to Guitar Center came only two months after an announcement that Best Buy Canada was closing 15 of their big-box stores and laying off 900 workers.
This move came about a year after Best Buy US decided that they were going to close 50 of their big-box stores and opening 100 “smaller mobile stores,” where they would concentrate on phones, tablets, and E-Readers. In short, Best Buy is consolidating. Forbes.com reads:
The company has fared better in 2013 thanks to new CEO Hubert Joly’s plan to slash jobs and expenses – Forbes.com
Best Buy had been going through a bit of a power struggle on top of it. The founder of Best Buy, Richard Schulze was trying to buy back the company since last year. He procured the funding and planned to buy the company in February, but because Best Buy’s shares had performed better than expected in late 2012 and early 2013, the board rejected his offer. Recently, everybody kissed and made up. Joly and Schulze are apparently running the company together like they’re frolicking through a sunny field of yellow daisies.
The reason that I’m spending so much time talking about Best Buy is because it may tell us what might be coming down the pike for Guitar Center. Of course, Guitar Center’s troubles are dramatically different from Best Buy’s. And, the course of action that Guitar Center has been taking so far has been different – Rather than closing their big-box stores, they’ve opened several new ones – So, in the end, this might all be speculation.
But, I’m not the only one thinking about it.
Bringing in the new blood with experience “slash[ing] jobs and expenses,” might be the catalyst for Bain Capital to begin consolidating Guitar Center stores. If the same thing worked to drive up Best Buy’s share prices, it would make sense that it would work with Guitar Center as well. This is just a guess, but if they do begin consolidating, and the shares can climb within an acceptable range to justify Bain selling them off, Guitar Center may go up for sale in the next five years.
Whether a GC consolidation would be good or bad is really hard to say. Of course, keeping in mind how deep in debt Guitar Center is, they would have to cut a hell of a lot more than 900 jobs to get their share prices to jump up high enough to get anyone excited.
Some of the Guitar Center employees are weighing in, making it clear that they’re not digging the way things are going.
Citing low wages, no opportunity for advancement, and lack of sick days and vacation, the Guitar Center workers in New York are circulating a petition asking for a “sit-down” with GC over deteriorating working conditions.
I’d love to be a fly in the room for that one.
When the official announcement came down that Mike Pratt would be named CEO, he said this:
There’s no question that Guitar Center is North America’s leader in musical instruments and related products, and there’s a long legacy of success that I greatly admire,” said Pratt. “Over the last few months, I’ve had the chance to look at the Company even more closely, and I came away very impressed with its dynamic, multi-format business model with strong in-store and web-based brands. I’m excited about this opportunity and looking forward to working with Guitar Center’s management team and dedicated associates to build the business at retail and online – Marketwatch.com
There’s really not much here. Just a “Happy to be here” kind of vibe. But he’s coming in when everything’s coming to a head, and what he’s NOT talking about is a bit unnerving.
Namely, their debt.
This month (April 2013) is when much of GC’s debt comes due.
Which means that they’re either going to have to refinance (again) or they’re going to have to default. GC’s financial adjustments will likely have to be accompanied by some sort of new business strategy that will help convince the banks to give them more money.
We’ll just have to wait and see what Mike Pratt’s next move is going to be. Either he’ll continue with the expansion, which would presumably put GC further into debt. Or, he’ll start “slash[ing] jobs,” which would be something else entirely.
Whatever GC does, it’s certain to trigger a big reaction from the financial community, like Moody’s or S&P. My guess is that Moody’s won’t be breaking out the cookies and beer.
On The Sunny Side
NAMM 2013 was a huge success in many ways. Everybody showed up with their ‘A’ game. Fender, Gibson, Randall, PRS, Peavey, Schecter, and Orange (just to name a few) had huge showings. Everybody seemed to be expanding into new areas. PRS is doubling down on their expansion into amps and acoustics, while moving into the bass business. Peavey is expanding on their already successful live sound inventory, while remaining true to what made them great, amps and guitars. Schecter is broadening their horizons with the introduction of their flagship amp series, the Hellwin Synyster Gates signature amplifier.
Many were talking about a new manufacturer/retailer dynamic. A renewed focus on smaller, independent retailers. Building better relationships with smaller shops instead of relying on larger retailers for the bulk of their sales. A new game.
And, they’ve already started.
Paul Reed Smith, for example, is personally traveling out to many of his smaller independent dealers to work with them on strategies for 2013 and beyond.
Other manufacturers also expressed an interest in working more closely with independent dealers to create a closer working relationship. Sometimes focusing on better pricing plans than they’ve offered in the past, or simply asking what they can do to help out these smaller retailers.
NAMM 2013 marked the start of this new dynamic. While the overall attendance was down this year, the decline was mostly attributed to limited number of NAMM Member Guest Badges (Yellow Badges) that were issued this year.
Instead creating a huge fan boy spectacle, NAMM wanted to get back to basics by encouraging manufacturers and dealers to work together to build stronger relationships.
Also notice that Larry Thomas’ biggest concern was the mistakes of the “larger retailers.” (MMR. March 2013, page 50) Presuming that he was talking about Guitar Center, this is really interesting. Larry Thomas was the one who brought Guitar Center to greatness during the 90’s and that had to be something that was particularly difficult for him to say. The company that he had help build had lost its way.
If you look at the top three retailers of 2013; the first is Guitar Center; the second is Sam Ash; and the third is Sweetwater. Both Sam Ash and Sweetwater are still owned by the same guys who founded them. And, both have been focusing on different aspects of the retail industry.
Sam Ash has been carefully consolidating over the past two or three years. Realizing that they had too many brick and mortar stores to keep providing good services, they opted for shutting the doors on many of those stores and concentrating in markets that they are more viable. Even the series of smaller Sam Ash stores that made up the famous Music Row on 48th street in New York has been shut down for one shop on 34th street.
Sweetwater, on the other hand, is all about the web and the service. There is really no such thing as a Sweetwater brick and mortar store; it’s just a giant warehouse. They’ve chosen to focus on just the selling of gear, leaving maintenance and show rooming to other shops. They also have a personalized showroom and auditorium at their facility where they get artists and manufacturers to do demos for the Sweetwater crew, keeping them abreast with the latest developments in the music industry. Sweetwater also does in-depth interviews and gear demos on their YouTube channel.
But, no matter how many people buy online, there will always be a need for smaller guitar shops for lessons, repairs, and checking out new gear.
Manufacturers know this.
They also know that smaller retailers aren’t going to carry 20 different lines of amplifiers. They’re going to carry 4 or 5. And, they’re going to be loyal if they’re treated right. Most importantly, they know if Guitar Center goes down, it might take everybody else with it. If they move quickly enough to shift the bulk of their sales to smaller, independent retailers, it may help weather the storm that they’ll be trapped in if GC does go under.
Things are about to get really interesting.
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About the Author: Marc published his first novel Becoming in 2010. It’s a kick-ass book with monsters and dreams and stuff, and you should buy it. Since then, he’s written thousands of articles for TheToneKing.com, many of which have been picked up for circulation by manufacturers and other news outlets. His next book, Drugs and Pancakes, should be available early 2014 if his alcoholic editor can find time to work on it in-between destroying his liver and screaming about punctuation. He graduated from Roosevelt University with honors, which means that he’s not as dumb as he looks. He’s been playing guitar for over 25 years, which is almost twice as long as most of his students have been alive.