While the biggest US name in pro audio made headlines last week with uncertain financial news, so, too, did the biggest US name in music retail.
Yes, we were so caught up watching Avid, makers of Pro Tools, Sibelius, and Media Composer, as they were dropped from NASDAQ and delayed earnings reports once again, we missed the latest on Guitar Center. The big box music giant may not be able to keep up with its debt. The Wall Street Journal [paywall] reports that the retailer’s largest creditor is in “advanced talks” with owner Bain Capital to take over the company. (That’s the same Bain Capital made famous by former Presidential hopeful Mitt Romney, yes.)
One element in common: both companies saw aggressive growth plans curtailed at least partly by the economic crisis. Guitar Center ran into trouble shortly after acquisition by Bain in 2007, growing head-first into a slowing US retail economy. Eric Garland, a writer, consultant, and “future trend analyst,” has some harsh words for the music store on his blog on the “transformational economy”:
I said that the debt-laden big box model was not built for the long term. I stand by my assessment. The events are playing out to make my point for me … In the mean time, you should think about the future of local retail – the kind that doesn’t end up billions in debt. It may have quite a future.
That seems a fairly black-and-white view. The question is whether the chain’s debt problems owe to the big box model fundamentally, or to a growth plan unhinged from reality.
Here’s the situation. Guitar Center has amassed some US$1.6 billion in debt, “much of it stemming from Bain’s $2.1 billion leveraged buyout of the company in 2007,” according to the Wall Street Journal. The talks would convert that debt into ownership by the creditor.
Note the numbers there. A large portion of the debt in Guitar Center came from the original, highly-leveraged buyout. In other words, you may be able to draw more conclusions about Bain from what’s happened than you would about the music instruments industry or big box retail in general.
There could be serious implications for music manufacturers, anyway, particularly the titular guitar makers. The big box format means accumulating lots of inventory, and that inventory means revenue for makers. Guitar Center is such a market force that it could pass its own financial woes onto those makers, exacting leaner margins. Then again, it was presumably doing that already.
What worries me in terms of the industry is that smaller players have already been marginalized, and online sellers can’t offer the hands-on experience musical instruments in particular might demand.
Consultant and music producer Bobby Owsinski, writing in response to the above story on his own blog, makes some dire predictions:
Ares wants their money, so watch as they squeeze GC by making it leaner and meaner than ever, all at the expense of the customer. If you think doing business with them now is hard, just wait until this comes down. Fewer sales people that turn over even more frequently, less stock on hand, only the latest products and no deep inventory – that’s what you can expect. It’ll be the way it is now, only worse, if you can imagine.
And expect to see some of your favorite small manufactures either struggle or go out of business, as GC cuts its inventory and SKU’s even more. For all those companies depending upon GC for a good chunk of their business, times are about to get a lot tougher.
Owsinski echoes the same concerns we heard about Avid last week (including from at least some financial circles):
Once again, this is a small industry filled with creative people. It’s too small for a company to go public, roll up smaller companies, or grow to big box levels without the customer suffering.
He also predicts, however, that the bright spot may be the return of mom-and-pop stores. Whether that happens remains to be seen.
In fact, the irony of all of this is that Guitar Center kept adding retail even when their sales growth wasn’t keeping pace. (If that isn’t a recipe for debt, I don’t know what is.) Note the contradictions in a story for National Public Radio’s Marketplace back in 2012:
That story sounds some positive notes: demand for instruments is up alongside lessons. But it also observes that Guitar Center continued its march to expansion even as online retailers gobbled up a lot of the actual sales growth, and that other big box retailers had run into similar problems with debt.
If you want to look to who would be threatened by troubles at Guitar Center, a New York Times story from the same year posits one answer: Fender.
Analysts say Guitar Center is crucial to Fender, accounting for roughly a sixth of Fender’s sales — and the ties between the two run deep.
But if under Bain ownership Guitar Center has mostly managed to acquire junk debt, we’ll see if the creditor is able to restructure the business back to health. Bain absorbed Guitar Center in 2007, so the stock GTRC is now defunct, in case someone was trying to go on NASDAQ to trade in either GTRC or AVID.
It’s worth revisiting the original acquisition of Guitar Center.
As for how this impacts people making and consuming musical instruments, I think the scale of the implication really comes down to whether they’ve found other alternatives. Those whose fates are intertwined with Guitar Center may face tough times. But those who don’t may see this as non-news. If you’re a manufacturer, we’d be curious to know how much you rely on the big box chain – or its rivals.