Guitar Center is (headed toward) dead, and I don't feel so good myself*

[bagman67]

Here is a reasonably deep analysis of the private equity game plan, as exemplified by the corruption of Guitar Center.  A demoralizing read, because the GC example is just that - a demonstration of how PE exists for the enrichment of its investors, and anyone downstream can (and in all likelihood will have no alternative but to) go suck it.




http://www.nakedcapitalism.com/2014/04/how-to-get-beyond-private-equity-parasite-economy.html




*With apologies to the late Lewis Grizzard.

 

[drewfx]

I have a shorter analysis:

1. You buy into a company.
2. You secure debt. The more the merrier!
3. The debt is used in part to reward yourself management for "rescuing" the company by securing debt.
4. The company now needs to generate cash to make debt payments.
5. If the company can keep up with the debt payments and come out ahead you win! If it can't, then you cash out in one way or another, and if the management fees, bonuses etc. cover your investment plus a nice profit, you win!


And note that one Fender Musical Instruments Corp. generates a lot of it's cash flow used to pay down it's debt from GC.  :sad1:

 

[Cagey]

Interesting read. Kinda sad, really. A study in market manipulation run amok. I understand the underlying philosophy, and in a perfect world, it should have worked out. But, somehow, it's poorly executed, so it's failing. Big time. They took over a business that needs serious treatment and tried to make it into a commodity business, like groceries.

 

[mayfly]

Hey - which on-line retailer is associated with GC again?  Musicians Friend?  Sweetwater?  Z Sounds? 

I forget...

 

[Cagey]

Musician's fiend. Same company.

This is all a bit distressing. One of my neices manages one of the GCs in Austin, TX. Hate to see her lose her job. She used to tour the country playing guitar in a band, but it didn't pay jack because it was a "christian" band. They were lucky to eat on a daily basis.

 

[6stringer]

I read the entire article and all the comments. I understand a little (corporate predation, tax loopholing) but the real story is lost on my little brain)

Anyone care to Explain Like I'm Five years old? Or maybe ten if it's easier...

 

[Cagey]

The long and the short of it is they're in debt up to their eyeballs, with much of it unsecured and due fairly soon. It's a bankruptcy waiting to happen. Imagine yourself holding a Visa card with a $50,000 balance that's due in full in 2 years. You might make enough to pay the interest every month, but it's unlikely you're going to touch the principal so in 2 years, yer fukt.

Oddly enough, they do make pretty decent margins on sales, even with their goods discounted as much as they are. It's what attracted Bain Capital, and subsequently Ayers Capital to invest in the first place. Looked like a license to print money. But, I think what they didn't consider is the nature of the business. Lotta high-priced inventory on the floor that doesn't necessarily move terribly fast, so you tie up a lotta money that does nothing. The stuff that does move fast at very high margins (picks, strings, straps, etc.) doesn't have the dollar volume needed to sustain massive investment.

 

[DslDwg]

Hey - which on-line retailer is associated with GC again?  Musicians Friend?  Sweetwater?  Z Sounds? 

I forget...

I know - already answered. But if you've ever done business with Sweetwater you can tell they are not related to GC. Sweetwater seems to care about its customer.

GC Corporate has made it's bed - they've created a horrible culture and frankly I will be glad to see them go.

 

[Cagey]

Sweetwater mostly hires professional musicians/technicians who know what they're talking about. GC mostly hires kids out of high school. They both pay commission on sales, but at GC it's kinda like they're waitresses who work for tips. They really don't know what they're talking about most of the time, they just parrot the company lines. "Today's special is a Squire Telecaster in a blister pack that includes a strap, an instructional DVD, a rip-stop nylon gig bag, and a FREE PICK! Now how much would you pay? Wait - don't answer - I'll even have one of our top-notch technicians tune it before it leaves the store!"

 

[DocNrock]

Very interesting read.  Also quite sad.

 

[Cagey]

I don't think I'll miss them. What I miss is the old days, when my brothers and I would go out on a Saturday and hit a dozen music stores and pawn shops in search of the panic sale or the rare used piece that you could offer some trade bait and a bit of money for and come home with something new to play with. Plus, the owners knew what they were talking about, and you got to meet real musicians instead of high-school wannabes. They're all gone now because of the Walmart effect GC had on the business. Now, there are about 7 music stores in the metro Detroit area, and 5 of them are Guitar Centers. Seen one, seen 'em all. The other two are purely pro shops where they don't screw around. Took all the fun out of it.

 

[drewfx]

Oddly enough, they do make pretty decent margins on sales, even with their goods discounted as much as they are. It's what attracted Bain Capital, and subsequently Ayers Capital to invest in the first place. Looked like a license to print money. But, I think what they didn't consider is the nature of the business. Lotta high-priced inventory on the floor that doesn't necessarily move terribly fast, so you tie up a lotta money that does nothing. The stuff that does move fast at very high margins (picks, strings, straps, etc.) doesn't have the dollar volume needed to sustain massive investment.

If a company generates enough cash flow to make debt payments and has the assets to secure debt, that's what they are looking for. The trick for them is to pay themselves enough from the debt they incur and then it doesn't matter to them if the company goes bankrupt. Just look at the dollar numbers here regarding Fender and Weston Presidio:

http://finance.fortune.cnn.com/2012/07/20/why-fender-pulled-its-ipo/

Weston Presidio paid $57.8 million for its stake in Fender back in December 2001. Fender used the money from the sale to help pay the shareholders who had orchestrated Fender's buyout from CBS in 1985. In 2005, Weston Presidio recapitalized the company thanks to a $320 million debt-financing package from Goldman Sachs (GS). Under terms of the deal, Fender had to pay Weston Presidio (along with other shareholders and employees) a total of $215 million in dividends and bonuses.

 

[bagman67]

Elsewhere in the news, Ovation (now wholly owned by Fender) will cease US production of guitars.  46 employees of the Connecticut factory will be on the street.


http://www.rep-am.com/news/local/799400.txt



I can't stand Ovation guitars, never liked a single one I ever picked up, but this is just another sad story in the tale of outsourcing production to Asia and other low cost labor markets because US labor, taxation, and financing conditions are just not as favorable to US-based companies.  Plus, of course, the overleveraged nature of FMIC likely drives some decisions that companies that are not in debt up to their eyeballs might not make.


Presumably in a few decades when India and China and their satellites have raised their standard of living enough, the cost of labor in Africa will be the big draw for outsourcing there.  Lord knows African governments, by and large, are already sufficiently corrupt that they are an attractive place to do business for folks willing to cut a corner here and there.


</rant>


Blah, blah, and furthermore, blah.


Bagman

 

[Cagey]

I can't stand Ovation guitars, never liked a single one I ever picked up, but this is just another sad story in the tale of outsourcing production to Asia and other low cost labor markets because US labor, taxation, and financing conditions are just not as favorable to US-based companies.  Plus, of course, the overleveraged nature of FMIC likely drives some decisions that companies that are not in debt up to their eyeballs might not make.

You're not alone in not liking their designs, and you're right about this being an unattractive place for manufacturing.

I wouldn't get too worked up over it. They were goofy guitars, and everybody knew it. Sometimes, businesses die because they deserve to.

 

[bagman67]

Oh, I think we'll still see lots of plastic bowl guitars come in from China or wherever they're building them.  My understanding is they've only killed off domestic manufacture.

 

[Re-Pete]

From what I've heard, Ovation will be made 'internationally". Read: China, Indonesia etc. USA factory to close.


I own an old Ovation (with no piezo & the only wood is the spruce top & bridge mount - the rest of it is synthetic). It was a lower priced version of their bowl tops. I actually did some recording with it way back when, in an 8 track demo studio, and it sounded surprisingly well in the mix. Had a piano-ey, trebly tone as compared to a woody, boomy tone. Darn fretboard is aluminium (with plastic neck) and has high "petillo" frets (it was a marketing thing back in those days) which makes it hard under your fingers. Action is not too bad for an acoustic & it's aged well.

For the price I paid for it new it's held up well and if Ovation can do similar with overseas manufacture, good luck!

My bet is FMIC are going to maximise their margins by pitching these as "OVATIONS" (with price to match brand) but in reality they'll be as cheaply made as they can get away with.

 

[Jusatele]

the true sadness is what they did to the retail industry of music
through price and market manipulation they ran the independents out of business
this is when they thought they would mop up, when they were the big boys on the block
however their own business plan doomed them in the end
And the little guys are mostly gone.
So now where is the future of the music business?

huge numbers of people learned music in the back rooms of music stores taking lessons from mom and pop businesses
the loss of the base of instructors has forced us to go to internet style learning where we get no feedback and can scatter brain going from course to course doing only the simple stuff. I see kids all the time who really do not want to practice because they just change the course and blame the last one for not being worth a f*&^. When in reality the problem is they have no one to discipline them because they are not set up in weekly classes they need to perform in.

GC business practices doomed them, I hope musicianship survives. because before their demise they destroyed the neighborhood guitar teachers place to have kids come and get quality lessons and direction.

 

[Day-mun]

I don't think I'll miss them. What I miss is the old days, when my brothers and I would go out on a Saturday and hit a dozen music stores and pawn shops in search of the panic sale or the rare used piece that you could offer some trade bait and a bit of money for and come home with something new to play with. Plus, the owners knew what they were talking about, and you got to meet real musicians instead of high-school wannabes. They're all gone now because of the Walmart effect GC had on the business. Now, there are about 7 music stores in the metro Detroit area, and 5 of them are Guitar Centers. Seen one, seen 'em all. The other two are purely pro shops where they don't screw around. Took all the fun out of it.

Yeah, that. We lost like 4 Ma-n-Pa shops in my West MI town since GC/MF... nothin' left but a chain store full of Squiers and Epiphones. -Disgusting.

 

[Re-Pete]

the true sadness is what they did to the retail industry of music
through price and market manipulation they ran the independents out of business
this is when they thought they would mop up, when they were the big boys on the block
however their own business plan doomed them in the end
And the little guys are mostly gone.
So now where is the future of the music business?

I would suggest that there will be a resurgence of smaller community shops that will pop up or stores like Pro Guitar Shop & Wildwood who will sell far & wide on the internet but have a local shop presence too.

Unless GC can sort out it's debt issues it's going to collapse one day under the weight of debt. The real worry is if they try to leverage that debt against other business they are involved with or simply not pay their manufacturers for goods received, leading to an industry collapse.

If I was in charge of a manufacturer's distribution and had to, HAD TO, deal with GC I'd be reviewing existing terms of trade & try to rein it in, even maybe leading to cash up front only. The key for the industry must be to isolate any business collapse from knock on effects upon other businesses within the industry. Or have strong contingency plans (including bailouts, subsidies etc.) if such a collapse should threaten.  Maybe NAMM should step in & call GC's bluff and if they can't satisfy the peak body of manufacturers about their ongoing viability, cease dealing with them? If that is legal to do so of course.  :dontknow:

 

[Cagey]

Someone once said "If you wanna make a small fortune in retail music supply, start with a large fortune".

It would seem a bunch of high-end MBAs saw some of the margins on musical equipment and said "we need to be in this business!". Unfortunately, those margins are wide because some big bucks can sit on the floor in inventory doing nothing for a long time while you sell strings, picks and saxophone reeds. It's kind of a feast or famine business to be in, so it's tough to carry long-term and/or heavy debt. Few things are predictable.