More Evidence Of Big Changes Coming To Guitar Center

Guitar Center has been in and out of the news lately mostly thanks to Eric Garland’s excellent analysis of the company’s woeful financial state. The huge musical instrument retailer has been treading water for some time, but now it looks like it might be readying itself to finally sink.

To recap, Guitar Center was acquired in 2007 by Bain Capital, who took on a huge debt load of $1.6 billion in the process. More recently Bain’s partner Ares Management turned it’s debt into equity when Bain had trouble making payments and took over the management of GC. Suddenly there was less inventory, fewer SKUs and fewer vendors, but there was also the matter of 5 stores unionizing. Ares was allegedly very slow in negotiating a union contract with these stores and was then hit by an unfair practice charges by the Retail Workers Union to the National Labor Relations Board.

Garland has stated all along that this was a financial hole that GC could probably never crawl out of, and that at some point the company would have to declare bankruptcy and regroup. The latest evidence that this might might be in the offing comes from a new employee agreement (as seen below) that resulted in decreasing sales commissions from 10% on profit and 2% on gross down to 0.25%.

Not only that, the company has decreased the number of work hours for both salesman and managers to the point where the inside joke is that the company is at “liquidation staffing” levels. To grind the corporate heel in the salesman’s face just a little more, the company has raised the cost for employees to purchase new gear (one of the major reasons for musicians wanting to work there) by 10 to 15%. Read more on Forbes.

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Guitar Center Charged With Unfair Labor Practices

We all like the convenience of Guitar Center, especially when it comes to product selection, but one of the things that most customers dislike is the service. Most floor salesman don't stay very long (especially if they're any good), and that high turnover rate leads to a generally inexperienced and sometimes inattentive and undertrained staff that can sometimes be frustratingly unhelpful.

The reason why employees don't stay very long is that they're not treated very well by the company, having to work long hours for low pay and few benefits for the "privilege" of having a day job connected to the music that they love. Even store managers have a real grind that takes over their lives.

Many thought that situation might turn around last year when three GC stores in New York, Chicago and Las Vegas won elections to become part of the Retail, Wholesale and Department Store Union (RWDSU), with two other New York stores voting against installing the union.

Now the RWDSU has filed unfair labor practice charges with the National Labor Relations Board alleging that Guitar Center has stalled in bargaining talks and attempted to punish workers who voted for union representation. The reason? Although the union was voted into the three GC stores, it has yet to reach a  collective bargaining contract with the company and seemingly has no interest in doing so.

The powerful AFL-CIO labor federation has even gotten involved and accused the company of dragging its feet as a tactic to warn other employees to back off from any attempts at unionizing.

Here's the bottom line - A strong Guitar Center is good for the entire music business, especially at the moment. Happier and better trained employees would lead to more satisfied customers and stronger sales, which once again, is good for everyone.

The company is now being run by Ares Management, who recently took over from Bain Capital, two investment firms that have demonstrated their interest more in bottom line profits at any cost rather than happy employees and customers (here's more about that in a previous post).

What we're seeing is some long-standing union busting management tactics because Ares/Bain needs to squeeze every dollar out of the company. Simply stated, both companies are very upside down in terms of their return on investment in GC, so the last thing they want to see is an increase in labor costs and benefits due to unionization. Meanwhile GC, the manufacturers, employes and customers suffer, with no glimmer of hope on the horizon.

Unfortunately, this is another lose-lose situation where no one benefits. A strong Guitar Center is currently very important to our industry, but this course of action does little in taking it there.

You can read more details here.

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The Beginning Of The End As Guitar Center To Be Acquired

As if one blockbuster business deal in our industry isn't enough (see my blog about Avid yesterday), today the news came from the Wall Street Journal that Guitar Center was in talks about being acquired by one of its creditors (see this post for the backstory).

It appears that Ares Management, who owns the majority of Bain Capitol's (the owner of GC) debt, is in discussions to convert the debt into equity by taking over the majority of the company.

Talk about sending shudders through the industry, this is going to change the landscape of music retail, for better or worse.

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.

And we may be seeing the beginning of the end of GC, at least as we know it. Ares could just decide it wants as much money as it can get right now and liquidate it.

The good thing out of all of this could be the rise of the indie music store again. I relish the days of individual services from people who really cared.

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.

I want to thank Eric Garland for his heads up on the story. He's been on top of this from the start.

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