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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Guitar Center: The Sad Story Continues

When I wrote about the financial condition of Guitar Center a while back, the post received a huge response, maybe the biggest I've ever had. Much of it came from customers who disliked the company's business style, some of it came from supporters, and a few from GC employees at various levels. Now analyst Eric Garland has written a long post on his blog on the current financial wrangling of the company that's truly an eye opener. Who thought selling guitars and amps could be this complicated?

To briefly and simply recap, GC was bought by private equity firm Bain Capital 6 years ago and has a huge billion dollar debt as a result. Ares Management, who holds much of the Bain's debt, announced at the beginning of March that it was converting its debt to equity and assuming management of GC. Since then there have been a number of announcements regarding the complex behind the scenes financial engineering to sell a number of notes to other private equity companies to raise the necessary cash to keep everything afloat and pull some money out before the whole thing implodes.

Eric discusses this in his article, and compares what's happening to the lead-up to the mortgage crisis in that the same kind of financial engineering is taking place. The deals are all complex to keep analysts and regulators from easily figuring things out, but he managed to get to the bottom of the everything thanks to the help of some extremely literate finance experts, who all seem incredulous at the situation.

Here's the bottom line. Guitar Center is owned by a bunch of Wall Street .1%ers who don't give a crap about you, the industry or music in general. It's strictly all about money, and they'll do anything to squeeze as much out of the industry before they leave it in the dust.

I really feel sorry for the manufacturers that are caught in the middle. They have to hang in there because they've geared up for the sales volume that GC brings, but I bet they're holding their collective breath that they won't get caught holding the bag when the fire sale happens.

Read Eric Garland's post, then decide where you want to make your music purchases. And no, this is not an April Fool's joke.

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Is Guitar Center Broke?

Is Guitar Center, the music store we all love to hate, going broke? It looks that way, according to a number of news stories in The Nation, Reuters, Huffington Post, and a wonderful post by Eric Garland. As many of you already know, GC was purchased by Bain Capital (formerly owned by Mitt Romney) six years ago, and it's been downhill ever since.

GC has a number of problems, not all of its making. One is that it carries a huge amount of debt as a result of the Bain deal, currently owing over $1.18 billion (yes, that's with a b). That's a lot of interest it's paying on the debt service (just think of what you pay on your credit card every month), plus it seems to have a $953 million(!!) balloon payment coming up in 2017 that's really going to stretch the company's finances to its limits.

Then there's the fact that the employees in some cities have tried to unionize, which has not only sent chills through company management, but has caused (along with other factors) the company's bonds to fall to junk status. GC tried to counter by giving its employees an extra $1.25 an hour, but that hardly seems enough to appease its poor abused workers.

Then there's the fact that GC's earnings have been essentially flat despite the upturn in the economy. Much of that has to do with the fact that GC's biggest competitor is the Internet, with musicians purchasing from Amazon, Sweetwater or even GC's own Musician's Friend. Anyone who's tried to buy something at GC knows that the process can be long and painful regardless of the size of the order, compared to the quick and easy online experience.

The big box store concept that we used to love so much has fallen on our collective disfavor lately, so we no longer look at GC as that mecca where we can see and try things not found in our local mom and pop store. Like in all parts of tech, when all things are equal, convenience always wins. With the relative commodity nature of music and audio gear these days (even with cheaper guitars and stringed instruments), we no longer have to try before we buy in many cases. We're winners when that happens, but Guitar Center may end up being the big loser.

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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter and Facebook for daily news and updates on production and the music business.

Don't forget to check out my Music 3.0 blog for tips and tricks on navigating social media and the new music business.

Judge Dismisses Suit Against GC and NAMM

Just to show how slow the wheels of justice actually move, a class action suit against NAMM, Guitar Center, Fender, Korg, Martin, Peavey and a dozen more MI vendors started in 2009 has finally been dismissed for lack of evidence.

The suit involved 38 separate plaintiffs from 15 states, and alleged that NAMM, GC and the various manufacturers conspired to raise the minimum advertised price (MAP) policies, thereby bilking musicians out of hundreds of millions of dollars in the process. What the suit basically said is that GC and the various manufacturers unlawfully restrained trade and artificially reduced competition, thereby violating the Sherman Antitrust Act.

After numerous court exchanges, the judge couldn't find any evidence to support the allegation, and threw the case out. The MI industry finally breathed a sigh of relief since the damages could have been north of $200 million, which would have really hurt in this economy.

Okay, so here's the reality as I see it. Guitar Center is definitely guilty of wanting to monopolize the MI retail business, and they've successfully done that, but not by conspiracy. They've achieved their monopoly by bullying the manufacturers. If anyone thinks that the manufacturers want to go along with GC's pricing policies, they're sorely mistaken. GC forces a manufacture to sell to them almost at a price they determine, not the manufacturer, so the only one making out in the deal is GC, not the rest of the industry.

And NAMM? The last thing they want to see is less competition, since the more market share GC gets, the less relevant they become. Bottom line, this was a misguided suit from the beginning.

That said, GC is the big winner, as always. You know you owns them? Bain Capital. Ring a bell, by any chance?

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Help support this blog. Any purchases made through our Amazon links help support this website with no cost to you.

You should follow me on Twitter for daily news and updates on production and the music business.

Don't forget to check out my Music 3.0 blog for tips and tricks on navigating social media and the new music business.