As a professional bassist, I buy a lot of musical gear. Let me highlight that, I buy as much musical gear as I possibly can, more than is reasonable or smart. As such, I patronize music stores – all kinds. I love ‘em. There is no better therapy than OPG – Other People’s Guitars. One of the places I inhabit frequently is Guitar Center.
In the last ten years the music store landscape changed as the big-box retail model arrived in musical instruments. Mitt Romney’s (*see correction below) Bain Capitalpurchased Guitar Center and helped it buy up independently-owned music shops, giving it extra leverage with mega-vendors like Fender and Gibson and running the “category killer” retail playbook. Many independent shops have been put out of business, vendors are pressed to lower quality and reduce diversity of offerings, but the proliferation of Guitar Centers would make you think the whole strategy is going well.
So how’s it going?
The finance behind the operation shows major weaknesses. Its corporate bond has been downgraded to junk status.
Standard & Poor’s cut its debt rating on Bain Capital-owned Guitar Center Holdings Inc late last month, as the music retailer purchased during the height of the 2007 buyout boom struggles with “weak operating trends.” The corporate credit rating on the Westlake Village, Calif.-based company dropped to ‘CCC+’ from ‘B-’.
“Although we anticipate the company (will) obtain the amendment to its financial covenants, we believe its capital structure is unsustainable in the long term and the company is dependent upon favorable business, financial, and economic conditions to meet its financial commitments,” S&P credit analyst Mariola Borysiak said in a recent note to clients.
Purchased using Bain Capital Fund IX in a deal valued at $2.1 billion six years ago, Guitar Center Holdings holds several debt instruments, including a $373 million ABL revolver, about $402 million in senior unsecured notes and $375 million in senior unsecured notes for its subsidiary Guitar Center Inc. It also floated a $650 million term loan.
S&P reviewed the company’s debt instruments in the wake of weaker-than-expected performance over the past two quarters and a “deteriorating liquidity position.” Guitar Center may have to borrow under its revolver to fund its operations and financing needs, S&P said.
For you musician types who never read contracts, let me decode this: Guitar Center be broke, and they are hoping that the economy gets better so people buy more guitars.
Dude, apparently all the musicians didn’t get the word that the Dow Jones is at 16,000 so they can go lay out $3200 on a new Paul Reed Smith. It’s like maybe the real economy isn’t doing that well…hmm…
But that’s not all, folks!
The employees of Guitar Center in New York, Chicago and Las Vegas have all voted to join the Retail, Wholesale and Department Store Union. I spoke with an employee at the local St Louis location who told me that following the Las Vegas vote to unionize, management gave all workers a raise of $1.25 per hour. Clearly, management is not interested in doing business with all union shops when their financial position is in the toilet.
The end of a terrible model
Guitar Center has the remnants of an inferior business model, one that prizes huge brand names, big volumes, low wages and non-existent character. I love walking through Guitar Center because I love playing anybody else’s guitars – but otherwise it is a catalog with walls. There is nothing special or charming about the place. The workers there, while nice people, don’t have 3% of the knowledge of the people who run Killer Vintage, a place that will set you up with either a vintage Strat or a terrific local instrument – and tell you stories of how the music industry really runs.
I would not miss Guitar Center, much in the way I did not miss Circuit City.
Retail in the 21st century will be centered around specialized knowledge, unique offerings and personal relationships, both local and digital. Any retailer – even one backed by Mitt Romney (*see correction below)- is doomed if they defy those requirements
*Editor’s note: Romney had little to do with the acquisition of Guitar Center. I didn’t expect this to go viral and did insufficient research. Mea culpa. Then again, if you know my past, I’m kind of a douchebag to Mitt.
**Second note: Romney may still have been profiting from the Guitar Center deal through 2009 as part of his retirement from the company of which he was sole stockholder. While Bain may not have been in Romney’s control, the model applied to Guitar Center was absolutely the one pioneered by Romney during his tenure at Bain. And that model, I maintain, is fundamentally flawed.