Some of my most popular material of late has been about musical instrument retail, though focused on a single company and its effect on the marketplace. Nearly a million readers later, I have been hoping to do a much more thorough job of showing just why MI retail is undergoing a revolution, one with ample shocks for all players.
I had the pleasure of teaming up on this project with Gabriel O’Brien of the unassuming-sounding-but-awesome Larry’s Music in Wooster, Ohio. Gabriel joined me in “controversial territory” by taking on another industry giant, Fender Musical Instruments Corporation in his viral hit, “Why We Fired Fender.” He’s one of the most insightful people in the entire MI industry, and I suspect you’ll see more of his writing in the decades to come.
You’re living through the transformation of musical instrument retail
Retail is going through what is perhaps its greatest revolution since the invention of mass production, and the musical instrument industry is unable to escape the implications of such a shift. MI Retail has been changing for years, beginning with department stores, catalogs in the 50’s, malls, then big box retail, and finally Internet sales. All these things started eating away at margins, a trend which has continued. Dealers began realizing that retail was changing, whether they wanted it to or not – though many have been slow to adapt to these changes.
Bain Capital’s purchase of Guitar Center, Musician’s Friend, Music & Arts, Woodwind & Brasswind, and Music123 made them a huge force in the MI retail industry and an Internet powerhouse. However, on a corporate level, they were saddled with huge debt, having made their acquisition of Guitar Center before the Great Recession. As widely reported, Guitar Center and its holdings were purchased for $2.1 billion, with $1.9 billion of it being highly leveraged debt. This debt has never been relinquished, and sales in stores and online have fluctuated, while the company has experienced high turnover rates and criticism of their employment practices – leaving them with many detractors and multitudinous tales of poor in-store experiences. Similarly, tales of negative online purchase experiences have become commonplace. Increasingly private equity companies have been moving into retail, purchasing manufacturers as well as big box and online retailers. The most visible case, of course, has been Guitar Center.
In recent months, much has been written about the competitive dynamics of the Guitar Center, but the truth is we are witnessing a symptom, not a root cause. To understand where the musical instrument industry goes from here, professionals need to see their business as part of a much larger system, identify what is changing and how, and creatively explore what this means for their particular firms. One size will not fit all. Nobody has all the answers about the future that we are currently creating for the industry, but the questions are fascinating. This story is far more vast than a single article, but a few trends are appearing that will change MI retail in the years to come.
Shrinking square footage and the end of the big box
In the musical instrument industry, where a single big box retailer remains dominant, it is considered inflammatory to suggest there is anything inherently wrong with a model dependent on sprawling square footage in suburban locations. One statistic will recast this issue for what it really is – a question of malinvestment and overexpansion unique to the United States, and one that is in the process of correcting itself. France, the inventor of the department store, has 2.1 square feet of retail per capita, Italy has 1.1, Sweden has around 3.0, and the United States has 24.0 square feet of retail per capita. America has between eight and twenty times the retail space as nations with similar or better standards of living.
How did this imbalance develop? As more people moved out to the suburbs and exurbs, and as banking regulations changed to allow more credit for more people, it made sense to scale retail up to behemoth size. It’s important to note that historically, scaling up to such a level can be a real risk – the bigger they are, the harder they fall – but the erroneous assumption was that things would be different this time. Wall Street provided the liquidity and new information technology made the scale more manageable. Getting vendors to drop prices and, therefore, cut costs – mostly by offshoring of manufacturing jobs to Asia, where labor was dirt cheap – provided profitability and shareholder value. The housing bubble also made consumer spending increase, despite flat wages. Without increasing wages, all that growth in big box retail came entirely from debt. The era of big box retail was therefore a temporary arrangement all along – as is every era. There will be no more growth in this model, and in all likelihood it will shrink every year for the foreseeable future.
The question is to identify what will grow in its place, and that portends considerably more excitement.
The mobile IT revolution rewires customer relationships
Catalog retailers, such as Musician’s Friend, were early adopters of the emerging Internet marketplace, as early as the days of dial-up AOL service. As broadband Internet access became more affordable and accessible to the general public, budget-conscious musicians always on the lookout for a deal began taking a chance on gear they had never played in order to get a good deal. This trend exploded overnight, morphing into a multitude of options for consumers. Unfortunately, independent retail stores were slow to adopt this business model, and worse yet many refused to acknowledge the changing tides of the MI retail marketplace even as they themselves had begun buying things such as office supplies and, yes, even some personal items and gifts, online.
Then implemented were peer-to-peer marketplaces, such as eBay, and Internet bookselling giant Amazon, who diversified their business plans by allowing users to sell used items to each other. It didn’t take long for new items to make their way onto both retail marketplaces. Some independent stores took advantage of these new revenue streams, the rules about which dealer agreements were murky at best. Dealers who were slow to capitalize on Internet sales have been vocal in expressing their displeasure about shrinking margins, the lack of sales tax being applied to online sales – which still hasn’t been remedied, further cuts into profits, and unfair purchasing power and discounts being awarded to the rapidly growing online-only retail giants.
Already, retail has been significantly changed by the emergence of the Internet in everything from branding to distribution to online commerce and beyond. Consider the systemic effects of proliferating the Internet to every household and now to every phone.
One of the key values for retail has been the ability to connect a customer with specialized knowledge. You go down to a store, and not only do they have a stock of inventory, they also have people working on staff every day who possess more knowledge than anybody else in the geographical region. Think about how the Internet has changed this: the customer has 24/7 access to expert information beamed directly to his or her mobile device. Therefore, two scenarios result:
1. Customers already have a base of knowledge when they walk in the store.
2. Much of what they think they know is probably wrong (but they don’t know that.)
In other words, retail has already lost its competitive advantage as a place that offers scarce, valuable information. To regain that value takes hiring expert level employees on, as industry leading independent retailer Sweetwater has done.
Another bit of knowledge scarcity that bitten the proverbial dust: knowledge of what’s available in the supply chain. Before the Internet, there was no way non-experts could learn about the existence of every single SKU a company offers, completely up to date, unless they worked in the industry. Today, customers can log onto a variety of sites and find out the breadth and scope of a company’s offerings, and even know if they are currently available. For that matter, if they get that far, they can just order an item and have it shipped to their doors – all before they walk into a traditional retailer. They also have access to a “wealth” of user reviews, however inaccurate those may be.
It is likely impossible to understate the revolution that is occurring just as a result of this shift in the scarcity of information. Before the Internet, customers needed to establish a relationship with a retailer if they wanted to know virtually anything about what they were buying, and had few other options but to buy it at their local outlets. Now, everything about that traditional scenario has flipped. Now it’s incumbent on retailers to convince the customer why they should come on down to the store instead of customers just punching a few buttons into an app and having the item appear magically on their doorsteps a few days later. The new game for MI retailers is all about creating durable social ties and relationships with their customers and their communities, something big box retail chains have been unable to accomplish.
How to deal with the disruptive near-term future
Independent MI retail stores have to become more cognizant of the trends emerging going forward, becoming early adopters of the opportunities the transitional retail marketplace affords them, or risk becoming further marginalized by consumers or, worse yet, going out of business altogether. After a lifetime of experiencing the impersonal interactions provided by malls, Millennials and GenXers are seeking more small community-based destinations, having come to realize that, despite being easy on the bank account, cookie cutter retail and dining experiences are not very rewarding as a lifestyle component. Farmers markets are popping up in small towns everywhere, frequented by people of all ages seeking locally grown produce. Much has already been written analyzing the rise of niche business destinations, such as craft breweries and record stores – two industries, driven solely by customer demand, which are still rapidly experiencing growth.
While large companies want retailers to believe consumer demand for their products is growing by leaps and bounds, the reality is consumers are trending toward smaller more innovative products and brands. In the beer industry, for instance, the big companies were slow responders to the craft brew and IPA trends, but have now taken notice. IPA-hating Boston Beer Company is now producing Rebel IPA, and Budweiser took out an anti-craft beer Super Bowl ad. While some MI brands, such as Fender, are adopting direct sales as a solution to their over-saturation in a market no longer able to support the growth they’ve experienced in the past, forward thinking retailers are responding by seeking out new brands to draw consumers in and make them once again a destination.
The strike against independent MI retail has been that everything in the world is available 24 hours a day at the very lowest prices simply by logging on to Amazon, and that the upcoming generation has grown up with this easy-to-access source for purchasing retail merchandise. The way to counteract that is to offer unique merchandise and a quality in-store experience with a staff of people who are excited to interact with their customers, who treat consumers as though they’re guests in the coolest home on earth. Other industries have shown that “all things in moderation” approach appears to be the answer. Stores should be utilizing social media and e-commerce solutions to reach consumers, while providing a unique in-store atmosphere where personal relationships may be nurtured. While easier said than done, this shift in retail practices must be heeded if independent stores expect to survive the current transition into the new marketplace. The future of retail is already here, and for those who are ready and willing to market themselves as part of the store experience while utilizing the benefits of the Internet and modern technology, the future looks bright indeed.
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