Ever since I did a little bit of research on Guitar Center (at the behest of their CEO on my Facebook page, weirdly) I’ve been told that every time corporate finance gets mixed into the musical instrument business, things get weird.
There was that time Fender tried an IPO, but yanked it last minute. That was kinda weird. But their new media strategy, which I just covered, looks smart.
The third major player in MI that is backed by complex finance is Gibson Brands, which owns Gibson Guitar Corporation, Philips, Onkyo, TEAC, and a few other companies in the consumer electronics space. The company is privately held, but they do have bonds available on secondary markets. If this sounds familiar, it’s the same deal as with how Guitar Center and other private equity firms borrow money for expansion: high-yield bonds subject to Rule144a, which works well for companies trying to keep from disclosing too much about their operations. Once you have bonds available to public markets, the ratings agencies (Moody’s, S&P, and Fitch) get involved.
Well, an executive recently hipped me to the latest news about what Moody’s thinks of Gibson’s creditworthiness as a corporation.
Um, whoa. Yikes.
And just like I did with Ukelele Barn, I’m going to need to dig into this so my musician brethren and sistren can understand the Orthodox Financier Pig Latin. Quit the beers and switch to coffee. This is gonna get complex, but it’s kind of a big deal.
Pre-analysis disclosures
Before I get started, I would like to disclose I have no commercial interest in the musical instrument industry, which remains primarily a drain on family finances and a topic of fascinating research. Also, I am a Strat and Tele guy. While I love Les Pauls and SGs in the right hands (Jimmy Page, Angus Young, Tony Iommi, Derek Trucks) I have never been able to dig them as a player myself. Great instruments, though. I mean, Wes Montgomery. B.B. King. Chuck Berry. Not much left to add.
Full disclosure, here’s where I’m at.
Also, I would totally buy a Gibson ES-175 and try to sound like a pathetic version of Pat Metheny, but I spend a buttload on basses already.
What do I mean buttload? I mean I’m now into Foderas.
OK, while I’d rather discuss instruments all day, like every day since 1986, I guess we should do some finance.
Moody’s thinks Gibson is sorta screwed, and here’s why
I’m going to go through the most relevant parts of this press release and translate them into what I call Drunken Bass Player Dialect. As I often contend, finance usually involves very simple concepts tarted up with very fancy names. If you break things down into English, they are a little easier to understand, and usually sound a bit worse.
Moody’s Investors Service, (“Moody’s”) downgraded Gibson Brands, Inc.’s (“Gibson”) Corporate Family Rating (CFR) to Caa2 from Caa1 due to increasing concerns about the company’s liquidity position. The rating outlook is negative.
Moody’s is giving a shout out to anyone who owns Gibson Brands’ corporate debt and letting them know that they consider the creditworthiness of the company as a whole (not just a specific bond) has gone from junk to a little junkier junk due to the fact that they’re outta cash and owe a lot of money to other people. Oh, and things look like they’ll get worse.
The downgrade reflects Moody’s concerns about the company’s ability to meet all of its financial obligations in 2016 and 2017 that include over $80 million due to a consumer electronics supplier and $45 million in near-term outstanding indebtedness, if the ABL revolving credit facility is not refinanced
Moody’s is now calling Gibson debt junkier junk because they have agreed to pay people a bunch in the next 14 months, and it ain’t looking so hot. They owe one of their vendors $80 million – a helluva steep individual invoice to pay – and another $45 million in the short-term unless they can find some other bank to make them a new deal on their asset-based loan, which is like a company credit card secured by Les Pauls and SGs in the warehouse.
The expiration date of the ABL was recently accelerated to May 2017 from January 2018 because the company was in violation of a covenant. “However, we expect that the company will be able to refinance the ABL based on the strength of the underlying assets,” said Kevin Cassidy, Senior Credit Officer at Moody’s Investors Service.
Gibson had until January 2018 to sort out this asset-based loan thing, but that got moved up to May 2017 because they broke one of the agreements they made when they borrowed that money. That said, they have a lot of Les Pauls and woodworking tools and other assets, so somebody will probably make them a new deal.
“We expect Gibson’s operating performance to improve this year, but remain below our original expectations.” noted Cassidy “We think the chances of some type of debt restructuring will increase as the company approaches the August 2018 maturity of its $375 million notes.”
The guy from Moody’s said that while Gibson might sell a little better in 2016 over 2015 (Ed. note: as all those automatic tuner guitars still churned through the guts of guitar shops, causing indigestion.) things are still not awesome. Also, they owe their investors $375 million in cash by August 2018, as they have to return the principal of those bonds they issued.
Side note on bonds for newbies
In corporate bonds you let the public – mostly investment funds from big banks – give you a wad of money and you collect the annual interest or “coupon” every six months or so. If it’s $100 and the coupon is 9% and you issue the bond January 1, then you pay investor $4.50 on July 1 and $4.50 on January 1 until the bond matures. This is why these investments are “fixed income” as opposed to stocks where you might get a dividend, or you try to make money when you sell the stock for a higher price later.
Meanwhile, back at Gibson, which owes a lot of money
Where were we? Oh yeah.
Ratings downgraded:
Corporate Family Rating to Caa2 from Caa1;
Probability of Default Rating to Caa2-PD from Caa1-PD;
$375 million senior secured 2nd lien notes due 2018, to Caa3 (LGD 4) from Caa2 (LGD 4)
All that is to say that Moody’s sees them as one step deeper into junky you-might-not-get-all-your-investment-back territory. But CFR means “the company’s debt as a whole,” probability of default means “chances you walk away with less than you’re owed or zilch,” and the $375 million of senior secured notes means the specific bonds they have outstanding right now. Key takeaway: Banjo Shack is looking better by comparison.
Actually, we should probably take a look at those high-yield bonds that Gibson has outstanding.
You can check this out yourself in the FINRA database. The basics here are:
- Gibson Brands has taken $375 million from investors.
- The coupon to investors is 8.875%, already high-yield (junk) territory that assumes a risk default.
- They offered the debt around August 1, 2013, and it matures after five years of paying the coupon, meaning they owe their investors back the principal.
- Both Moody’s and Standard & Poors have downgraded the ratings on this debt very recently.
- The secondary bond market has been FREAKING OUT, dumping these bonds on speculators for cheap. That spike of yield this summer means that original investors were selling their bonds to secondary investors for half of what they paid. If they gave Gibson $100, they sold those bonds to another guy for $50, meaning they were afraid to lose even more of it if they waited until August 1, 2018.
- This means that investors roughly estimate that there’s a one-in-four chance that either Gibson won’t make all its coupon payments or return all the money it owes, a.k.a. default.
Moody’s mood, or its rationale for downgrading Gibson
Moody’s press release goes into further detail for why it is bearish on investing in Gibson Brands.
Gibson’s Caa2 Corporate Family Rating reflects the company’s untenable capital structure based on expected operating performance, weak liquidity profile, soft credit metrics and the highly discretionary nature of its musical instrument and consumer electronics product lines.
“Damn son, this is a hot mess.”
The ratings also reflect the company’s high leverage at over 10 times debt/EBITDA at March 31, 2016 and concerns that there continues to be high turnover in the company’s senior financial management level.
This means that the company owes a whole lot of money compared to what it makes in earnings with that leverage. Also, it’s executive musical chairs, which means borrowers don’t know who’ll be running the company in the near-term future.
Gibson’s ratings are supported by the company’s strong brand recognition in musical instruments and market share for guitar products, and diversified product line within guitars and related music areas. The ratings are also supported by its geographic diversification.
Moody’s is saying that all is not lost; Gibson is still one of the top killer brands in all of MI, and having a wide range of music and audio products is on balance something with intrinsic value. There’s value there. Also, that value is worldwide, not just US-focused.
The ratings could be lowered if the company does not successfully address its upcoming debt maturities that include:
a) $32 million of financial obligations to a consumer electronics supplier by December 2016, of which $25 million currently remain outstanding;
b) Refinancing of a $75 million ABL facility (of which $45 million is currently outstanding) maturing in May 2017;
c) Over $50 million of additional financial obligations to a consumer electronics supplier by December 2017
“Remember that stuff we said we’re worried about? Yeah, if it doesn’t get better, ooh, that would be even yuckier. But we’ll cross that bridge when we come to it.”
While unlikely in the near term given the negative outlook, over the longer term an upgrade could be considered if Gibson successfully addresses its upcoming debt maturities and improves and sustains its operating performance.
This last statement is consistent with the overall negative outlook from Moody’s. “Could we upgrade these guys? Sure. Like, if they stop defaulting on their debt covenants and get people paid off and pull off some sweet moves and make some money, that would be awesome. And also, there is a certain chance of monkeys flying out of our butts. So we’ll believe it when we see it.”
Some final thoughts on the future of the guitar business
Corporate finance is a jolly way to effectuate rapid expansion and make strategic-looking plays for assorted companies. It is also a great way to get in a lot of complex debt very quickly.
If there’s anything I’ve concluded in looking at that musical instrument industry in greater depth since covering Mandolin Hut, it’s that this business is kind of resistant to complexity. Guitars. Picks. Amps. Cabinets. Cables. Speakers. These are artisanal products that are rather simple. They provide joy. They’re made of wood and metal. Adding tons of sophistication, from either software algorithms to business models, seems a risky play. We musicians are a simple lot. The joy of a Les Paul blasting an A-chord through a Marshall and thus through your pants is not complicated, but it is addictive. Get too far away from those equations, and trouble seems to brew.
Otherwise, I think that the fundamental issue for guitar manufacturers is cultural, not technocratic. Rather than focus on a cross-technological, spectrum-spanning, electromechanical, consumer-creator-hybrid growth hacking play, we gotta get more people to play guitar and keep playing guitar. We gotta get people from Epiphone to Gibson, from D chord to D dorian mode, if you dig. Figure out how to inspire the love of actual tube amps in a tone-simulated digital world. We must take action like the Irish monks who saved antiquity from the witch-burning idiots who didn’t know a good thing when they saw it.
This might coincide with complex Wall Street finance, but from my point of view, that trend doesn’t seem compelling.
However, we might need to put Slash in charge of the Kennedy Center.
What do you think? Let’s hear it in the comments.
Comments 58
Fodera? Yep, that’s a buttload of money! Some good news from the MI might be Behringer – they seem to be the only large company left who’s doing any genuine innovation e.g. their X Series mixers. Their new “DeepMind 12” synthesiser is expected to cost under $1000, much less than half of what you pay Dave Smith for fewer features, because it’s being made in China, natch.
Fodera…yeah, but dag nabbit, they sure are worth it. Every time I touch the thing, it sounds and plays PERFECT.
I’m gonna keep an eye out on Behringer. I agree, the company continues to make interesting moves at interesting price points.
Gotta say I love the Allen and Heath line. Better sliders than Behringer, stands up better to random sound guys (ahem). QU-24 is a sweet mixer…but it is a more expensive option. And the newer Pre-Sonus are worth the look too. But the Mackie DL-1608 at under a grand is really a fab tool for FOH or monitor. What’s your thought on Mackie as a viable co.?
Henry is a slippery one! I have also heard that PRS owes suppliers a lot of money and they are up for sale. Possibly Dean Guitars too.
Guitar is a tough business, and it’s shifting rapidly. I’ve heard that acoustic guitar is the only segment really cruising with six-strings. And for people playing ukelele who are *not* Jake Shimabukuro or other native Hawai’ians…I just don’t know what to say.
I’m probably wrong about this but it’s my understanding that the universal price point for an acoustic guitar is $400. Not sure how you go forward at $400/pop. I am surprised that companies like PRS have expanded like they have. Love their stuff, never owned one of their products. Sad story all around IMHO.
This stuff is pretty standard for PE. Load up on debt, drain cash, reduce operational costs and sell individual divisions to the next fool…
Gibson’s brand is worth a lot however. Its their crown jewel. The name. Their operations, not so much. Just how many people are buying $5000- 7500 Les Paul’s? Not many… They’re screwed because they tried to be more than they are and this is the fault of the CEO and his BOD.
After reading this I predict that their guitar business is sold very soon, the CE business peeled off and sold as well. Most likely to a differnt set of buyers. The brand is the value, the business has obviously been poorly run but the future for Gibson’s guitars remains solid albeit much much smaller than they’d like.
While that’s definitely the story of private equity and Guitar Center, I’m not sure that it fits the Gibson narrative. While PE shops have loaned them money, I don’t think that adequately explains Gibson’s current position, even though Henry Juskiewicz originally ran such a financial shop. They have complex financial moves, more than most MI companies, but this hasn’t been that classic Bain “roll-up” strategy, usually done in 3-5 years. In fact, I think that HJ’s strategy has been more specific, even more compelling – not to say workable – than the average “let’s make it biggerer” of PE. Perhaps the next phase of Gibson will need to be less vertical, and better focused. Then again I like my whisky straight and my guitar companies nice and simple. Seems the market agrees – on both.
Thanks Eric, I assumed this was a PE play, it sure appears to mimic their typical debt leverage. To me, the bottom line is that the company over leveraged itself, under estimated the market and ultimately failed to execute on a realistic sales and growth plan. They obviously bit off far more than they could chew.
What ever happened to sane, slow, steady growth? That’s why this entire situation reeks of greed. I’d be very curious to know where all that capital went. Inventory? Real estate? Its a big number for a company that did not need to build new facilities, or spend a fortune on R&D. It either went to cash out shareholders (my guess) or towards failed acquisitions. Perhaps its all on the CE side, but the fact that they were in that business is more ammunition to prove the failings of their C suite and BOD.
I still wonder who is buying these $7500 remakes.
Good story, but you missed a great pun.
“Remember that stuff we said we’re worried about? Yeah, if it doesn’t get better, ooh, that would be even yuckier. But we’ll cross that (Tune-o-Matic) bridge when we come to it.”
I’m Eric Garland, and I approve of this pun.
We posted this on Legends of Rock Guitar and are getting a good response, thanks.
https://www.facebook.com/LegendsOfRockGuitar/
My newest Gibson is an ’81 KZII. I don’t care what they do, I’ve never bought new electric and I probably never will. But the good old days of picking up a pawnshop treasure are long over thanks to cable TV and a generation of yuppies who think great guitars are wall decorations. A tech billionaire set up a vintage guitar store in Chicago and cleaned out the city of decently priced vintage instruments. You can find them on North Lincoln Avenue, hideously overpriced. Right now if I needed a decent Gib I’d buy an Epiphone and say to hell with the cache. The low price end of the market offers some very playable instruments (ditto Fender)
You’re talking about David Kalt and Chicago Music Exchange, and I gotta demur – every single instrument in the place is set up nicely and the employees are super knowledgable. Of course, I think ALL vintage instruments are stupidly overpriced, but you’re not buying guitars – you’re buying childhood dreams.
I agree with you about vintage electrics but not acoustics. Not only is the quality of wood not available at any price, it still takes decades for it to mature and come into its voice. And that usually comes with thousands upon thousands of hours of playing. In the same way you cannot hurry wine or whisky, you cannot hurry or create tone and/or patina.
Insert a debate about the stability of Suhr Classic Pros versus pre-CBS Strats versus…versus…versus…
This is why I’m a bassist. I don’t like to argue – I like deep grooves and harmony.
haha. OK you win 🙂
“cachet”
Bill – I thought it was caché – as a professional French translator, thank you for this enlightenment.
Let’s not forget the typical Gibson snob here (which is most everyone). We all complain about the price of a Les Paul traditional, but complain bitterly when they try to produce a more affordable model. “It doesn’t play like my 68 LP”, “They’re ruining the brand”, “Why pay 800 for a Faded American SG when I can pay 700 for an Epiphone and get a better looking guitar”. Gibson put themselves into a position where they’re “Damned if they do and damned if they don’t” because we demanded it.
I totally agree with this. The Les Paul was $375 in 1960, which is about $3000 in constant 2016 dollars. But new Gibson Les Pauls sell for all manner of price points, from $799 to $12,999. All of those are good quality, playable guitars, but they obviously have major variations. I’m not sure there is a perfect formula. All I know is…no robot tuners. There I’m drawing a line, but so did the rest of our species.
It’s difficult when you try to be all things to all people. And I agree about the Robo tuners. As an upgrade maybe, but stock out of the box, no choice in the matter for the consumer? Bad idea.
It’s Microsoft Zune of the guitar world – an epic, historic clusterf**k.
This is literally the most interesting finance article I’ve ever read. Now I’m reading your past posts.
Good work, sir.
Then that’s literally the best kind of compliment to receive. Thank you.
If you came here for guitar, you might want to skip to this one: http://www.ericgarland.co/2015/02/03/end-guitar-center/
Well now I’m interested in the “Mandolin Hut” you mentioned. I’m a mandolin player and have never heard of that.
Oh, that’s just Guitar Center. I got bored of calling them that, so I just write Zither Barn and Lutes ‘R’ Us instead.
Oh, heh — I feel silly.
If you’re bored and feel like exploring another musical instrument industry stuff, there have been some interesting goings on with ‘Two Old Hippies’, Breedlove, and Weber Fine Musical Instruments, over the past couple of years. At least interesting to me.
I refer to GC as NINTH CIRCLE OF HELL MUSIC.
Economics causes me to break out in hives, but I read every word of this. And yes, a good read…even (especially?) for (by…heh) a musician. This piece is of particular interest to me in that I own some wonderful Heritage lumber (Heritage Guitars are the Kalamazoo guys who stayed on Parsons Street, under the “Gibson” smokestack, after the union busting Gibson exodus), have an acquaintance with the principals and some of the good folks in the shop, and am a regular on The Heritage Owners Club user’s group. Henry, and Gibson’s trials and tribulations have been a regular topic of discussion for years there. Don’t think anyone’s linked this, yet. Won’t this be fun!
Heritage – never picked up a hunk of mahogany from them that wasn’t a killer guitar.
Ruh Roh Reorge… But a good post. Thanks for sharing …and that is a sweet bass there, too.
Vinnie and Joey know how to make a bass, I’ll tell you whut.
Interesting analysis, and a decent read.
Looks like Gibson has taken on a huge amount of debt.
Anyone know what their topline revenue is for the overall company (to include Onkyo, TEAC, etc.)??
They killed Steinberger. For that alone they deserve to wither and become part of the dust of history.
While I feel bad for those on the lower end of the economic scale who might have invested in them I think Gibson’s reaping what they’ve sowed. The last ten years or so they’ve been delivering increasingly worse products at increasingly more expensive prices. I just hope this doesn’t have a negative effect on Epiphone. They at least have continued making quality instruments that are of the same if not better quality as Gibson’s best when they were at their peak. Plus they’ve kept their instruments affordable.
For a few hundred dollars you can get a great quality guitar which is fantastic for people who want to get into playing but can’t afford a more expensive instrument. When Epiphone’s $200 Slash model Les Paul is matching $5k Gibson custom LP’s you know there’s issues with the main brand.
Is their $200 Slash LP that good? Asking for a friend.
Bang for the buck, absolutely. It’s not perfect of course, but it’s damn good.
Like Don said for $200 you get a pretty decent instrument. I was surprised at how close to Slash’s tone it gets. Plus for maybe $100 more you can upgrade the pickups and have yourself a pretty sweet Youtube/clubbing axe.
Say what you will about our Chinese overlords – 25 years ago, $113 would NOT buy you an Epiphone LP that almost nailed Slash’s sound. The quality of instruments are probably higher than they ever have been. We live, essentially, in a freaking golden age for this stuff.
It’s all about computers and automation. For better AND worse. Unfortunately I’m on a fixed income so even the cheaper stuff is out of my reach.
Gibson pricing is insane, yes, there are the lower end guitars, BUT, you can get a cheaper Epiphone that will come pretty close to what Gibson offers. I haven’t looked at how well Epiphone sales are going, but I can bet that it is on the rise. With a little tweaking and a few parts replacements when finances allow, and your Epiphone will sound identical to a mid range Gibson.
I think this notion of Epiphone’s quality cannibalizing Gibson’s offerings because the chasm in pricing could offer a lot of insight into the trouble in the brand’s overall strategy. Still – it’s important to remember that a lot of bond stuff appears to be from acquiring companies, NOT from trouble with selling Les Pauls and 335s. Anyhow – I always marveled at Epiphone’s like the Joe Pass, which was a incredibly functional jazz box on a budget that sounded way better than its price tag. For all the criticism, this company as a whole is still making very good products for working musicians. Now, if you want a $13,000 korina Explorer…well, that’s on you.
I could never understand why Gibson (and Fender and most of the others) insisted on annual model changes, like they were making automobiles in the 1950s. I also never understood having 47 different models of every guitar they make in a huge range of price points. I own an Epiphone Dot Studio, and it plays and sounds great. My lack of skill and talent is the only thing holding it back, though dedicated volume & tone knobs for each pickup (the only difference between the “studio” and “regular” Dots) would be nice. It strikes me that a smaller number of models of really excellent instruments, at reasonable premium prices, would be more profitable than a mind numbing plethora of redundant designs with no rhyme or reason to the extreme pricing swings. I’m sorry, but it makes no sense that a new, 2017 Gibson Les Paul Standard HP should have a street price of $3,199 while a 2017 Gibson Les Paul Faded T should only cost $799 on the street. What could possibly make the one worth four times as much as the other? I might as well buy the Epiphone Les Paul 100 for only $279.
It gets worse. I went to another online musical instrument store and found a Gibson True Historic 1959 Les Paul Aged Electric Guitar with Case for only (?) $9,899! Almost $10,000 for a guitar should include a month’s worth of private lessons with Eric Clapton! Or at least Slash.
I’ve been playing Gibson acoustics for about 50 years now, and still have one. I have only bought one new, and that was their short-lived effort at being affordable, the Gibson Bluesman. I still love them for playability, sound and quality, but the costs don’t make any sense. They have employee morale problems –Check Glassdoor — and the general theory is that from CEO to Shipping Foreman, management is a conspiracy of clowns. At their scale, they’re trying to charge what Collings and Santa Cruz charge for their custom, hand-made axes, and sometime they get into Bourgeois or other boutique level pricing. Epiphones are almost as good with their Masterbuilt line for acoustics and their Casinos, Dots, Rivieras, Les Pauls and SGs. If the Epi factory in Ghangzhou can build Les Pauls as well as Nashville, we can see the future. Expect a sell off of the other stuff, and a focus on more higher end, cheaper and sustainable Chinese and perhaps Aussie or African imports. Or, my Songwriter will become a museum piece…
I mean, love Dylan but I can’t imagine dropping $5K on something that looks like his one-off or $10K on something he signed.
As someone who has always bought Epiphones because I couldn’t justify the cost of a real Gibson, I know I’m part of the problem. Still, for those of us who aren’t going to make huge dollars with our tools of choice even while wearing them out with decades of sweat and road scars, a genuine Les Paul has always seemed a needless luxury – unlike, say, an American Strat which is still pricy but not prohibitively so.
I have a late 90s LP Classic that I love and have played the crap out of it. Since I beat the hell of it regularly I have to work on it occasionally as expected to keep it in good working order. I also loved the LPs Traditionals with the P90s and went to my local GC to try one out. I pulled it off the wall, sat down with it and the P90 in the bridge position literally fell out of its slot hanging by wires. The price on this guitar was in the $1700 range if I recall. All I know is I showed it to the local sales dude who didn’t seem to be surprised or even interested/concerned. So, I handed it to him and walked out. Haven’t been back since. I now order my strings, picks and other parts online rather than drive 3 miles to GC. Call me crazy but if I am going to spend that kind of money on a guitar it damn well be nearly bullet proof.
Pickups shouldn’t fall out in the store. That is a very reasonable criticism of QC. 😉
Good article, the other issue IMO it that guitars,etc are luxury items, and the overall economy is still down.
Plus they are “loud” 😉
Yes. Down economy. And yet, the price setters at Gibson think that their products are economy and logic proof. TRUTH IS, their better quality guitars are way too expensive for the average player. Step No. One: LOWER PRICES SIGNIFICANTLY.
They shot themselves in the other foot by limiting the buy-in via ridiculous volume levels to play the franchise. Step No. Two: MAKE THEIR GUITARS AVAILABLE IN NEIGHBORHOOD SHOPS AGAIN THROUGH LOWER PRICES AND SMALLER INITIAL INVENTORY REQUIREMENTS.
Gibson, like Fender, has way too many models. If it weren’t for computers, they couldn’t even keep up with them all. Step No. Three: LIMIT THEIR MODELS OR AT LEAST, COLORS, THUS KEEPING BETTER CONTROL OVER RESOURCES.
Both Gibson and Fender need to quit trying to reinvent their own products with things like space-age tuners and plastic coated bodies and all the other junk they try to foist on players, and just make solid, attractive, well-playing guitars with even frets and straight necks, and that tune and stay in tune.
Over and out. BTW: That’s from someone who is a 55-year player and who has worked in umpteen music stores (And no, I don’t know it all, but like Skinny Lynyrd said, “I know a little”.)
Tonetwisters, baby, you seem to know a little. 🙂
“Of course, I think ALL vintage instruments are stupidly overpriced, but
you’re not buying guitars – you’re buying childhood dreams.”
When I read this I’m just baffled.
I was there at the beginning of R’n’R and am still here at it’s bloody demise and I have to say I’ve never bought a guitar due to a “childhood dream”. Maybe I’m just too utilitarian/blue collar to understand such things but, really, I only buy instruments that speak to me. A “childhood’s dream”? Really? People spend $ on that? Think I’d rather buy an ounce of smack. The kick would last longer and the memories would fade much faster . . . 😉
I think that if you’re a partner in a law firm who always wanted to be the sixth Beach Boy and you remember that 1959 Strat in the window and your Dad wouldn’t buy it from you and you just got a partnership bonus and dammit you want a REAL guitar, then you’re the exact guy who drops $37,000 on a vintage axe. At least that’s how the guys in the vintage business tell it. There are the collectors and speculators as well, but a healthy amount of love for the old axes is from emotional income. Because let’s face it – a John Suhr or Grosh is almost uniformly a better instrument on every level. And yes, yes, aging the instrument, it finds its voice, old wood, all of that. But 99% of the time, the modern boutique builds of similar price and quality (in constant dollars) are almost always better because the design flaws have been dealt with. (D string that jumps out of the nut, the hum of single coils, etc.) Nobody Needs a Guitar, except for on an emotional level Of Course I Need a Guitar. It’s not a rational business, which is why I think the standard MBAs come into the industry and lose their pants on a regular basis.
Ha-ha! Thanks for sharing. Speaking of being the 6th Beach Boy here’s some truth for you: https://www.youtube.com/watch?v=w-0CS-T1HUQ Cheers!
Gibson’s manufacturing facility in Nashville was heavily damaged in the 2010 floods, and many musician’s storage units, with who knows how many classic Gibsons, were wiped out.
I’m sure some of Gibson’s rebuilding process was funded by insurance payments, but I wonder if they needed to get into the corporate bond game so they could start rebuilding their inventory, particularly since a lot of Nashville musicians were suddenly in the market for a new guitar or two.
You mention debt issued in 2013, which doesn’t line up well with the flood timing, but maybe the 2013 debt was to cover payments they needed to repay folks who lent them money in 2010. And thus the spiral starts.
If this financial state for Gibson is fallout from the floods, climate change might be more to blame than sketchy financing schemes. Over the next couple decades, I expect a lot more companies (not to mention individuals) to end up in financial distress due to climate change. If politicians can’t get their act together to address the issue, maybe insurers and reinsurers can start imposing an ad hoc climate tax.
Gibson makes great guitars and mediocre guitars, however the product is rarely consistent. My 1996 ES-335 is a superior guitar than the Epi BB King but that Epi is a really good axe and I would take it on the road. Every time I go to a store or guitar show I compare guitars. Gibson makes new uneven-quality guitars. The robot tuners were horrid. They deserve to be spanked financially for their misdeeds until they make products that are always great. I sold two Les Pauls – a custom flame top and standard flametop. My Heritage is a better guitar than most Les Pauls I have played. The public is smart and demands incredible value from a premium brand. Even an expensive axe should give you bang for the buck. At those prices the guitar should be amazing. With their history and knowledge it is doable in all price ranges.
So many want to make this about their personal experience with Gibson. YOU (the individual) are not Gibson’s customer. The shops they refuse to sell to are the customer they’re missing. The gamble they took with the robot garbage was a risk they’re going to need to recover from. The Nashville flooding, and fallout had to be funded. TEAC and other Gibson-owned brands are in trouble.
We know how this story ends…. it happens every day…. PE will come in, bail them out, break them up, bond out the debt again, massively restructure, cut costs, focus on the 80% of the business that works right, and then do it again three more times for the next twenty years.
There’s really nothing to see here. Also, we don’t know for certain if they’ll be punished for missing debt covenants…. there could be plenty of relief there, if the business has begun to right the ship.
2016 (not 2015) models are without a doubt, the highest quality Gibson instruments I’ve ever experienced. I purchased two Gibsons in the last few months – but their supply chain is whacked…. that’s obvious…. there’s probably plenty more obvious going on here.
Now, which PE firm will buy up Gibson and break them up again? I’ll put my money on KKR.
Hey, maybe we’ll be able to buy a Gibson somewhere other than Guitar Center next year?
Acoustic guitar sales over the last 10 years in the USA have increased slightly, but electric guitar sales are down by a third from 1.5 million sold in 2005 to 1 million in 2015. A 33% decline says this product category is losing relevance. Gibson is buying and expanding all over the place but the core of their business and fame is dying. Average price per guitar is up slightly over 10 years from $375 to $495. What is their future? And Fender must also be in the same boat.