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The month marks the 15th anniversary of Bain Capital’s $2.1 billion acquisition of Guitar Center, a transaction that has been a continuing source of disappointment for investors, employees, and the music industry at large. There have been two financial restructurings to trim a $1.5 billion debt load, a reshuffling of ownership that saw Bain take a $600 million loss, and a quick 2020 trip in and out of bankruptcy court. The recent appointment of Gabriel Dalporto as new CEO, the sixth in a dozen years, suggests that the company has yet to find solid footings. However, the fact that financially strapped Guitar Center has managed to survive these tribulations in an unforgiving retail environment testifies to the underlying strength of its business model.
Dalporto brings a sterling resume to his new post, not unlike his five predecessors. He’s an MIT grad who led dynamic growth at Lending Tree, building it into a diversified financial services platform, driving a meteoric stock price rise. He’s joined by Ken C. Hicks, the new chairman of the board, a onetime McKinsey consultant who has held leadership posts at Foot Locker, Payless Shoes, and Mays Department stores. Tim Martin, GC’s long time CFO, has also rejoined the company after a one year hiatus. In the coming years, the collective talents of this team, and the entire GC organization, will be put to the test by challenging macro trends and seismic shifts in the way music products are sold.
GC’s financial woes have been so widely publicized, it’s easy to forget that it was once considered an unstoppable juggernaut. In 1997, it had 30 stores concentrated on the West Coast, sales of $220 million, and bold ambitions for a national roll-out. The financial community thought these ambitions were well founded: GC’s $600 sales-per-square-foot made it one the most efficient retailers in any category and huge crowds at every new store opening underscored the strength of its marketing and merchandising formula. A Goldman Sachs analyst said Guitar Center had a “proven model, unassailable competitive strengths, and tremendous growth potential.” Another analyst from Wellington Capital enthused, “Guitar Center is simply the best retail model I’ve ever seen.”
The accolades were not misplaced. After a well received IPO, GC went on a tear and between 1997 and 2007, expanded revenues nearly ten-fold to $2.1 billion, with profits keeping pace. The 1999 acquisition of Musician’s Friend gave it a leadership position in the fledgling online marketplace while the Music & Arts acquisition delivered access to the profitable school music market.
In 1997, then CEO Marty Albertson decided to take the Guitar Center private. He reasoned that with fewer opportunities for geographic expansion and growth slowing, a “re-tooling” was required. He explained “We had to move in a strategic direction that the public markets just wouldn’t support.” Goldman Sachs put the company up for sale, and Bain Capital prevailed in a bidding contest, prevailing over a prominent consumer electronics chain and an unnamed musical instrument company. The $2.1 billion price tag--$600 million in equity and $1.5 billion in debt—was the most ever paid for music products concern. Bain’s ambitions for GC were quickly derailed by economic upheaval and the meteoric rise of online commerce, compounded by some managerial missteps.
Bain reasoned that GC profitability could be enhanced by ending negotiated pricing on the retail floor, shifting sales compensation from commission to straight salary, and increasing the selection of high-margin private label products. However, in the midst of the 2008 financial crisis, these moves backfired. The shift to fixed pricing alienated cash strapped customers, compensation changes led to the departure of top performing sales people, and private label products failed to resonate with customers. A cost cutting initiative that merged Musician’s Friend into Guitar Center operations, also fared poorly, leading to declining online sales.
These issues would have been manageable, absent the outsized debt burden. But with cash flow constrained by interest costs, GC management had no other option than a short term survival strategy: an “SKU rationalization” program that reduced in-store inventory selection; revised store formats designed for leaner staffing, and significant layoffs. Even these moves were not sufficient to stem the losses, prompting three restructurings where debt was swapped for equity, and ownership shifted from Bain, to Ares Capital, to a current consortium of Ares, Carlyle Group, and Bridgade Capital.
Some point to Guitar Centers’ financial struggles as an indictment of the private equity model that relies too heavily on leverage. But Guitar Center was hardly the first, and will certainly not be the last leveraged business transaction in the music industry that went awry. What set it apart was its scale and the hubris of the participants. The management principals at Ares, Bain, and Carlyle proudly display their Ivy League credentials, as if these degrees are a guarantee of infallible wisdom that will deliver “transformational” results. By contrast, the educational attainment of the trio that masterminded Guitar Center’s growth—Ray Scherr, Larry Thomas, and Marty Albertson—was far more modest. (Based on their resumes, its unlikely that Bain, Ares, or Carlyle would ever have extended any of them a job offer.) Whatever they lacked in credentials, they more than made up for with a grasp of the market, based on untold hours of face-to-face customer contact, a love for the music business, and a “do whatever it takes to succeed” mentality.
Investor confidence in Guitar Center’s ongoing viability is not misplaced. There are approximately 300 Guitar Center locations and 250 Music & Arts locations, giving the company a true national foot print, serving a market where an in-store experience is still important for many customers. These well-appointed stores are backed by efficient logistical support and potent marketing capabilities. They also benefit from the shrinking number of competitive brick and mortar outlets.
Right-sizing GC’s store count, energizing a staff demoralized by years of layoffs, improving the customer experience, and finding a way to add value to every transaction, are challenges that will tax even the best management team. We suspect solutions to these and other challenges aren’t going to be found in college text books or divined from complex excel spread sheets, but from the kind of first hand market experience that originally transformed GC from a single store in Hollywood to a national chain. Here’s wishing the new GC team success in shoring up an important pillar of the industry’s distribution channel.
For a better idea of Guitar Center’s evolving position in the music products industry distribution channel, consult Music Trades’ annual Top 200 survey, a revenue ranking of the industry’s largest U.S. based music products retailers and our Global Retail Report, which provides similar data on top music products retails in over 50 markets around the world.
Brian Majeski
Editor
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