Is Big Guitar Inc. on the Way Out?

The owners of major guitar brands like Fender and Gibson--and the Guitar Center big box chain that serves as their dominant channel of distribution--are struggling. What problems are causing this gradual decline of large guitar companies? What can we learn from this about marketing and consumer behavior? And what comes next for the guitar industry and the musicians who depend on it?

Gibson Brands this week saw its credit rating downgraded further into junk territory as significant debt payments are due in August of 2018. Creditors fear the company may not have the cash on hand to pay. Guitar Center is in a similar pickle, and survived only when one of their major creditors in 2014 took on an ownership stake in the company in lieu of payment. Their bonds hit the wall and were downgraded again in Spring of 2017. Fender had to pull its 2012 IPO due to their own crushing debt load.

How did these storied guitar companies wind up in these dire straits? In each case, they started as companies with exciting, new products and valuable intellectual property. They had willing markets with a growing number of buyers.

Let's look at the major problems these companies are saddled with.

PROBLEM: Creative beginnings, corporate mismanagement

Consider the case of Gibson.

The company was started by 1902 by Orville Gibson, who patented a mandolin that could be more easily manufactured than previous designs. With the addition of luthier Lloyd Loar, the company entered the guitar market with revolutionary new designs that took the industry by storm. Later, Les Paul and Ted McCarty designed the Gibson Les Paul, which after its 1952 introduction became one of the most sought-after solid body guitars even today. A succession of ownership changes have diminished the creative capacity and financial strength of the company, starting with the 1969 acquisition of Gibson parent Chicago Musical Instruments by a South African brewing company, ECL. In 1974, the company became a division of Norlin Musical Instruments, named for ECL president?Norton Stevens and CMI president Arnold Berlin.

Even today, Norlin is an easy punchline for guitar-related jokes. Making fun of Norlin era guitars is almost like poking fun at Nickelback. Consistency of guitars within the same model range suffered. New products were launched that seemed to be disconnected from the needs of the player. Guitars, amps, everything got heavier, according to some. Norlin, in some circles, has become a synonym for heavy.

During the Norlin years, the company also abandoned its historic home in Kalamazoo. Mich. for a new plant on Nashville.

The company was bought in 1986 by its current CEO and president, Henry Juszkiewicz. Their debt challenges stem in part from acquisitions of electronics companies including Teac and Onkyo (perhaps as a hedge against the shrinking guitar market).

The guitar side of the business has had ups and downs, but these days is lampooned horribly for seemingly nonsensical product moves, like adding robotic auto tuners to traditional guitar designs, turning off buyers even as they jack up prices. Quality and consistency meanwhile is suffering. I myself bought a Gibson ES-135 Limited Edition a while ago. It came with the tuning machines not even completely bolted onto the headstock, among other initial quality problems I had to resolve. They recently, at least, reverted back to offering guitars without the electronic gee-gaws for auto tuning, including some with no frills at aggressive price points in what looks like a race to the bottom.

Fender was started by Leo Fender in 1946, who after manufacturing electric lap steel guitars, in 1951 released the Telecaster--the first production solid body "Spanish" electric guitar. He invented the solid body electric bass, an instrument with the tonal register of an upright bass but with frets. This solved the problem faced by bass players who were increasingly drowned out by electric guitarists. He later sold the company to CBS in 1965 for the exorbitant sum of $12 million.

Immediately, CBS started to re-engineer the product to save on manufacturing cost. Body contours became less curvy. The truss rod design changed. The material used for the pick guards changed. Pre-CBS Fenders became more sought after, and still carry heavy collector values. In 1985, CBS sold the company to a group of employee-owners. And in 2001, when private equity firm Weston Presidio paid $57 million for a stake in the company, most of the money went to pay off the debt hangover from the purchase from CBS. Weston Presidio later refinanced the company's debt with a $320 million restructuring package from Goldman Sachs.

Over the years, Fender has made multiple acquisitions that were not well rationalized in the business ... Gretsch guitars were turned mostly into a cheap import line. Tacoma, a brand of American acoustic guitars was purchased and then folded. Guild Guitars was purchased, were moved to the old Tacoma plant, shut down entirely and then resurrected as an import-only line. Fender in 2014 mercifully sold the Guild line to Cordoba, known for quality affordable classical guitars.?Metal guitar brands Jackson and Charvel were purchased and also turned almost exclusively into import lines. Fender purchased Ovation, a maker of unique round-back guitars popularized by players like Glen Campbell, and turned them into a budget import line as well.

Guitar Center started off as a small appliance store that in 1964 gained momentum by selling Vox guitars and amps popularized by the Beatles. It grew into a nationwide chain and went public in 1997. By 2007 Guitar Center was taken private by Mitt Romney's former company, Bain Capital, which saddled it with $1.7 billion in high yield debt. Fender Musical Instruments had to abandon a public offering back in 2012 due to their own unsustainable debt load, which similarly was the result of various ownership changes, each leaving it more heavily leveraged.

Private equity does a lot of good things in the world--particlularly when there is a highly specialized focus that brings industry insight, connections and strategy along with financial wherewithal. But the idea that electric guitars are a growth-oriented industry that can dig themselves out from under crushing debt-to-earning ratios ... no. Just no.

Some private equity companies like Bain also operate a pump-and-dump model--pump cash out of a company, load it with debt and sell it as having tremendous growth potential. This approach of making money not by investing, taking risk and creating value but by financial maneuvering to the detriment of everyone but yourself is vastly different from the approach of an originator like Orville Gibson or a Leo Fender. Orville and Leo had lightning in a bottle, and sold it to the world. These new owners have been trying to sell the memory of that lightning as nostalgia, like a postcard in a tourist gift shop. That is one reason these companies are struggling now.

PROBLEM: Fading icons in a shrinking market

Industry watchers have observed that electric guitar sales, a major portion of Gibson's guitar revenue and an even larger share of Fender's, have been declining for years. Electric guitar sales have plummeted from $2.1 billion to $1.7 billion over the last three years alone.

Gibson and Fender, and their creditors, have banked on a brand appeal that frankly may have run its course. Any guitarist above a certain age may feel a certain loyalty to the Gibson and Fender brands. Clapton and Hendrix with their Fender Stratocasters. Jimmy Page with his Gibson Les Paul. These and countless other icons were seen as money in the bank ... a serious rock guitarist would need to have a Strat or a Les Paul. A serious country guitarist would need to have a Telecaster.

But guess what? Middle aged and older guitarists only need so many Fender and Gibson guitars. The product is not changing--changes tend to be met with howls of disapproval, negating the desire to buy new to take advantage of incremental or revolutionary improvements. And a smaller and smaller percentage of budding electric guitarists care about the aging rockers their parents worshiped so fervently. An up and coming player like my 15-year-old son is more likely to lust after a Schecter guitar, endorsed by my buddy Jeff Loomis.

Imported guitars from companies like Schecter can be had very reasonably, and their exalted US-made custom shop models are priced competitively with custom shop offerings from Fender and Gibson. But price is hardly the issue. The design and vibe are different--active pickups instead of the vintage, passive pickups associated with the big two. New configurations like 7-strings for more low-end authority and range and even 8-strings. But best of all, someone starting out in new musical styles like death metal or screamo can play a guitar that is not associated with the lame old guys their parents listen to. Off-the-shelf products like Schecter, Ibanez, high-end products like Stormshadow--all of these offer more aggressive styling, more metal-oriented tonal palettes and endorsements by a new pack of electric guitarists who would just not be candidates for the Fender or Gibson artist rosters.

Part of this disconnect between young and old, vintage and modern, may be cultural and brand-oriented. But Big Guitar Inc. is just not very good at innovating and launching new models beyond rehashes of what has made them money in the past. Just like the major Hollywood studio that banks on sequels and remakes of past blockbusters while indie film houses churn out taste-making and innovative work, Big Guitar Inc. is stuck in the 1960s.

The overall number of guitar builders competing for space in this market has also exploded. Global sourcing and supply chains mean a talented product manager can develop an assortment of guitar designs, take them to a plant in China and launch their own affordable product line at the winter or spring NAMM (National Association of Music Merchants) show. This squeezes Fender and Gibson from the low end of the market. Higher-end domestic builders like Collings, Tom Anderson, Paul Reed Smith and others compete directly with higher-end US-made Gibsons and Fenders. In fact, new US-based builders do better when they come in at a high price point.

Fender faces even another competitor from its own licensed parts. Their designs feature necks bolted onto the body rather than glued in, and it is easy enough to buy domestic or imported parts and assemble your own Fender-style guitar that is higher in quality than all but the most premium offerings from Fender. I myself built my own Tele-style guitar from American-made parts from Warmoth and Musikraft.

So we have a situation where the current owners of Big Guitar Inc. bought into companies with brand equity that is diminishing in value as aging rockers die off and lose cultural relevance, to be replaced, if at all, by guitarists who would not associate themselves with the guitar makers of decades past. More and more competitors crop up every day. Big Guitar Inc. heavily leveraged itself to buy a shrinking share of a contracting market. Which is never good.

PROBLEM: Changing musical tastes de-emphasize electric guitar

While electric guitar sales are tanking, acoustic guitar sales are increasing. But there is not much unique about acoustic designs offered by Fender and Gibson that give them an edge over other acoustics. In a recent dealer poll, 45.8 percent of guitar retailers said acoustic guitar business was up versus the previous year. Other industry insiders report acoustic guitars are at least dependable year-in, year-out products, and acoustic guitar stalwart C.F. Martin had their best sales year ever in 2014.

Acoustic guitars may be a growth market in part because more women are picking up the guitar than men, inspired perhaps by pop artists like Taylor Swift. But Fender's acoustic lines are famously abysmal. Gibson's are respectable but have a hard time competing at the higher price points with Martin and upstarts like Taylor, Breedlove, Santa Cruz and Collings. Imported Fender acoustics and Gibson's imported Epiphone line have to duke it out with a slough of other imports from Yamaha, Blueridge, Eastman, Recording King and others.

But much of popular music relies on no guitars, basses, drums or analog instruments of any type. Young people who want to make music now are more likely to buy a mixpad electronic device for DJ sessions than a Fender or Gibson guitar. Loop-based music production tools, sampling and editing are also incorporated in top-selling pop records, with nary a guitar solo to be found anywhere.

We may not in our lifetime see another Elvis, another Clapton, another Page, another Eddie Van Halen. These guys showed whole generations The Way, and thousands wanted to follow in their footsteps. The intermediate future may not be about the icons of yesterday or even the celebrity musicians of today, but about the need for artistic expression by each of us as individuals. In the 21st Century, the market is not one universe, but rather a universe of one. And that neutralizes much of the competitive advantage for Big Guitar Inc.

PROBLEM: Corporate rock and roll disconnect

Whether you are a tween starting a screamo band or a middle age bohemian trying to achieve musical catharsis, your instrument needs to align with the vibe you want to create, right? And as the great rock and roll guru Dewey Finn explained to us in the epic film School of Rock, rock and roll is all about sticking it to the Man.

Who is the Man?

"In the White House, down the hall,?MISS MULLINS, she's the Man. And the Man ruined the ozone, and he's burning down the Amazon, and he kidnapped Shamu and put her in a chlorine tank! Okay? And there used to be a way to stick it to The Man. It was called rock ‘n’ roll. But guess what. Oh, no. The Man ruined that too with a little thing called MTV!"

The suits and bean counters at Big Guitar Inc. ... aren't they the Man, too? Oh, you betcha. It is like buying your instrument from Best Buy. Nothing hip, bohemian or counterculture about it. If you are more of a folk or country artist, there is nothing earthy, homey or natural about it, either. It is a sterile, anonymous, faceless experience.

So if rock and roll is about sticking it to the Man, does it make sense to buy your guitars from the Man?

Or should you buy your guitar from someone with more street cred? My friend and collaborator Perf DeCastro, one of the finest musicians in the world, endorses Chapman guitars. My friend Jeff, as noted above, endorses Schecter. Guys like Emil Werstler of the metal band Death endorse Paul Reed Smith, a serious domestic competitor of Gibson and Fender with a value-priced import line.

?

These are the players young musicians, who are not settled on their forever guitar and frequently trade and buy up to new instruments, want to emulate. More so than Fender endorsing artists like David Gilmour of Pink Floyd or the guy from Jimmy Eats World.

And there are still independent instrument dealers apart from Guitar Center--although that major chain's buying power makes it difficult for other retailers to compete on price. They have been sued for anti-competitive practices due to efforts to set the minimum advertised price in order to quash competition from online retailers in particular. Instrument retailers were further marginalized directly by Fender, who started to sell their products directly to customers over the internet. Meanwhile. Gibson pushed away smaller retailers, giving additional advantage to Guitar Center by implementing a minimum $100,000 order size.

All of these are ways The Man--Big Guitar Inc.--has put the squeeze on the indie music store, local establishments often run by a prominent local musician with their finger on the pulse of the local music market. These remaining indie retailers are finding they can in fact stick it to the Man and compete with the Big Guitar Inc. on service, even price. Suppliers are also sticking it to the man, after finding it may not make sense to sell through Guitar Center as payment terms and other requirements are just too onerous.

Want to stick it to the Man? Buy something like a Heritage H-157W from someplace like Cream City Music.

So ... what's next?

One thing that is almost certainly lost on the folks associated with Big Guitar Inc. is pointed out here by longtime Guitar Center critic Eric Garland:

"Fact is, musical instruments are a terrible business to be in. Constantly shrinking margin, shifting consumer tastes, working with musicians?in a business context ... But for those of us who love it, we couldn’t care less. And that’s why not every MBA will get what’s going on here. However, if they want to stay they should pick up an instrument and join a band. Any band. It will all make sense in time."

The owner of a music store I frequent once asked me ... "do you know how to make a small fortune? Start with a large fortune and buy a music store." He recently merged his operation with another local multi-store retailer and is doing fine. But this is not a business with incredible margins. I bought one of my guitars custom-made by Dave Wendler, a luthier from Kansas. He will not be a billionaire anytime soon, and his business may not be attractive for private equity investors. But he will leave a legacy of some fantastic, unique, patented designs that will have value as long as people are playing amplified guitars. His work will leave its mark, which is more of what music is about than leveraged buyouts and IPOs.

As Fender, Gibson and Guitar Center continue to diversify into non-instrument-related product categories like electronics and digital services, they may or may not keep creditors from their door. But what will life look like for guitarists around the world as Big Guitar Inc.'s fortunes rise and fall? Those of us who see music not as a way to shuffle numbers around in a spreadsheet, but to make sounds that move people and make life more hospitable ... what about us?

Here are three causes for hope.

• The originators are still out there. After Leo Fender sold his company to CBS, he started a new company with longtime associate George Fullerton ... G&L. Their instruments compare favorably in quality and price to Fender, and are very well regarded among professional players. Leo also helped a former employee of his found a company called Music Man, which is now owned by Ernie Ball. Both these "children of Leo" have a more affordable import line as well. After Gibson moved from Kalamazoo to Nashville, employees at the old plant hung a shingle as Heritage Guitars, with the same artisans, making instruments on the same ground, using the same tooling and machines, as the sought-after Gibsons of yore. They are also well regarded, and considered a premium product. Regardless of what happens with Fender and Gibson, quality vintage-style electric guitars will still be available.
• As more of us tune into acoustic music from singer-songwriters and contemporary folk artists ranging from the Milk Carton Kids to the Punch Brothers, acoustic instruments will continue to sell well. The specter of the Beatles, Led Zeppelin, Cream and the Woodstock Generation, which helped build Big Guitar Inc., will have faded. People will still need music that flows from the soul of one person, through resonant, vibrating wood, and into the soul of another. And the availability of high quality acoustic instruments from a broad spectrum of manufacturers and at multiple price points is fantastic right now. Canadian-made, all-solid wood (no plywood) acoustics can be had starting around $700.
• Players, guitar builders and others will find each other one way or the other, and the internet is a great place for these encounters to take place. I am not just talking about online shopping sites. But rather, social media, where builders can target players based on their interest. Or online discussion boards, where even a small guitar builder or boutique guitar dealer can get a sponsorship and interact directly with potential buyers.

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Charles Rathmann is a veteran consultant, researcher and industrial journalist. Currently, he serves as technology editor across AC Business Media’s portfolio of construction publications, where he helps contractors learn about and understand how to harness emerging and proven technologies and conducts primary research in the space.?When not working, he is happily fishing and exploring the Driftless region of Southwestern Wisconsin, playing guitar or spoiling his wife and daughter.