Guitar Center Looks for Harmonic Resurgence

Guitar Center Inc.’s flagship store on Sunset Boulevard recently got a tune-up. At the redesigned location’s debut in November, the Westlake Village based-retailer unveiled a 15-foot-long playable pedal board, eight new state-of-the-art lesson rooms and a surprise performance by Grammy-nominated R&B artist Anderson.Paak. Customers were invited to try out even the most expensive guitars hanging from store walls and participate in free music clinics put on by professional musicians and producers. The remodel is part of a larger effort by Guitar Center executives to turn around the country’s largest musical equipment seller. At a time when musicians are increasingly shopping online, the company aims to entice players back to its brick-and-mortar stores by expanding its core product line and reinventing itself as a destination for services including music lessons and instrument repairs. Last spring, Guitar Center found itself in dire financial straits. Analysts feared the retailer was about to run out of money and in danger of defaulting on a portion of its $1 billion in debt. The liability stems from a $2.1 billion leveraged buyout by private equity firm Bain Capital in 2007. The Great Recession hit shortly after the deal, crippling sales across the specialty retail industry and eventually prompting Bain to sell its controlling stake in the struggling chain to Culver City-based alternative asset manager Ares Management in 2014. Guitar Center was able to stave off the impending bankruptcy in April with an agreement to extend payments on $615 million of its outstanding maturities by two years, the first of which is due in 2021. In response, S&P Global Ratings raised the company’s credit rating from “selective default” to “CCC+.” While still a “junk bond” score, the upgrade signaled the company has steadied its financial outlook. Experience-based retail “Now that our refinancing activities are behind us, we are focused on implementing our strategic growth initiatives,” said Chief Executive Ron Japinga in a statement. “We’ve begun to realize the benefits of this work in our sales and earnings growth over the past few quarters, which is allowing us to make increased investments in areas that differentiate us.” Jeannine D’Addario, chief marketing and communications officer at Guitar Center, said the plan is to revamp the company’s 290 U.S. locations into “experience-based” retail sites that will appeal to a variety of musicians. Offering in-store opportunities such as community events, classes, product demonstrations and other interactive promotions is a growing trend among retailers including Nike Inc., Target Corp. and Starbucks Corp. At fitness apparel seller Lululemon, some customers can even take part in guided meditations at special “relaxation pods.” “The brick-and-mortar businesses that continue to perform in this changing retail environment offer opportunities and experiences that you can’t get online,” said D’Addario. When customers enter a Guitar Center, they are welcome to pick up and play any of the instruments on the sales floor. In addition to drums and guitars, D’Addario said the company has introduced interactive DJ booths and music production stations geared toward a younger generation of music makers raised on the synthesized sounds of hip hop and R&B, she added. Another way the company hopes to keep people coming back to its stores is by expanding its student lessons and offering additional repair services for expert players and professionals. The idea is to make Guitar Center more than just a place to shop for a new guitar or pick up a pair of drumsticks. “We want to sustain lifetime engagement with our customers by offering services that meet all of their needs,” D’Addario said. The company is also investing in its subsidiary, Music & Arts, which offers lessons and rents band and orchestra equipment to schools. There are more than 190 Music & Arts locations across the country. S&P Global Associate Director Samantha Stone told the Business Journal that these kinds of services yield a higher margin than instrument and accessory sales. She added it will be necessary for the company to focus on these opportunities as it tries to climb out of debt. “Guitar Center has very large and unproductive stores,” Stone said. “They need to be more thoughtful about their product and store space now that customers aren’t shopping at (brick-and-mortar stores) as often as they were in the past.” Expanding footprint According to a report by Los Angeles-based market research firm Ibis World, more than 15 percent of instrument sales and services are now made on ecommerce sites such as Amazon.com or Craigslist.com. That’s up from just 5 percent in 2009. The shift appears to have taken a toll on Guitar Center’s sales. Since 2012, the company’s annual revenue dropped 14 percent to an estimated $1.5 billion, according to the report. Guitar Center, for its part, says it has seen positive year-over-year revenue growth the past five quarters. Going forward, the company believes it’s well positioned to take advantage of this new paradigm. It recently began upgrading its namesake website and e-commerce subsidiary Musiciansfriend.com to grow its digital presence and boost digital sales. In addition, 65 percent of its products are now subject to a minimum advertised price, meaning that online competitors can’t undercut the company on sales of those items. And even as retailers such as Sears Roebuck & Co. and bankrupt Toys R Us close stores across the country, Guitar Center sees an opportunity to grow its physical footprint. The company opened at least five locations last year and plans to open as many as 10 more in 2019. D’Addario said there’s plenty of room for “smart” expansion into areas where the company doesn’t yet have a presence, including Hawaii and Alaska. The bet is that no matter how the retail landscape evolves, there will always be a demand for the music store experience. “Because we are a specialty retailer and not a big box retailer, we believe there’s continued opportunity in markets where we aren’t in today,” she said.