Be Careful What You Wish For
Music Inc. Publisher Frank Alkyer weighs in on the Competitive Futures post "The End of Guitar Center" by Eric Garland that has been sweeping the MI industry.

Everybody loves to take shots at the big guy, and in musical products retailing, no one is bigger than Guitar Center. There are more than a few competitors and industry watchers who think life would be a whole lot easier if GC wasn't in their backyard. And some who would love nothing more than to hear bad news about the world's largest retailer of music gear.

Enter, Eric Garland — a futurist, managing director at the consulting firm of Competitive Futures and a musician — who has set his sights on calling the demise of Guitar Center. Garland has been saying for the last 18 months or more that Guitar Center's days are numbered, highlighting (for one) what he considers to be an insurmountable debt Bain Capital took on when acquiring the company in 2007, a good portion of which was converted to equity last year, giving Ares Management a majority stake in the company.

Normally, someone with Mr. Garland's resume wouldn't necessarily make the pages of Music Inc., but he's found a way to make us sit up and take notice — through our readers. When his latest blog condemning GC hit the internet last week, it was immediately trending with our audience. Music Inc.'s email inbox started buzzing with "Did you see this?" and "What do you think of this?" and "What do you know about Eric Garland?"

Rather than rehash what he said, I'd suggest you read his complete post, called "The End Of Guitar Center," at http://ericgarland.wpengine.com/2015/02/03/end-guitar-center/.

Because of the amount of communication we received about the blog, we reached out to Guitar Center for response.

"Guitar Center recognizes that as the leader in MI retailing we draw some level of attention and online noise," said a statement from Guitar Center. "While we are flattered that these sources take the time to focus on us, they are at best uninformed and inaccurate and we will treat them for what they are — noise. Guitar Center's prior statements regarding the health of our business and the adequacy of our capital remain true and speak for themselves."

From my vantage point, Mr. Garland's case is full of hyperbole and overstatement and light on new evidence or real research, but I agree with his basic premise — GC has a debt challenge. But, we've known that since 2007, and the company keeps chugging along. I felt like everything else he wrote was self-aggrandizing rhetoric to get people to read his blog. And it worked.

I'll stick my neck out. GC isn't going away anytime soon. There are plenty of companies in this industry that have had large debt challenges for years and even decades. And there are plenty of options for restructuring debt or kicking the debt can down the road a piece.

I don't agree with Mr. Garland's charge that in the mid-term (whatever that means) the company, "may cease to operate as a going concern and will be reduced to a group of trademarks, service marks and patents that will be sold to a buyer with considerably different plans for the company." The stores are cash-flow positive, according to Tim Martin, GC's CFO. That was in August. I have no reason to doubt him. Worst case, in my mind, is somebody will buy it. There's always a private equity firm that says, "Wow, the music business. How cool!" Even Wharton School MBAs are bored with most of the companies they tinker with and would love nothing more than working on a music retailing chain.

Mr. Garland makes some Nostradamus-like predictions and, who knows, he may just end up guessing right. There has been rapid turnover at the CEO level from Greg Trojan to Mike Pratt to Darrell Webb. But Garland doesn't look at a deep, very experienced management team that knows how to run a retail business, and how to solve problems.

Recent layoffs and resignations from that executive team are bad for the company, but not fatal. Those who left included some of the brightest minds in music retail, including Gene Joly, president of Musician's Friend, Laura Taylor, senior vice president of operations, Dustin Hinz, vice president of brand experience, and Chris Tso, vice president of merchandising at Musician's Friend. Joly is just an encyclopedia of music retail. Taylor was instrumental in figuring out and implementing the supply chain management system at GC that allowed it to go public. Hinz spearheaded the "All We Sell Is The Greatest Feeling On Earth" advertising campaign as well as the "Guitar Center Sessions" television program on DirecTV. And Tso is a purchasing guru who knows what gear customers want now.

Those folks and others not mentioned are tough to lose, but for all the turnover GC has with front-line sales people, there are still a lot of crafty, smart, long-time veterans who have been through tough times.

So will GC go under? Like any business, success isn't guaranteed, but I'm certainly not willing to write an obituary. And if that day actually came, beware — a lot of suppliers will probably be filing for bankruptcy protection right behind it. A lot of retailers, too, because it will take years for the flood of out-of-business-priced gear to work its way through the marketplace.