Monday, October 26, 2020

Guitar Center is Circling the Drain


Man, that's a lot of debt:

Venerable music gear retailer Guitar Center is preparing for a possible bankruptcy filing, according to a new report from The New York Times.

The pandemic has been tough on all areas of the music industry, and Guitar Center is no exception. The company missed an interest payment of $45 million earlier this month, setting off a 30-day grace period that ends in default.

According to the Times, Guitar Center is in talks with creditors about a plan that would see the company file for bankruptcy, with the hope of balancing its books by early 2021. Guitar Center generated $2.3 billion in sales in its most recent fiscal year but has about $1.3 billion in debt.

 Guitar Center has faced financial struggles for nearly a decade, as its struggled to build an online shopping experience to rival other retailers. The pandemic compounded those problems when Guitar Center was forced to shutter nearly 300 brick-and-mortar locations across the United States.

 In April, Guitar Center addressed debt payments with a series of transactions that were made possible through company lenders, allowing the company to continue operating during the summer months of the pandemic.

As far as business models go, maybe it wasn't a great idea to accumulate that much debt. There are some guys who used to work for Tower Records who can help you out with that.

I would have thought that Guitar Center's sales would have skyrocketed during the COVID-19 lockdown. You have millions of people sitting around with nothing to do--sell them a musical instrument! But the simple fact is that if people don't have the money to spend on recreation or hobbies, they're not going to make purchases from a retailer like this.

Touring musicians who already have high end gear are not going to be regular customers at a Guitar Center, by and large. They may buy replaceable items, but if you're already a recording artist with a large following and a history of recording music, then you're not going to be looking for what they sell here.

This goes back to my thinking that there is too much focus on high-end or vintage instruments and not enough emphasis on the fact that today's musical gear is actually pretty good in terms of quality and durability. We have really gotten good at replicating musical instruments. Manufacturing standards being what they are, I gotta believe that what you can get now for under $500 is probably a pretty decent thing to learn with and play. The software that powers electronics is exponentially better as well.

Is this going to be like vinyl records and high end stereo equipment? Which are things you can now only buy at specialized retail stores that are smaller and harder to find? I hope not. 

As always, I could be totally wrong and way off here, but I just don't get how a company with a billion dollars in debt that is based on selling things that people usually only buy with discretionary funds is rocking a solid business model.

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