When Guitar Center Inc. opened a store across the street from its Westlake Village headquarters in April, it invited alternative L.A. rock band The Beta Machine to perform. It was a typical marketing ploy by the firm, which has a long history of inviting celeb musicians to fraternize with customers, head up competitions and promote products. And it was a success, drawing 800 fans who mingled with musicians and were able to check out the new store – one of seven it plans to open this year as it seeks to turn around its fortunes in an era where an increasing number of musical instrument sales are made online. A key part of the strategy? A refocused marketing message and a plethora of in-store services to increase foot traffic and hopefully boost sales. The company emphasizes that the best way to pick an axe is to pluck it in a store – even if it’s only a dream buy. “Part of the fun of coming in here is you get to play the $5,000 guitar that you may not be able to afford,” said Kevin Kazubowski, senior vice president of stores. The 9,000-square-foot Westlake Village shop has a regular inventory of music gear and also offers services including instrument lessons and guitar repairs. It is the company’s 268th store. The chain has also opened locations in Illinois, South Carolina and Missouri this year, and plans locations in Washington and Texas before the year is out. But that aggressive expansion strategy has startled some in the industry given the growing ecommerce trend and the financial struggles the company has faced. Guitar Center has been privately held for eight years, but because it had publicly traded debt it filed financial reports as late as November 2013. That quarterly report showed an operating loss of $453 million for the first nine months of that year. In March 2014, the company gave notice to the Securities and Exchange Commission that its securities were no longer traded so it was no longer required to file reports. Eric Garland, managing director of Competitive Futures, a market research company in Washington, D.C., said many instrument retailers have ceased to pursue the brick-and-mortar model. In fact, Guitar Center competitors such as Sam Ash Music Corp. in Hicksville, N.Y. and Sweetwater Sound Inc. in Fort Wayne, Ind. are thriving online. “The $7 billion music instrument industry is flat and all of the growth in retail is online,” Garland said. “The music development industry has suffered from a lack of sophistication and nobody is buying new guitars. But online is throbbing, and your model can no longer be just brick and mortar alone.” Of course, Guitar Center doesn’t see it that way, and maintains that its current course is a healthy mix of a rich in-store experience combined with a full online sales platform. The company also expects to release a mobile app later this year. “We are heavily investing in increasing the omni-channel capabilities of our Guitar Center website to allow customers to experience a more seamless shopping experience between online, mobile and stores,” said company spokeswoman Syvetril Perryman in an email. The company also hired a new chief executive in November. Darrell Webb previously served as chief executive of Sports Authority Inc., a 475-unit sporting goods retailer in Englewood, Colo., from 2011 to 2013. Prior to that, Webb was chief executive at Jo-Ann Stores Inc. Webb replaced former chief executive Mike Pratt, who resigned after less than two years with the company. Debt question Guitar Center was publicly traded until 2007 when Bain Capital LLC, an investment firm in Boston, took it private in a $2.1 billion leveraged buyout. Many of its financial problems appear to have stemmed from the transaction, which was ill timed as it saddled Guitar Center with $1.5 billion in debt right as the recession hit. Then last year Ares Management LLC, a Los Angeles investment advisor and one of Guitar Center’s largest debtholders, exchanged its debt for preferred stock. That reduced Guitar Center’s debt by $500 million and its annual cash interest expense by $70 million. Ares became the major shareholder in the company, while Bain retains partial ownership. Garland maintains that the company is still not in good financial shape. “Guitar Center is big but they’re a company full of debt. Their same-store sales operations are down (and) they are absolutely desperate for cash,” he said. The company declined to disclose its current debt burden or profitability to the Business Journal. Earlier this month, Forbes ran an online story about the specialty chain stating that the company “has been treading water for some time now, but looks like it might be readying itself to finally sink.” The article discusses a new employee agreement the company distributed last month. According to Forbes, the agreement states that employment can be terminated at any time without cause and sales commissions will decrease. The story also rehashes the company’s financial troubles, concluding that its debt “was a financial hole that Guitar Center could probably never crawl out of, and at some point the company would have to declare bankruptcy and regroup.” Nevertheless, Guitar Center still accounts for $2 billion of the $7 billion industry sales in the music equipment sector, according to Garland, and it’s banking on its new strategy to improve its financials. It’s the company’s brick-and-mortar “try the product” sales model that sets it apart from online competitors and could allow it to charge more than low-ball Internet prices. “Right after the recession is when all of the dot-com stuff started getting crazy. It was all about ‘how cheap can we sell it’ online, and it obviously hurt brick and mortar facilities,” said Kazubowski, the Guitar Center executive. “After the recession hit is really when a lot of our guitar lessons, workshops and other services were born.” At the new Westlake Village store, the action emanates from the showroom which features a wall covered with guitars, including Gibsons and Fenders. Beside the wall is a designated area where customers can try out any guitar, hook it up to an amp and jam away. Kazubowski said many young customers spend hours trying out the guitars and basses, keyboards, electronic drum kits, disk-jockey equipment and more. “In our Northridge store, oftentimes if you go in there in the afternoon the kids are all over the disk-jockey equipment and in the middle of the room they’re dancing,” he said. “It’s like a club, and it really makes me excited because I love to see people playing and getting into it.”
