February 2006

The pressures felt by small musical instrument retailers have been a recurring theme at GuitarAttack.  During our eight years online we’ve watched as the musical instrument retailing industry transformed, and those who supposedly represent the interests of these same retailers have, in our collective opinion, been complicit, or at least asleep at the switch while the major musical instrument manufacturers have set the agenda.  We believe the “business speak” used by these advocates has masked a number of the real issues, and the lack of facts, coupled with tired slogans, will make it worse for the next generation of guitar players.  This is how we arrived at our conclusions.


Background

Last night my son and I watched a show on the National Geographic Channel which dealt with the space shuttle Columbia accident and the investigation into its cause.  Columbia broke up over Texas during reentry in January 2003, and the initial cause of the accident was a mystery, leading to a lot of wild speculation by both government contractors and NASA.  Eventually the cause was found to be a two-pound chunk of insulating foam.  Video from the launch showed what appeared to be the foam breaking free of the main fuel tank during liftoff and hitting the leading edge of the shuttle’s left wing.

OK…where are we going with this?  The interesting thing about the show was that the experts at NASA were looking for the “usual suspects” with regard to the accident.  This is what we can expect as “group behavior”; that is, the group spends its time seeking consensus rather than really trying to find the right, “hard to accept” solution.  One of the scientists sought to prove the foam/wing theory, but was ridiculed by his peers.  He used a pneumatic cannon normally used for shooting chickens into high performance jet windshields (a legitimate test regimen) to blast a piece of foam into a carbon fiber wing mockup at 500 miles per hour.  Based on the test -- not merely his opinion -- his theory was shown to be plausible.  Eventually, the other experts warmed to the “theory” and the facts spoke for themselves.  This was the point I wanted to share with you, and the point I shared with my son: most people are really uncomfortable with facts which cause them to question their opinions.

In light of the great TV show, what got me fired up were two articles sent by Ken Huddleston.  Both appear in the January 2006 Music INC. magazine, and they provide two very different viewpoints on the state of the music business, as well as the plight of struggling independent musical instrument dealers.  As with most of these articles, each is steeped in emotion and use a number of arguments that, to me, appear tired, fallacious, and opinion-based.  Lets take a look at each article.
 

From the President of NAMM

Article number one was written by Zach Phillips and Frank Alkyer.  Their article is a sweeping interview/narrative piece concerning Dennis Houlihan.  Mr.  Houlihan is President of NAMM, which used to be the National Association of Music Merchants, and this article really gives us some insight into the organization and its agenda.  Quietly, a few years back, NAMM started adding “(the International Music Products Association)” to press releases and its logo products, particularly at NAMM conventions. This is what their site says:
 

Did you catch that? What started as an organization to represent retailers has transformed into an omnibus organization representing retailers and manufacturers/wholesalers.  Pretty interesting stuff, particularly against the backdrop of what Mr. Houlihan says in the article.  By the way – Mr. Houlihan was the first president of NAMM who actually worked for an instrument manufacturer – Roland – rather than being involved as a retailer!  Mr. Houlihan makes some very predictable statements in his article, entitled “The New Deal”.  The central theme of his article is that “change is inevitable” and retailers need to seek new “relationships” and “leverage” market positives, embracing the change.  These words are the stock in trade of those who continually try to convince us that a Super Wal-Mart is better than having a number of smaller, community-owned stores, and jobs going to China is actually a good thing for America.

I believe that “business speak” like we see above actually leads to a specific thought process. That is, one that dismisses the obvious truth in favor of adopting a homogenous opinion that doesn’t buck the trend, or make people seem to be dissenters or disruptive!

The bottom line in his article is that mass merchandisers like Best Buy, Wal-Mart, and Target are interested in getting into the musical instrument and accessory business.  Based on his article, Mr. Houlihan thinks this is a pretty good idea. Here are some of the cogent points from his article:

 

OK, Mr. Houlihan -- we are tired of hearing about cycles as an explanation for everything.  We believe that cycles occur when the underlying conditions are generally the same and a “sine wave”, or ups and downs of activity occur over a time period.  However, when the conditions change, it is probably fair to believe that the resultant cycles – as well as their impacts -- will change as well.  However, NAMM is clearly using "cycle speak" without a change in methodology to explain away a changing environment, and I think this is just plain wrong. This is a simple way to deflect criticism and forego analysis.

How does a small business compete with these big boys?  According to Mr. Houlihan the answer is simple: teach music lessons! That is NAMM’s focus; namely, keeping music in schools and keeping programs funded which, by the way, we wholeheartedly support.  He also states that “recreational music making” is a huge thing for our Baby Boomer generation which will drive 50-somethings into independent music stores for lessons.


The Opposing Viewpoint

Chris Lovell, co-founder of Strings n’ Things in Memphis, also has an article in this issue entitled “An Industry Revolution, Part 1”. Predictably, the article is not very complementary to the viewpoint of Mr. Houlihan.  Mr. Lovell contends that, based on his recent Winter NAMM show experience, that most independent musical instrument dealers are “filled with a lot of anxiety and anger. He also states that, "Several retailers have lost their stores and even their life savings.” (Note: I would like to know the exact number because anecdotes like this don’t help to drive solutions.)  Lovell clearly believes that “somewhere along the line, manufacturers had chosen the bottom line over integrity, profits over common sense.”  Pretty strong words, because he doesn’t exactly define “common sense” which, as Voltaire stated, “is not so common.”

Mr. Lovell contends that independent music dealers are the “keepers of the key”; that is, respecting music, not just the instrument, and “respect, uphold, and make and spread good music.”  Along with this, Mr. Lovell would like to have a “level playing field” with the big retailers, which is an admirable goal.  We would also like to hear how we characterize “good music”.

I think he does make one very interesting point with which we agree.  Mr. Lovell states that “For manufacturers to end up with literally less than a handful of customers would be the worst possible scenario for them, and yet they still stand by and offer little assistance.  The tail is now wagging the dog, and eventually, it will own the dog.”  Do some research, GuitarAttackers…look at what Wal-Mart allegedly did to Pillowtex Industries and make up your own mind.

Mr. Lovell continues with an entire litany of grievances against the big manufacturers.  I am sure we know who “they” are based on previous rants on this site and conversations with some industry insiders.  I particularly like his explanation of how the big internet sites beat the Minimum Advertised Price (MAP) for instruments, and how they sell comparable instruments below what Mom and Pop can get them for wholesale!

Note: The MAP goes something like this:
 

Musicians Friend doesn’t see MAP as being a problem – just give them a call.  You'll see this on PRS guitars and some of the Peavey gear.  Interestingly, our Federal Trade Commission has ruled that certain MAP structures may actually be in violation Federal law! Check out this website:

http://www.ftc.gov/os/2000/05/mapanalysis.htm

Here is how the MAP can be easily side-stepped: A big chain orders a “one-off” famous guitar with a special, non-catalog paint job.  They receive 1,000 of them for their retail and internet operation and get a great price on them because they are buying in quantity.  Due to the special paint job, the MAP is usually set much lower because, technically, the guitar is not sold anywhere else.  So Junior, who really wants guitar X, is attracted to the “one-off” because of the price.  This "arrangement" also applies to closeouts and other business arrangements.

Mr. Lovell continues his call to arms, and asks if the reader wants to be part of the revolution.  We’ll have to wait until next month to see what that revolution actually looks like!  I like Mr. Lovell’s enthusiasm and emotion, but the article feels like sour grapes and would probably be better served by applying some analysis to this very difficult question.  We don’t need name calling – it diverts us from our true purpose of finding the truth.

Hey...wait a minute...you know what?  Enough rhetoric...GuitarAttack wants to see some no-kidding research and some facts.  I want to see if selling GHS strings in Wal-Mart impacts selling GHS strings at KKs Music down the street, and what NAMM is going to do about it if something is required to support its membership!

Here are a couple of lines from GuitarAttack, January 2004:
 

My opinion: Having worked in a music store, I’ve seen folks drive two hours each way to save $30 on a set of $1500 drums.  I never personally saw the correlation between buying a guitar and guitar instruction, unless it was on a very low end guitar in which the first-time student used for lessons.  Once the student decided to step up to a better guitar, price became the driving factor.  This is an observation that both Mr. Houlihan and Mr. Lovell really miss -- the behavior of the consumer.
 

What should the companies do?

Bob Lutz, perennial car guy and the dude who brought you the Viper says that “making money is not the most important thing” for a company. To quote his great book “Guts”, which is one of my all-time favorites:
 

Rather, Mr. Lutz derides those who “regard product as nothing more than a conduit: In one end they pour as little money as they can get away with; out of the other end they expect a munificent return”.

BTW: munificent \myoo-NIF-i-suhnt\, adjective: Very liberal in giving or bestowing; very generous; lavish.

In my opinion you’ll find a number of companies that do this start with a desired amount of money as a return, then work backwards to figure out how to get there, as with a “five year business plan”.  When they do this, they start squeezing people who do not support their vision or plan. I think that is what we are seeing now with our big manufacturers.

I believe this is why Fender makes about 85 different Stratocasters and Gibson makes “special” Les Paul models that are only available through “Guitar Center”.

Where do we go from here?

This is where the opinion and predictive analysis starts….

     - The large manufacturers will continue to squeeze the retailers until they decided the time is right for selling direct to the public. I believe we are very close to this time right now.

     - Small retailers will continue to fail because there is no way they can compete while trying to sell the same product available from the big retailers.  Music retailers will consolidate in some markets.  The bigger stores will buy out or wait out smaller ones with particular niches.

     - Smaller towns – those with populations in the 10,000 to 35,000 range outside of metro areas will lose their music stores all together because the owners will not be able to stock instruments other than entry level instruments with extremely slim margins and their all-important accessory business will be taken over by  the ubiquitous Wal-Mart Super Center which, by the way, has destroyed most of the other retail businesses in town also.

     - Guitar repair people will probably be able to eek out a living doing work on guitars purchased from the big box stores, but I believe that a kid who paid $250 for a guitar will shy away from paying $50 for a setup, nor will he pay $10 to have a set of strings installed. I also predict we’ll see a lot more internet store fronts offering refrets and neck resets for cut rate prices.

     - Used guitars will continue to be sold on eBay, not in local stores.  We already see eBay setting the price for used guitars no matter where the seller is located.

     - The time might be right for a new brand of guitars geared toward independent dealers. Who would have thought PRS could have been a “playa” against Fender and Gibson?

What I would like to see...

As stated earlier, NAMM needs to conduct some no-kidding research into this phenomenon if it cares about small retailers.  However, based on its behavior and shifting focus, this research would pre-suppose that they care about the survival of small retailers.  I believe they have already written that segment off, and the study may offend some of the biggest supporters of, and contributors to NAMM.  If not, I would like to see a real analysis; that is, not some rehashed online questionnaire for major retailers.  If NAMM has as much cash-on-hand as it claims it does, this should be pretty easy to pull off, and would probably quiet a lot of the critics and help the industry chart a sustainable course.

Conclusion

Sadly, the very stores and owners who helped Gibson and Fender out of the dumps in the 1980s are the very ones who are paying for their new-found prosperity and their bottom-line focused business plans.

When guys like George Gruhn and Chris Lovell get squeezed by “The Man”, we are all in trouble.  As we’ve said before, the culture of the “guitar shop” is changing radically, and we are not planting seed corn for life long guitar customers.  I believe the reason Baby Boomers are still buying guitars is because of that culture; Gen X and Y will probably not do the same thing.

Gloom and doom from GuitarAttack?  Not exactly, because nowhere will you read that business is fair. We just want to see a sustainable relationship, and we’re not sure Best Buy or Sam's Club is the best place to buy a guitar.  Let’s see some research and let the numbers and facts speak for themselves!

In addition, out there lurking somewhere is the Wal-Mart killing business model.  Who would have ever thought twenty years ago that Sears would go bankrupt?  Keep on the lookout....

Tell us what you think!