Guitar Center, Inc. - Company Profile, Information, Business Description, History, Background Information on Guitar Center, Inc.

5155 Clareton Drive
Agoura Hills, California 91301

Company Perspectives:

Guitar Center's mission is to build a vehicle that allows all associates and customers to achieve their goals, pursue their dreams, and reach their destiny.

History of Guitar Center, Inc.

Guitar Center, Inc. is the nation's leading retailer of musical instruments. In 1998 it recorded sales totaling $391.66 million. That was up nearly $100 million from 1997 figures when the company was number one in sales on the Music Trades 1998 Top 200, outstripping its nearest competitor by nearly $100 million. In 1998 the Music Trades also reported that Guitar Center had the highest dollar increase in sales, $166.7 million, between 1993 and 1997. In 1998 Guitar Center had a 6.7 percent share of the national market for musical instruments, up from 5.12 percent the previous year. Its 1998 annual report estimated that 68 percent of its sales are made to professional musicians or musicians who aspire to become professional. At the beginning of 1999, Guitar Center operated 48 stores in 24 major U.S. markets. Stores range in area from 12,000 to 20,000 square feet, much larger than the industry average of 3,200 square feet. In addition to 300 to 500 guitars, every Guitar Center location offers a broad selection of percussion instruments, amplifiers, keyboards, and accessories. Customers are attracted by Guitar Center's low prices as well as its hands-on atmosphere and its friendly, knowledgeable sales staff. The company's flagship store in Hollywood, which measures 36,000 square feet, features one of the nation's largest selections of used and vintage instruments as well as the famous 'Rock Walk,' an area that commemorates leading innovators and performers of popular music. With its purchase in summer 1999 of Musician's Friend, the country's largest online musical instrument retailer, Guitar Center poised itself to leap into the potentially lucrative Internet market.

1960s Origins

Guitar Center, Inc. was born, almost by accident, in 1964. Wayne Mitchell was managing the Organ Center, a 21~store chain of music stores in southern California. The store specialized in keyboards, organs in particular, the instrument that dominated music sales at the time. In 1964 the Thomas Organ Company acquired Vox, a manufacturer of guitars and amplifiers. Unfortunately, its sales reps knew next to nothing about the new products and had no idea how they should be sold. The Thomas representative approached Mitchell at Organ Center and--possibly through the application of subtle or outright pressure--persuaded him to take on the Vox line. A deal was reached: Mitchell would rent a storefront in Hollywood and Thomas would provide the sign. When it arrived it read 'Vox Guitar Center,' which later was shortened to Guitar Center.

Mitchell quickly discovered that his new store was a gold mine. Rock 'n Roll was taking off, the British Invasion was at its height, and bands like the Beatles, Rolling Stones, and Kinks had sparked an unprecedented demand for guitars and amps. When Mitchell realized how much better guitars were selling than organs, he started closing his Organ Centers to concentrate on the new business.

Not all of Guitar Center's early success can be explained by Mitchell's remarkably good timing. By all accounts, he was a born salesman and a charismatic personality. He brought the savvy and technique he had developed as an automobile salesman and put it to work at Guitar Center. He knew, for example, that auto dealerships rely on their parts and service departments to pay the bills, enabling salesmen to cut margins on car sales to a minimum and offer customers the best deal possible. Mitchell decided that the equivalent at Guitar Center was the accessories department. Its products--cords, straps, picks, and effects, for example--helped stores cover their expenses. Mitchell cut costs to the bone and invested little in the look of his store, an expense he considered not directly linked to profits. The early Guitar Center stores showed it: old carpets mended with duct tape and racks purchased at closeout or bankruptcy sales gave them a bargain basement look.

One point that Mitchell insisted on was that Guitar Center pay all bills promptly. It used the reputation it developed, one unusual in music retailing, to win price concessions from manufacturers. Mitchell also created a hungry, aggressive sales atmosphere by putting his sales staff on straight commission. 'If you didn't work,' Chief Operating Officer Marty Albertson later recalled, 'you didn't eat.' A 'hustle' atmosphere was created, which helped fuel Guitar Center's early growth, but which was consciously abandoned in the mid~1970s.

Mitchell used a series of gimmicks, described in company literature as 'Barnum & Bailey-style sales promotions,' to draw customers into his new store. He set a record, for keeping a store open longest (11 days), which made it into the Guinness Book of World Records. He created the world's largest Les Paul guitar cake. He mounted 36-hour-long sales extravaganzas in which the store opened at ten in the morning one day and did not close until ten in the evening the following day. He continued to rely on those events throughout Guitar Center's first 20 years.

By the end of the 1960s, Mitchell's combination of low prices, attention-grabbing promotions, and timely paying of suppliers had made Guitar Center one of the most profitable stores in southern California. In contrast to the staid, old-fashioned, department store style of the established music stores, the Guitar Center on Sunset Blvd. had a distinctly counterculture feel. Its salespeople were usually musicians themselves, with long hair, who while making their hard-sell pitch, encouraged customers to handle the merchandise, to pick it up and play it.

Expansion in the 1970s

Mitchell had the ultimate vision of 50 Guitar Center stores across the country. He opened a second store in San Francisco in 1972, and a third in San Diego the following year. Mitchell kept Guitar Center decentralized as it expanded, to cut overhead. The new stores were semiautonomous, run as a partnership. Mitchell was the majority partner to the store manager. Mitchell instilled all his employees with a sense of what Guitar Center could become, that it could grow. The positive attitude that Mitchell created manifested itself in the group that later evolved into the company's senior management. Mitchell began hiring them, as salesmen, in the mid~1970s: in 1975 Ray Scherr, who later took over the company; in 1977 Larry Thomas, later president and CEO; in 1979 Marty Albertson, later executive vice-president and COO. Guitar Center, historically, has had more than average staff turnover at the entry level, but the company has had nearly no turnover at the management level. Store managers remain an average eight years. By the late 1990s, most senior management had been with Guitar Center from ten to 15 years.

Ray Scherr moved rapidly from the sales floor, became a store manager, and then became a sort of junior partner to Wayne Mitchell. Scherr became a major force for innovation at the company in the 1970s and 1980s. It was Scherr's idea, for example, to centralize Guitar Center operations and thereby increase the company's buying power with vendors. Initially, Mitchell resisted the added expense of central administration until he could be shown that the money saved in vendor discounts would pay for it. Scherr also instituted the direct mail campaign that is still an important element of Guitar Center marketing. The Guitar Center of the late 1990s is the common product of the vision of both men. 'Wayne ;obMitchell;cb built a lot of the value culture of Guitar Center,' Albertson said, 'while Ray ;obScherr;cb built the operating structure.'

In 1979 the company received information that a bank was about to foreclose on a music store in Chicago. Guitar Center moved quickly and later that year opened its first Chicago store, the company's first outside California. Moving into the Chicago market forced Guitar Center to confront its weaknesses and to rethink its entire approach. It discovered it could not simply enter the Chicago market and conquer it. Chicago, Guitar Center learned, was dominated by local independent retailers who commanded fierce loyalty from their customers. What was more, Chicagoans were put off by the company's tried and true hard sell tactics as well as its radio ads, ads that had worked well in California for five years or more. 'Chicago was where we cut out teeth on expansion,' said Larry Taylor. 'It changed the way we did business.' The experience led Guitar Center to become more customer service oriented, working to win customer confidence and earn repeat business, a priority that had never been high previously.

Changes and Continued Growth in the 1980s

In 1980 Mitchell inaugurated an Employee Stock Ownership Plan (ESOP), a stock-sharing program for Guitar Center workers. The ESOP transformed the company from a sole proprietorship to one owned jointly by management and employees and helped increase employee commitment to company growth. Because of the transient nature of the company's entry-level sales force, however, the ESOP was later converted to a profit sharing plan.

For a short period around 1980, Guitar Center became involved in guitar manufacture when it purchased Kramer Guitar. Kramer eventually produced a full range of guitars for beginners to professionals and its popularity was increased substantially at the time by its association with guitarist Eddie van Halen. Kramer's head Dennis Berardi was, in Larry Thomas's words, 'a very young, inspirational, undisciplined kind of guy.' Berardi's management style clashed with Mitchell's, which was considerably more conservative. Running Kramer came to be so stressful for Mitchell that Guitar Center, Inc. decided to pull out. Mitchell already had heart problems and other members of senior management were afraid he would suffer a heart attack.

In 1983, at the age of 57, Wayne Mitchell did die of a heart attack. Mitchell's family sold half of his share of the company to the ESOP and half to Ray Scherr. Scherr, who had been Guitar Center president for several years, became the majority shareholder and took over the running of the company. The Guitar Center chain had, in the meantime, grown to nine stores and under Scherr the chain continued to grow, adding an average of one store a year for the next decade.

In 1985 the Hollywood store inaugurated the 'Rock Walk,' where the greats of popular music have pressed their hand prints in the sidewalk. It has gone on to become a popular tourist attraction in Los Angeles. More important, the chain had 12 stores that year and it had become obvious that an effective infrastructure was urgently needed that would enable the company to effectively control inventory and sales. As a result, Guitar Center interrupted its expansion drive for a couple of years to concentrate on computerizing its existing stores and introducing bar coding for its entire line of merchandise. The work lasted a year and a half, but when it was completed the company had a state-of-the-art system that was far ahead of its competitors in the music retail industry. Once in place, the system laid the foundation for Guitar Center's explosive growth during the 1990s.

Becoming a Public Company in the 1990s

Guitar Center had another short-lived involvement in manufacturing when it acquired amplifier producer Acoustic Amplification in 1987. It sold Acoustic only two years later. In 1991, Larry Thomas--after working as a salesman, a store manager, a regional manager, corporate general manager, and chief operating officer--became Guitar Center president. By 1993 the company had 17 stores across the United States, with annual sales of approximately $100 million.

In 1996 Ray Scherr decided to leave Guitar Center, Inc. As a result, senior Guitar Center management, led by Larry Thomas and Marty Albertson, borrowed $100 million and, together with three California venture capital companies, bought most of Scherr's stock in the company. Not long afterward, the company made a high yield bond offering to convert the $100 million loan to long-term debt. The added burden of that large debt, together with the new involvement of the venture capitalists who were counting on stepped-up, national growth, led to the decision to make an initial public offering in March 1997. The company had a scare the day the stock was priced when the market plunged 157 points and some of the banks involved almost pulled out. The stock, however, after being offered at $15, closed the first day of trading at $18 and about $90 million was raised. Guitar Center became the first publicly traded company in the music retail industry.

Going public raised some difficult issues for Guitar Center. The stock offering was predicated on the assumption that the company would expand quickly. It was accustomed, though, to opening one store at a time, then closely monitoring developments before moving on to the next opening. Suddenly it had to move efficiently at a much faster pace: in 1997 it opened five new stores, in 1998 it opened 12, and it planned 12 for 1999 and 16 for 2000. The company foresaw a network that would ultimately number 150, including a new smaller store format in small- and middle-sized markets, across the United States. Another important question mark was whether manufacturers would be able to supply a much larger Guitar Center with the large volume of product it required. Most suppliers were able to adapt to Guitar Center's new needs. Still a common complaint of smaller music retailers is that they are often not able to take shipment on items because most have been allotted to Guitar Center. Its first year as a public company was a successful one. In spring 1998 it reported that sales had increased 39 percent and net income increased 60 percent to $11 million.

In May 1999 Guitar Center, Inc. acquired Musician's Friend in a stock transaction valued at approximately $50 million. Musician's Friend, based in Medford, Oregon, was the world's largest mail order and e~commerce retailer of musical instruments, with $97 million in revenue in 1998. Its acquisition made Guitar Center the leader in Internet as well as traditional musical instrument retailing. The Internet business was to remain headquartered in Medford under the name Musician's Friend. Most of its music stores were converted into Guitar Center stores. Guitar Center intended to use the stores, located in smaller markets, to create its new smaller store format.

Principal Subsidiaries: Musician's Friend.

Additional Details

Further Reference

Booth, Jason, 'Guitar Center Earnings Are Music to Ears of Analysts,' Los Angeles Times, December 14, 1998, p. 40.'California Guitar Center Agrees to Buy Musician's Friend Mergers,' Los Angeles Times, May 14, 1999, p. C2."Guitar Center Celebrates 35 Years," Musical Merchandise Review, January 1999."Guitar Center Expands with Stores in Chicago, Northern California," Music Trades, November 1996, p. 69."Guitar Center Merges with Musician's Friend," Los Angeles Times, June 8, 1997."Guitar Center's Profits To Miss Estimates," Los Angeles Times, June 5, 1999."Inside Guitar Center: A Look at the Financial Workings of the Nation's Largest Music Products Retailer," Music Trades, August 1996, p. 198."Is Guitar Center Worth $251.0 Million?," Music Trades, July 1996, p. 169."Meltdown in Miami: Showdown Between Guitar Center and Sam Ash Music," Music Trades, July 1997, p. 102.Proctor, Lisa Steen, "Wall Street, Get Ready to Rock," Los Angeles Business Journal, March 17, 1997, p. 17."Record Sales at Guitar Center," Music Trades, April 1997, p. 50."Revenge of the Store," Music Trades, August 1997, p. 168.Scally, Richard, "Guitar Center Packs Coffers in 97," Discount Store News, May 25, 1998. p. 8.Strauss, Neil, "Coddling Musicians' Dreams: Selling the Stairway to Heaven, and Instruments Too," New York Times, February 3, 1999, p. 1E."The Top 200," Music Trades, August 1998.Vrana, Debora, "Ready To Rock Guitar Center Going Public, Cranking Up for Nationwide Expansion," Los Angeles Times, March 14, 1997, p. D1.

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