Gibson – Out of Bankruptcy: Now the fun begins

les paul shotAfter declaring Chapter 11 bankruptcy and parting ways with the sometimes controversial Henry Juszkiewicz, Gibson will emerge from bankruptcy protection on November 1st with a new management team and funding from private investment firm KKR.

It’s safe to say that the future of Gibson the guitar company was never really in doubt. As a brand it is healthy and well-respected, and annual sales of Gibson and associated brands like Epiphone are somewhere in the $300 million range. But while Mr. Juszkiewicz can be credited with taking Gibson from a struggling brand in the 80’s to the giant it is today, his quest to build Gibson into a “lifestyle brand” was also Gibson’s financial undoing.

The Gibson acquisition 1986 was Juszkiewicz’s home run, but nearly every other attempt to build the brand — Stanton, Phillips, Baldwin Piano, Garrison Guitar, Gibson branded restaurants, etc — were essentially financial drags that puffed up the top line, did little to grow the bottom line, and added piles of debt. And when Gibson skipped the 2018 NAMM show and instead attended the CES (Consumer Electronics Show) in Vegas, things had gotten truly weird. In the end, Gibson’s bonds were rated at near junk status, and the “lifestyle brand” was brought down by what kills most distressed companies: They ran out of money to pay their debts.

With KKR funding and shedding some of the under-performing dead weight, Gibson guitars and Gibson Pro Audio will enter a new chapter of ownership, and has recently announced their new management team. You can read about the new team here: https://tiny.cc/wzsi0y

It would appear that things are looking up for Gibson: They have a great brand, loyal customers, formidable financial resources, and if you look past the buzzword-gibberish of their resumes, a capable management team. But their are some things to watch for with the New Gibson.

KKR is a Private Equity (PE) firm, meaning that they have their own funding to invest with, and are not a publicly traded company. PE firms tend to target companies that they believe are under-valued, with the goal of increasing their financial worth, and selling them at a profit down the road. PE firms are typically not in it for the long haul. They want to get their initial investment back, and hopefully drive up the value for a future sale.

So while the new CEO professes to be a personal fan of Gibson guitars — make no mistake — this is about making money, and preferably quickly. PE firms are not touchy-feely organizations, and they are not always particularly patient. There will be plenty of pressure to perform and create solid financial returns. Hopefully, they will do this by making great guitars that musicians love and want to purchase. But this is not a labor of love, and at some point KKR will want to recoup their investment.

From personal experience, one of the tricky things about Gibson is the steadfast traditionalism of their fan base. In contrast to Fender, Gibson fans have less tolerance for deviating from tradition (no Gibson “Parallel Universe” guitar, that’s for sure). Silly things like robo-tuners aside, Gibson fans push back rather swiftly — sometimes even making personal YouTube complaint videos — when they feel that Gibson has strayed off course. So when the new management team talks about “innovation” they have to keep in mind that their core customer may not be looking for something different. Technology has revolutionized recording, pro audio and even guitar amplifiers, but guitar players tend to like their instruments just as they’ve always been, and are slow to change.

Also, while the internet is a powerful selling tool, many guitar players still like to have a personal shopping experience. The “old” Gibson made it pretty much impossible for smaller stores to do business with them, and put all their chips in with major big box and internet retailers. While Sweetwater is the major exception, most of the big internet retailers don’t know the product well, frequently have inaccurate descriptions, pricing and sometimes even the wrong photos. You do yourself no favors when your chosen retail channel does not know what they are talking about. Feeling good about where you bought the product is part of the ownership experience (premium car brands focus intently on this aspect of the sales process)

So best wishes to the new Gibson management team. The music business really is different and more emotionally-linked than other products. Guitar Center and Mars Music were supposed to be the future of music retail. Mars folded eons ago, and Guitar Center has struggled for years to turn a profit (they are also in junk bond territory and routinely flirt with insolvency). The great thing about selling musical instruments is that it’s not like selling blue jeans, and a great many of our customers are emotionally invested in the product. Let’s hope they take that into consideration.

Guitars as Investments – IMHO

lp-tightIs it a good idea in general to buy electric guitars as investments?

No.

That’s the short answer, and generally speaking I think it’s a good idea to purchase guitars that you like and want to play. While it’s true that some brands of guitars — Fender, Gibson, Martin, Rickenbacker for example — will appreciate over time, quite often it’s a long time and of course not every model. Yes, people are now paying some silly prices for 70’s Fenders, which were not even very good guitars to begin with. And we’re also talking about waiting almost 40 years for the guitar to be worth something. Just the idea that something is old does not make it of increased value.

Even if you got a really cool guitar cheap, the rate of appreciation is generally very slow. Maybe you got a great R9 Les Paul in mint condition, but it’s not a house: You can’t sit on it for 3-4 years and flip it. While it’s certainly possible that it holds its value well, it does not mean it’s going to go up. If you want a guitar that really holds its value, buy a Rickenbacker. They have a great combination of quality, history and scarcity. Hardly the all-around rock guitar, but if you’re obsessed with resale, you’ll get a good chunk of your money back. Used guitars that really take a beating? Almost any import guitar not from Japan (sometimes Korea) and valued-priced USA guitars like PRS S2 and various ~$1000 Gibson’s.  They are not bad guitars, but they are appliances, not works of art.

Manufacturers also make it difficult for investors by making increasingly good new guitars. The idea that only old stuff is good, is just not true. In fact a lot of old instruments are highly variable in quality. The hard to define “mojo” of an old guitar is often psychosomatic, and players love the concept of old stuff, and will make themselves believe that it is special. If you spend $2000 on a 1970’s Fender with a 1/4″ thick polyester finish and a 3-bolt neck are no getting a “vintage” guitar? In name only.

Manufacturers also make it difficult for investors by making way too many versions of the same guitar. When somebody gives us a Les Paul or Strat to sell (especially Les Paul) we spend a chunk of time trying to figure out what it’s really worth. Gibson makes so many darn versions of the Les Paul (Traditional, Traditional Plus, Tribute, Studio, Awesome Maximus…) it’s truly hard to figure out what the guitar is worth. Go on Reverb.com and there will be around 300 Les Paul’s from $800 to $5000. Strats are not much better: I’m mean really, how many versions of a “Clapton” Strat can you make? Quite a few, it turns out. All this just confuses the market and makes it hard to assign value.

Lastly, then you have dealers that frequently skirt MAP pricing rules for new guitars. So what you say? Selling a guitar blatantly below MAP depresses the price of a used guitar by deflating its new value. No matter how you feel about MAP, strong MAP enforcement helps the value of used guitars. Companies that protect their brand value (Bose, Mesa for example) enjoy higher perceived value and better resale. Companies that let retailers run amok pay for it in the long run.

As a G&L dealer, I often hear the comment, “Great guitars but I wish the resale value was better.” I’ve come to realization that G&L’s fare no better or worse than most Gibson’s and Fenders. It just that Gibson and Fender owners think their guitars are worth more. In the end, the relationship between street price and used prices are not appreciably different (But the Gibson owner is disappointed and the G&L owner says, “Ok thanks for selling if or me.”). I just sold a left handed mid-2000’s ASAT Classic in nice condition for $849. The guitar probably went new for a little over $1000. Took about 10 days to sell. That’s a boatload better than I’ll do trying to sell a 3-year old Les Paul that had an original list of $3600.

Play what you like, have fun, and if you love the guitar, keep it. If you don’t like the guitar, sell it an move on. Guitars are a passion, a hobby, and for some a profession. For a precious few, they are an investment.

Fender to phase out MSRP “List” Pricing

Fender has recently announced that starting in July, they will no longer provide Manufacturer’s Suggested Retail Pricing — also known as list pricing — to their retailers. As of  July 7th, Fender will begin using just an “advertised” price, otherwise known as MAP pricing.

In many industries besides musical instruments list pricing is an almost meaningless number, sometimes only a reference point from which to calculate the MAP price. Given the fact that probably 0% of guitars are ever sold at list price, reverting to using only MAP may not have any material impact on the average consumer. But given the ability of buyers to rapidly price check products on the internet, MSRP bears little connection with reality.

The larger goal for Fender and other makers of well-known consumer brands is working with retailers — brick and mortar and otherwise — to properly present, market, and value their products. If the internet has proven anything, it’s that there are people out there willing to make amazingly little margin on their sales. Sometimes these folks don’t last long (it’s hard to survive on marginal profits, at least not without massive volume) but they all have their impact on the overall market. While low pricing and competition is inherently good for the consumer, taken to an extreme it lowers the value of a product to the point where it becomes unattractive to manufacture. This is the Wal-Mart effect of being able to drive a supplier to the brink of failure.

Case in point: I used to work for a well-regarded maker of very nice pens (writing instruments to those in the industry) and in order to grow volume they took on big box customers such as Wal-Mart, Target, etc. It got to the point where Wal-Mart was retailing our typical pen for less than a jewelry store or gift shop to could buy it from us. Long term having our pen at Wal-Mart dropped it’s perceived value, plus our traditional retailers were mad at us and stocked less of our products. Ultimately, Wal-Mart dropped the pens because the product did not generate enough sales volume. So the pen company alienated their traditional retailer, had their reputation damaged by the big box store that ultimately jilted them, and for that and many other reasons the company was never the same.

I can’t be inside the minds of Fender management, but the pen company experience feels very much like what many old line musical instrument manufacturers have been going through. We’ve had the grand experiment with Guitar Center, Mars, Unique Squared, Bain Capital, a botched IPO, and now it’s time to regroup and rethink.

While guitars can and will be sold on the internet, if they are sold and marketed like a commodity, the industry is doomed. Musical instruments are a personal experience, and people create art and emotion with them. Quite often the sales process is a relationship process, and even big mail order companies like a Sweetwater get that point. Consider Best Buy and their dalliance with MI products: Having untrained, underpaid people selling microwaves and Marshall amplifiers was so uncool and unappealing it could only crash and burn.

It’s interesting to see the recent changes at both Fender and Gibson. Fender is getting new management, dabbling with some direct sales of merchandise and high end products, cracking down on MAP violators, pruning minor brands, and eliminating MSRP. Gibson has been in an acquisition mode to acquire other types of entertainment and audio products, and positioning Gibson as a “lifestyle” (sic) brand. And while all this is going on, Guitar Center has cut ties with the private equity group that nearly killed them, dropped Berhinger for kicking them when they were down , and is crafting a plan to cutting years of quarterly losses. Interesting times indeed.

Personally, as a self-described “micro-retailer” I’m not sure who I’m rooting for. But emotionally, Fender is trying to maintain and protect the value that their products represent. Yes, you can get a silly “Fender” stereo in a VW Beetle, but I think you’ll see less pimping of their name, and more focus creating true brand value. Gibson appears to be doing the corporate diversification game, which is a sign that they may have less than rock solid faith in the profitability of their core products. Both approaches can work, but Fender’s “do what you are good at” approach is more reassuring for music lovers. As far as Guitar Center goes, their tactics have contributed to the devaluation of musical brands in general, but they are now trying to reinvent themselves. GC is very big player, so it’s similar to not liking General Motors, but not wanting them to go belly up either.  Paying their salespeople a half decent hourly wage would be a start though.

In the end though, any product has to represent value: Both tangible and emotional. And the selling process is part of the overall value proposition. Selling your product for too little, whether it be a guitar or the music you create is bad for your products, and it’s bad for the artist and creator. Free sounds cool until it’s your work that is being literally given away. On the surface, Fender dropping MSRP may appear like just a marketing sleight of hand, but hopefully it’s a sign of a new recognition of value in the MI industry.

American Made Electric Guitars for around $1000

Updated January, 2016

The solid body electric guitar is a uniquely American invention, but as most people know, very few of them are made in the USA anymore. As with many consumer products, the lure of low cost labor has drawn most manufacturing offshore. The first imports in the 60’s were from Japan, and then as costs rose there, manufacturing shifted to South Korea, then China, and now there is a growing industry in Indonesia. China is still the big dog in terms of guitar production, but as Chinese manufacturing costs continue to increase, more manufacturing will likely shift to Indonesia, and after that, who knows where?  Most players would be surprised to learn that South Korea accounts for only about 5% of electric guitar production, with the USA a couple points below that.

In practical terms, the average guitar player benefits from lower prices for musical instruments and gear. Given the combination of low labor costs and improved manufacturing technology, the bang-for-the-buck on guitars has never been better. About 44% of electric guitars purchased in 2011 cost less than $200. That’s just an astounding number, and even more astounding when you figure that these products are generally something you can actually play and that will stay in tune. Fully 80% of electric guitars purchased in 2011 cost less than $600. While I can’t be certain, I’ll wager that virtually none of these guitars were manufactured in the USA.

But what if you want to purchase something made in the USA, and you are on a budget? There are several options available, and if you are willing to head north of the border, the selection expands considerably. This is not meant to be a totally comprehensive list, but just some of the options out there for guitarists that want a good quality instrument and also support American manufacturing.

G&L – Barring a special release model, the days of a $1000 street price G&L are over. With new dealer and list pricing implemented in July 2015, your not going to see a 2015 G&L at this price; short of a desperate and/or math-challenged dealer blowing them out. There are still quite a few new 2014 models out there, and a base Legacy or SC-2 still might be had for around a grand. G&L continues to offer a unique value in terms of fit, finish, and the ability to special order. If you are willing to stretch your budget, you will be well rewarded.

Godin – Godin gets an honorable mention because while they don’t manufacture complete guitars in the USA, they assemble a variety of models in their New Hampshire facility from Canadian-made parts. Godin also uses a lot of locally sourced and sustainable woods like Maple, Basswood, and Cherry for their guitars. The Session and Progression and Core lines are examples of guitars assembled in the USA, and with a street price of around $500 the Session is a particularly good value. If you consider Canada as the 51st state, the all-Canadian Godin Core is our favorite both in P-90 and Humbucker trim. These street price for around $800, and there is just nothing not to like about them. They even use Seymour Duncan P-90 and bridge Humbucker pickups. Now for a $500 North American guitar don’t expect vintage Alnico pickups, and Godin does use PCB-mounted controls rather than hand-wired pots, but the setup and playability are first rate. All Godin guitars included a gig bag in the price.

Fender – One thing is for certain about Fender, and it’s that they offer a dizzying array of products that is both extensive, confusing, and often unnecessary.  But mixed in there is an assortment of Highway One and American Special guitars that offer good values and prices right at around $1000. Models seem to come and go in the Fender line with little or no warning, so what’s available at any given moment is hard to predict. The pickups in these guitars are decent if not awe inspiring, but overall these guitars are perfectly gig-worthy instruments and great platforms for hot-rodding. Keep in mind the price of these guitars either include no case, or a gig bag.

Gibson – Like Fender, Gibson suffers somewhat from product line schizophrenia. If you are browsing the major online retailers, models tend to come and go, at least from a standpoint of what’s being promoted at the moment. Gibson offers “faded” Les Paul and SG models with prices below $1000. There are also satin finish guitars both with flat and carved tops that come in under $1000. Gibson also offers Melody Maker and Les Paul Junior models, again with satin or aged finishes. We’ve tried the Les Paul Junior, and it’s pretty nifty with lots of bite out of the single dog-ear P-90, and good playing qualities. LP Juniors are fun guitars, and for a for pure elemental rock machine you can’t really go wrong. Gibson fit and finish can sometimes be a little variable, and if you want to mod the pickups or controls, you’ll likely be dealing with a printed circuit board (even if you spend thousands). As with Fender, gig bags may not be in the price, so consider that when you are shopping.

Carvin – By eliminating the retailer and going strictly direct, Carvin has been putting out a broad variety of attractively priced USA guitars for many years. Having never played their guitars I can’t say a wh0le lot, but my personal experience with their pro-audio and bass amplifiers tells me that they do deliver above average performance at a very competitive price. Provided you don’t option them up too much, their ST300, DC127, DC134/5, DC600 and Bolt-On  series guitars can all be had for under $1000. Carvin guitars can be custom built to order, and the array of options available from Carvin is pretty mind-boggling. For under $1000, your going to be looking at a fairly basic guitar — no quilt maple tops or Koa wood — but there is still a lot to choose from. Part of the option list is the case, and essentially you have to buy some sort of case, but the case pricing is very reasonable.

Summary – There is a good feeling about buying something made in the USA, and supporting American manufacturing. After all, the solid body electric guitar was born here, so why not buy one made in the USA? In this global world, made in USA is also subject to interpretation. For many product categories there are specific regulations that control whether a product can be labeled “made in USA” or “assembled in USA” etc. There is likely some amount of foreign content in any USA guitar, most notably electronic components, and of course certain woods like rosewood just don’t exist in the USA. Also, chances of finding a gig bag not made in China is pretty tough. So made in USA can sometimes be a fuzzy term, and certain components just cannot be sourced domestically. With that in mind, you can find a guitar in which the majority of the parts and labor come from domestic sources, and not break the bank doing so.

To see some of the American made guitars carried by UpFront Guitars for around $500 – $1200: www.upfrontguitars.com