Guitar Center, Inc. History

Address:

5795 Lindero Canyon Road
Westlake Village, California 91362
U.S.A.

Telephone: (818) 735-8800
Fax: (818) 735-4923

Public Company
Incorporated: 1964
Employees: 5,520
Sales: $1.27 billion (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: GTRC
NAIC: 451140 Musical Instrument and Supplies Stores

Company Perspectives:

Our goal in the retail stores business is to continue to expand our position as the leading music products retailer in the United States. We plan to increase our presence in existing markets and open new stores in strategically selected markets. We will continue to pursue a strategy of clustering stores in major markets to take advantage of operating and advertising efficiencies and to build awareness of our Guitar Center and American Music brand names in new markets.

Key Dates:

1964:: Wayne Mitchell opens his first store, initially called "Vox Guitar Center."
1972:: Mitchell's second store opens in San Francisco.
1979:: Guitar Center's first store outside California opens in Chicago.
1993:: The 17-store chain reaches the $100 million-in-sales mark.
1997:: Guitar Center completes its initial public offering of stock, becoming the first publicly traded company in the music retail industry.
1999:: Guitar Center acquires Musician's Friend, the largest mail-order and e-commerce retailer of musical instruments.
2001:: Guitar Center acquires the 19-store musical instrument chain American Music Group.
2002:: A 500,000 square-foot distribution center is opened near Indianapolis, Indiana, the largest facility in the industry; sales surpass $1 billion for the first time.
2004:: The GCP Pro sales division is formed to serve the commercial recording market.

Company History:

Guitar Center, Inc., is the leading retailer of musical instruments in the United States, selling guitars, amplifiers, percussion instruments, keyboards, and professional audio and recording equipment. The company operates a chain of 122 stores, maintaining a presence in 45 major markets and in 15 secondary markets. Guitar Center operates online through Musician's Friend, a mail-order and e-commerce retailer of musical instruments. The company also operates a chain of approximately 20 musical instrument stores called American Music, a purchase made in 2001. The company's operations are served by a 500,000-square-foot distribution center near Indianapolis, Indiana, the largest facility in the company's industry. Management foresees Guitar Center eventually developing into a chain of 160 large, "big-box" stores and 160 smaller stores.

1960s Origins

Guitar Center 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 representatives 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 and roll music 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." While a "hustle" atmosphere was created that helped fuel Guitar Center's early growth, this policy 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 continuously open (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 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. To cut overhead, Mitchell kept Guitar Center decentralized as it expanded. The new stores were semi-autonomous and were run as a partnership, with Mitchell serving as the majority partner to the store manager. Mitchell instilled all his employees with a sense of what Guitar Center could become. The positive attitude that he 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. Historically, Guitar Center has had more than average staff turnover at the entry level but nearly no turnover at the management level. Store managers remain an average of 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 early 21st century embodies the vision of both men. "Wayne Mitchell built a lot of the value culture of Guitar Center," Albertson said, "while Ray Scherr 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 a store in that city, 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 hard sell tactics as well as its radio ads, which 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 consumer confidence and earn repeat business, a goal that hitherto had not been a high priority.

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 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 went on to become a popular tourist attraction in Los Angeles. More important, the chain was operating 12 stores by 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 engaged in 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. 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 (IPO) 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 opening another store. Suddenly it had to move efficiently at a much faster pace. In 1997, the company opened five new stores; in 1998, it opened 12 further stores and planned 12 more for 1999 and 16 for 2000. At the time, he 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 products it required. Most suppliers were able to adapt to Guitar Center's new needs. Nevertheless, 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. Overall, Guitar Center's first year as a public company was a successful one. In the spring of 1998, it reported that sales had increased 39 percent and net income increased 60 percent to $11 million.

In May 1999, Guitar Center 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.

Vibrant Growth in the 21st Century

Guitar Center embarked on the most prolific period in its history as it entered the 21st century, expanding physically and recording enormous sales growth. Perhaps most remarkable, the company's robust development occurred while the rest of the retail industry--not just musical instrument retailers--suffered from recessive market conditions. Guitar Center was one of the few success stories in the entire retail industry during the early years of the century's first decade, demonstrating strength that was acknowledged by an impressed financial community. The stock market reached its lowest point in four years early in the decade, but Guitar Center's stock increased in value, doubling between September 2002 and September 2003. Wall Street was watching the next "category killer," a company like Wal-Mart Stores or Home Depot that silenced competitors through sheer might, and it approved of the strategy. The company's growth led an editor of an industry trade magazine to remark to the Los Angeles Business Journal on September 30, 2002, "They have taken market share and they've pounded a lot of other businesses. What everyone asks is, 'How big can they get?'"

Guitar Center, prodded by its IPO to expand more aggressively, did not disappoint investors following the acquisition of Musician's Friend in 1999. The company opened its 100th store in early 2002, a shop located in Little Rock, Arkansas. A year earlier, the company acquired a new vehicle for expansion, purchasing American Music Group, a Liverpool, New York-based chain of 19 musical instrument shops that sold and rented band instruments to schools and colleges. The company planned to open between eight and ten new stores, focusing on markets with a "strong educational environment," according to Albertson in a November 25, 2002 article in the Los Angeles Business Journal. In 2002, when 20 new Guitar Center stores were established, the company opened a 500,000-square-foot distribution center near Indianapolis, Indiana, to service its rapidly expanding chain. With the distribution center, Thomas and Albertson hoped to secure price reductions from instrument manufacturers, arguing that Guitar Center should receive some of the savings realized by shipping and billing to one location instead of myriad locations. It was the stuff of Home Depot and Wal-Mart Stores, giving Guitar Stores an advantage over smaller retailers who were not in the position to ask for discounted prices.

By the end of 2002, Thomas foresaw Guitar Center as chain of 160 large stores and 160 smaller stores. That was the goal the company was pursuing as it enjoyed enormous increases in its revenue volume. Sales, which neared $400 million in 1998, leaped to nearly $800 million in 2000 before reaching $1.1 billion in 2002. The company opened 14 new Guitar Centers in 2003 and announced plans to open between 16 and 18 new stores in 2004. In March 2004, the company formed a new division to broaden its already comprehensive customer base. GCP Pro was established to serve the commercial recording market by offering services that included analyzing a professional musician's recording studio and installing equipment and upgrades on-site.

As Guitar Center celebrated its 40th anniversary, the company held sway in the musical instrument industry. The company was the dominant player in the industry by far. Few industry observers doubted that Guitar Center would cede its overwhelming lead in the years ahead, particularly given its intention to eventually establish more than 300 stores in major and secondary markets throughout the United States. The task of blanketing the nation with "category killer" units fell largely to Albertson, who became sole chief executive officer and chairman of the company in late 2004. Thomas, who had served as co-chief executive officer and chairman, became Guitar Center's chairman emeritus. As the company pressed ahead with Albertson dictating its strategy, competitors and industry observers waited for the answer to the question: "How big can they get?"

Principal Subsidiaries: Musician's Friend, Inc.; Guitar Center Stores, Inc.

Principal Divisions: GCP Pro; Musician's Friend.

Principal Competitors: Sam Ash Music Corporation; American Music Supply; Sweetwater Sound Inc.

Guitar Center, Inc. History

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Key Dates:

Company History:

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