We’re living through the transformation of retail.
Retail is going through what is perhaps its greatest revolution since the invention of mass production, and the musical instrument industry is unable to escape the implications of such a shift. MI retail has been changing for years, beginning with department stores, catalogs in the ’50s and shopping malls; then big-box retail; and finally Internet sales. All these things started eating away at margins, a trend that has continued. Dealers began to realize that retail was changing, whether they wanted it to or not. And, unfortunately, many have been slow to adapt to these changes.
Bain Capital’s $2.1 billion acquisition in 2007 of Guitar Center and its sister companies/subsidiaries (Musician’s Friend, Music & Arts, Woodwind & Brasswind and Music 123) helped make the family of brands a massive force in the MI retail industry and an Internet powerhouse. However, the deal left the MI behemoth loaded up with debt, and it’s been bearing that load ever since. GC’s debt issues have come to the fore as in-store and online sales have fluctuated with a challenging economy. Meanwhile, the company has experienced high turnover rates, and some have criticized its employment practices. This has left the big-box chain with a number of detractors and numerous tales of poor in-store experiences. Similarly, tales of unsatisfactory online-shopping experiences have become common. Guitar Center is only the most visible example of a burgeoning trend: private equity companies moving into retail and purchasing big-box and online retailers, along with, in some cases, the manufacturers that supply them.
In recent months, much has been written about Guitar Center—its future, its competitive dynamics and more—but, the truth is, we’re talking about symptoms, not the underlying condition. To understand where the musical instrument industry goes from here, professionals need to recognize that their business is part of a much larger system, identify what is changing and how, and creatively explore what these dynamics mean for their particular firms. One size will not fit all, and nobody’s going to have all the answers about the future we’re creating for the industry. Just asking the questions is fascinating, though. This story is far more vast than a single article could contain, but here we explore trends that will change MI retail for years to come.
Shrinking Square Footage
In the musical instrument industry, where a single big-box retailer remains dominant and captures a huge market share, it is considered inflammatory to suggest there is anything inherently wrong with a model dependent upon sprawling square footage in suburban locations. One statistic will recast this issue for what it really is: malinvestment and overexpansion that is unique to the United States. And we believe this is in the process of correcting itself. France, arguably the inventor of the department store, has 2.1 square feet of retail per capita. Italy has 1.1 and Sweden has around 3.0. Meanwhile, the United States has 24.0 square feet of retail per capita. America has between eight and 20 times the retail space that nations with similar or better standards of living have.
How did this imbalance develop? As more people moved to the suburbs and exurbs—and as banking regulations changed to allow more credit for more people—it made sense to “scale up” retail to behemoth size. Note that, historically, scaling up to such a level can be a real risk. The bigger they are, the harder they fall, right? But the erroneous assumption was that things would be different this time. Wall Street provided the liquidity, and IT advancements made the scale more manageable. Getting vendors to drop prices and, therefore, cut costs—in many cases by offshoring manufacturing jobs to Asia, where labor was cheap—delivered profitability and shareholder value. The housing bubble also made consumer spending increase, despite flat wages. Without increasing wages, all that growth in big-box retail came entirely from debt. The era of big-box retail, therefore, inevitably was temporary all along, much like most every era is. There will be no more growth in this model. In fact, we think it will shrink every year for the foreseeable future.
The task is to identify what will grow in that model’s place. The tea leaves bode well for a future that, while perhaps turbulent, could be exciting and profitable.
The Mobile IT Revolution
Catalog retailers, such as Musician’s Friend, adopted the emerging Internet marketplace early: as early as the days of dial-up AOL service. As broadband Internet access became more affordable and accessible to the general public, budget-conscious musicians always on the lookout for a bargain began to take a chance on gear they had never played in order to get a good deal. This trend exploded overnight, morphing into a multitude of options for consumers. Unfortunately, most independent retail stores were slow to adopt this business model and, even worse, many refused to acknowledge the changing tides of the MI retail marketplace. (This even as they, themselves, began buying various items—office supplies, personal items, gifts, etc.—online.)
Next to be implemented were peer-to-peer marketplaces, such as eBay and Internet bookselling giant Amazon, which diversified their business plans by allowing users to sell used items to each other. It didn’t take long for new items to make their way onto both retail marketplaces. Some independent stores took advantage of these new revenue streams, even as the rules about dealer agreements were murky at best. Dealers that were slow to capitalize on Internet sales have been vocal in expressing their displeasure with shrinking margins; the yet-to-be-resolved issue of sales tax generally not being applied to online sales and further cutting into profits; and unfair purchasing power and discounts being awarded to rapidly growing online-only retail giants.
Already, the emergence of the Internet in several areas—branding, distribution, online commerce, etc.—has significantly changed retail. Just consider the systemic effects of the Internet’s proliferation in every household and, now, on every phone. One of the longtime distinguishing “values” in-store retail offered was the ability to connect a customer with specialized knowledge. When you went down to a store, not only did the store have a stock of inventory, but it also had employees working every day who had more extensive knowledge than perhaps anyone else in the region.
Think about how the Internet has changed this. The customer has 24/7 access to “expert” information (the expertise is often debatable) beamed directly to his or her mobile device. Two scenarios result:
1. Customers already have a base of knowledge when they walk into the store.
2. Much of what they think they know is probably wrong (but they don’t know it).
In other words, much of physical retail has already lost its competitive advantage as the best source for scarce, valuable information. There is only one way to retain (or regain) that value: hire expert employees. Want a real-world example? Look at what industry-leading independent retailer Sweetwater has done.
As for another place where knowledge scarcity has become an abundance of knowledge? Knowledge of what’s available in the supply chain. Before the Internet, there was no way for non-experts to obtain up-to-date information about every SKU a company offered, unless they worked in the industry. Today, customers can log onto a variety of sites and discover the breadth and scope of a company’s offerings; they can even find out if the items are currently available. And, if they get that far, they can just order an item…and have it shipped to their door, for that matter. That’s all without walking into a traditional retailer.
It is likely impossible to understate the revolution that is occurring simply as a result of this one key shift: going from a scarcity of information to an overabundance of it. Before the Internet, customers needed to establish a relationship with a retailer if they wanted to know virtually anything about what they were buying…and they had few options except to purchase from their local outlets. Now, everything about that traditional scenario has flipped. It is incumbent on retailers to convince potential customers why they should come on down to a physical store, rather than just punching a few buttons into an app and having the item appear, as if by magic, on their doorstep a few days later.
The new game for MI retailers is about creating durable social ties and relationships with their customers and their communities. And that’s something big-box retail chains—whether inside or outside the MI universe—have been unable to accomplish.
The Future Is Now
Independent MI retail stores have to become more cognizant of emerging trends, and they must become early adopters of the opportunities that the transitional retail marketplace affords them. If not, they risk becoming even further marginalized by consumers or, even worse, going out of business altogether.
After a lifetime of experiencing the generic interactions provided by malls and impersonal shopping meccas, GenXers and Millennials are seeking smaller, more community-based destinations. They’ve come to realize that, despite being easy on the bank account, cookie-cutter retail and dining experiences are not very rewarding as a part of people’s lifestyles. Farmers’ markets are popping up in small towns everywhere, frequented by people of all ages who are seeking locally grown produce. Much has already been written analyzing the rise of niche business destinations. Craft breweries and record stores are two industries that, driven solely by customer demand, are still experiencing rapid growth. Our industry can follow this model. Our brick-and-mortar stores can emulate these success stories.
Although the giant corporations want retailers to believe consumer demand for their products is growing by leaps and bounds, the reality is contrary: consumers are trending toward smaller, more innovative products and brands. In the beer industry, the big companies were slow to respond to the craft brew and IPA trends, but they’ve now taken notice. IPA-hating Boston Beer Company is now producing Rebel IPA; Budweiser, meanwhile, took out an anti-craft-beer Super Bowl ad. Even as some MI brands, such as Fender, are adopting direct sales as a solution to their over-saturation in a market no longer able to support the growth to which they’ve grown accustomed, forward-thinking retailers are responding by seeking out new brands to draw in consumers, and to make their stores into destinations once again.
The strike against independent MI retail has recently been that everything in the world is available 24 hours a day, at the lowest prices, by simply logging on to Amazon. Furthermore, the skeptics say, the younger generation has grown up with this easy-to-access source for purchasing retail merchandise. But there is a way to counteract this: offer unique merchandise and a quality, highly personalized in-store experience. Hire a staff of employees who are excited to interact with their customers, and who treat them as though they’re guests in the coolest home on earth.
Other industries have shown that an “all things in moderation” approach is part of the answer. Stores should utilize social media and e-commerce solutions to reach consumers, while simultaneously providing a unique in-store atmosphere where personal relationships are nurtured. Although easier said than done, this shift in retail practices must be heeded if independent stores expect to survive the current transformation of retail.
The future of retail is already here. For those who are ready and willing to market themselves as part of a personal, highly cultivated experience—all while fully utilizing the benefits of the Internet and modern technology—the future does, indeed, look bright.
Eric Garland is Executive Director of Competitive Futures. Find him on the Web at competitivefutures.com and ericgarland.co. Gabriel O’Brien, a columnist for The Music & Sound Retailer, is Sales Manager at Larry’s Music Center (larrysmusiccenter.com) in Wooster OH.