- The Washington Times - Tuesday, March 16, 2004

LOS ANGELES - The year was 1964. The Beatles had conquered America, and the first Guitar Center store opened in Hollywood, selling instruments and amplifiers to a generation eager to play rock ‘n’ roll. Four decades later, Guitar Center Inc. is the nation’s biggest purveyor of music equipment in a $7 billion industry in which most of its competitors are still mom-and-pop stores or small regional chains. The company has thrived by bringing a big-box approach to the business, using its size and buying power to offer more variety and lower prices — a strategy that has allowed other retailers, such as Wal-Mart Stores Inc., to dominate their industry segments.

Nationwide, the Westlake Village, Calif.-based company operates 124 Guitar Center stores and 19 American Music Group outlets. Its customers range from professional musicians to baby boomer hobbyists with plenty of disposable income and an urge to relive their rock ‘n’ roll days.

“It’s like a shrine,” says Steve Hammond, a 49-year-old guitar collector from San Francisco, as he surveys a back room at the 30,000-square-foot store in Hollywood.

Designed like an Old West saloon, it contains scores of vintage guitars. A cream-colored, 1958 Fender Stratocaster is selling for $39,950. A Fender Squier is going for $99.

Elsewhere in the store, old and young patrons browse rows of amplifiers, keyboards and drums. Guitars in myriad colors and shapes line the walls. Among them are a pink bass shaped like a daisy and black guitars that seem fit for death-metal music.

A muffled jumble of noise fills the store as customers in glassed-in chambers try out instruments. Some spend hours in the rooms without buying anything, but that’s not a problem.

Outside, Rian Barton, of Pasadena, Calif., beams after saving $200 on his new Gibson Les Paul electric guitar. “This is the best place for guitars I’ve ever seen,” the 14-year-old says.

Since going public in 1997, Guitar Center has succeeded with investors; its stock is hovering near a 52-week high of $37.10.

Net income for the fourth quarter was $19.7 million, a 47.1 percent increase from a year earlier. Fed by five straight quarters of sales growth, net income for the year jumped 45.9 percent to $36.9 million on revenue of $1.3 billion.

“They beat the competition on selection, they beat the competition on service, and they beat them on price, the three legs of the stool that really drive store choice,” says Richard Nelson, an analyst with Stephens Inc. in Chicago.

Like other big-box retailers, Guitar Center has forced smaller competitors to change quickly how they do business.

Retailer Rob DeKarr has been battling Guitar Center since October 2002, when the chain opened a 22,000-square-foot store in Pasadena, down the block from DeKarr Music.

“It was hellacious,” Mr. DeKarr says. “What your customer base does is go down there and check it out. Heck, I went down there and checked it out. They’ve got one of everything.”

Mr. DeKarr has lured back some customers by nearly doubling the size of his store to 9,000 square feet. And like other independent operators, he is stressing personalized service, repairs and classes in his effort to compete.

“Their sales people don’t have the same amount of training. They don’t have the same amount of product knowledge,” Mr. DeKarr says of Guitar Center.

At times, Mr. DeKarr and other small retailers have had no choice but to lower prices to match Guitar Center’s. Sometimes, however, Guitar Center’s price on an instrument will appear lower because the sale doesn’t include a case.

“They take the case out of the mix, then they reduce the price,” Mr. DeKarr said. “In order to survive, you have to be aware of those kinds of things.”

Guitar Center is expanding rapidly. It opened stores in Manhattan, N.Y., and Nashville, Tenn., in late 2003. In all, the chain added 14 stores in the past year. At least four more will open from Florida to Wisconsin in the first quarter of this year.

“Guys are walking into the stores in their 50s … buying Martin guitars and wanting to get into garage bands,” says Larry Thomas, co-chief executive of Guitar Center.

The American Music Group, which sells instruments and equipment to school bands, has not fared as well, posting a $1 million operating loss in the fourth quarter.

“The AMG business model is taking longer to develop than the company had anticipated,” Mr. Nelson wrote in a recent analysis.

A plan to build more AMG stores was put on hold as the 19 outlets posted net sales of $38.2 million in 2003, an increase of 17.5 percent from the same period of 2002.

“We just want to make sure we have it down before we start rolling it out,” Mr. Thomas says.

The success of such stores often hinges on appealing to band instructors and parents. Competitors say it’s an area where Guitar Center’s big-store model won’t work.

“You just don’t open up down the street and say, ‘Here I am, come and get it,’” says Johnny Thompson, owner of Thompson Music in Monterey Park. “We have long-term relationships with teachers, and we give them every bit as good a price as they get everywhere.”

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