A Store Strikes A Chord

By Rebecca Winters

In the 1998 film Velvet Goldmine, the ex-wife of a '70s glam rocker declares "how essential dreaming is to the character of the rock star." In 2003 the dream seems more easily realized than ever. Today fame feels within almost anyone's reach, thanks to TV talent shows like American Idol and new digital recording technologies, which allow the humblest garage band to own a home music studio.

To fuel the nation's pop-star fantasies, there is Guitar Center. The country's largest retailer of musical instruments, with 113 stores in 30 states, Guitar Center provides the teeming ranks of wannabe musicians with guitars, keyboards and digital recording and mixing equipment. Although 2002 was a grim year for many retailers, sales at the chain, based in Westlake Village, Calif., rose 16%, topping $1 billion for the first time. Profits jumped 48%, to $25 million, and investors took note. Guitar Center shares, which trade on the NASDAQ, more than doubled, from $16 in September 2002 to $34 one year later.

When the first store opened, in Hollywood in 1964, founder Wayne Mitchell, a former car salesman from the Midwest, was running a chain of California organ shops. Mitchell bought out a competitor, acquiring a shipment of guitars and amplifiers. Almost as an afterthought, he hung a GUITAR CENTER sign on a storefront on Sunset Boulevard to unload the new merchandise and launched his company from the sleepy world of keyboards into the nascent West Coast rock scene. The Hollywood outlet soon gained a reputation as a place where the stars shopped--some of its earliest customers included members of Led Zeppelin and the Beach Boys. Since then, the chain has kept its focus on professional musicians by maintaining an artist-relations staff to provide personal service to Willie Nelson, Run-D.M.C. and Limp Bizkit, among others--loaning them equipment and stocking the rare and vintage instruments they favor. The store's reputation as a hangout for pros creates a "cool factor" that is seductive to musical neophytes and serious hobbyists, says Sharon Zackfia, an analyst at William Blair & Co.

But it's not the music icons who carry Guitar Center's sales. It's the twentysomething guys with day jobs, weekend gigs and outsize hopes. According to Marty Albertson, Guitar Center's co-chief executive, 43% of the chain's customers are aspiring professional musicians, whose purchases account for 40% of revenues--the largest chunk of any customer group. Among them are strivers like Andrew Geonetta, 27, a singer-songwriter who plays club gigs in Cincinnati, Ohio, a few nights a week and works for an interactive design firm during the day. "I'd love to make a living at making music," says Geonetta, who notes he spends about $2,000 a year on music gear and drives 20 miles to the nearest Guitar Center rather than visit the neighborhood music shop.

Geonetta is in what Albertson calls "the dream phase." According to Albertson, a former sound engineer who worked his way up to co-CEO from Guitar Center's sales floor, "becoming a musician is all about dreaming. The longer we can extend the dream phase, the better." In the past several years, the dream phase got a boost from advances in digital recording technology. Artists like Geonetta who don't have a record-label contract used to have to pay tens of thousands of dollars for studio time plus distribution costs. But now amateurs can produce CDs with their home PCs and cheap recording and mixing gear--there's even a free version of the industry-standard music-editing software called Pro Tools available online. Geonetta plans to lay down tracks for a solo acoustic album in his home studio and burn 1,000 CDs through a copying service. He'll sell the album at his shows, on Amazon.com and Bestbuy.com (for a small shelving fee) and on independent artists' websites like CDBaby. The entire enterprise will cost about $3,500, Geonetta figures. Here again, Guitar Center gains: it sells home-recording equipment and has just started a CD-copying service.

Music retailing has traditionally been a fragmented industry of mom-and-pop stores. Guitar Center, however, is following the lead of retail giants like Wal-Mart. After raising $101 million in a 1997 IPO, Albertson and his co-CEO, Larry Thomas (himself a frustrated rock guitarist), went on an expansion run that included opening new stores at the rate of one or two a month and acquiring, in 1999, the Musician's Friend catalog for $48 million. In 2001 the company purchased a 19-store chain catering to schoolkids and beginners called American Music, and last year it opened a 500,000-sq.-ft. distribution center near Indianapolis, Ind., the largest in the business. This year Guitar Center will open new flagship locations in New York City and Nashville, Tenn.--loud, sprawling spaces designed to attract the stars in these music-industry towns. Like the Hollywood flagship, these stores will have towering walls of guitars, sizable vintage collections and a staff of experienced musicians manning the floor.

Guitar Center has been able to expand in part because of weak competition. The country's next biggest music-store chain, privately held Sam Ash, has 40 stores concentrated on the East Coast. A 79-year-old family-owned business, Sam Ash doesn't have the capital to grow at Guitar Center's pace, says William Blair & Co. analyst Zackfia, nor can it match the big chain's massive catalog and online sales. Another national retailer, Mars Music, went under last fall.

Guitar Center hopes to avoid the growing pains that often plague expanding businesses. Albertson says he expects a bump in his customer base in the near future. After dropping for decades, the population of men ages 15 to 29, the chain's prime customers, is projected to rise 6% by 2010. The company is expanding its pro-audio selection and is exploring opening stores in Canada and Britain.

The tough part will be maintaining the chain's hard-won brand cachet. That means keeping service levels high and stocking a $125,000 guitar that may take years to sell but gives shoppers something to drool over. "You'd never see Wal-Mart keep around merchandise just to help customers daydream," says Zackfia. But for Guitar Center, the very best customer is the one who's lost in the music.