Fifty years ago, when Eric Clapton played lead guitar on the Beatles’ “While My Guitar Gently Weeps,” he played a Gibson guitar. Gibson is an iconic brand and has been the guitar of choice for a wide variety of musicians including Bob Dylan, Jerry Garcia, BB King, Slash, Neil Young, and Bob Marley. The company has been an innovator in the field for decades. But after a string of bad decisions, Gibson declared bankruptcy last May, and fired its CEO.
Why did this happen? How did such an iconic brand lose its way? And what should the next CEO do to help the company recover? As a former guitar player who grew up near Gibson Guitar’s headquarters, I’m intensely interested in why the company went downhill, and as a student of innovation and someone who’s studied different companies’ responses to crisis, I think there’s an answer.
A little history:
Gibson was founded in Kalamazoo Michigan in 1902. The company was an early and frequent innovator, creating the adjustable truss rod, height adjustable bridge, and the humbucking pickup –innovations that are all still in use today.
In 1969, an Ecuadoran conglomerate took over the company. Navigating the twists and turns of a US market from thousands of miles away was difficult, leading to a steady drop in quality, sales, and profits. Fifteen years later, the company was down to one line of guitars with only about $10 Million in annual sales. In 1986, current owners Henry Juszkiewicz and David Berryman were able to acquire the company for relatively little and began rebuilding it.
The early years of Juszkiewicz and Berryman’s management were hugely successful. The company moved the headquarters from Kalamazoo to Nashville, restructured operations, and began a series of acquisitions that expanded both the range of guitars they made as well as added other musical instruments such as electric basses, drums, and pianos. The company grew sales at 30% per year for eight years.
But the strategy that served them so well in the 20th century has not succeeded in the years since. Fender – a competing guitar maker – bought most of the other major guitar brands that Gibson hadn’t. As Gibson continued its acquisition strategy, it was forced to move way beyond musical instruments. Styling itself as a “music lifestyle” company, it acquired the consumer electronics companies Onkyo, TEAC Corporation, Cerwin Vega, and WOOX Innovations (the consumer electronics business of Philips). These acquisitions launched Gibson into businesses it didn’t understand and didn’t manage well. For example, the acquisition of TEAC, a company that makes cassette and CD players (among other things) defies logic. Onkyo makes good mid-priced sound systems for home theaters, but that’s a brutal market that’s declining as integrated home sound systems like Sonos have risen. Cerwin Vega makes great speakers, but its consumer business is declining as low-end integrated systems have improved in quality.
And while these acquisitions were sapping resources and management attention, three dangerous trends were emerging. First, the overall guitar market declined. 2.6 million guitars were sold in 2017, a drop of over 20% from the 2005 peak (source: Statista).
Second, the revolution in manufacturing technology has enabled new companies to enter the market with guitars that are better and cheaper than a Gibson at almost any price point. Ruokangas and Comins guitars will make you a custom guitar for $10,000 or more, while Diamond will sell you a great guitar for less than $700, hundreds less than the cheapest Gibson. And new companies are innovating in ways that Gibson has a hard time matching. For example, a US company called Prisma makes guitars out of converted skateboard decks.
The third trend, and possibly the most dangerous, is the globalization of the market. The Internet makes it possible for anyone to sell into the US market. Great boutique guitar makers like Distorted Branch from Mexico, Frank Brothers from Toronto, and Soultool from Switzerland are now selling guitars in the US while high-end custom shops like Ruokangas and Comins are selling direct to consumers.
What Should Gibson Do?
My two most recent books focused on a single idea: that sometimes the best way to revive a product is to innovate around the product. While Gibson should always work to improve its products and operations, much could be done to complement the company’s products with other products and services that help to make Gibson’s core products more useful, compelling, and valuable. My recommendation to Gibson’s new CEO: apply this approach to your guitar business. Innovate around the guitar to help your retailers succeed, and they’ll help you recover your former greatness.
The first step is to choose your customer. For this, Gibson should follow the approach of Sherwin Williams, LEGO, and others, and choose the retailer, not the end consumer as your focus. Gibson has three types of retailers: online retailers such as Sweetwater, the big box retailer Guitar Center, and small, local retailers. Gibson already puts a great deal of time and effort into serving the first two but is not good at serving the latter. And while there’s no good data on what percentage of guitars are sold through these different channels, a quick online search shows that every major city has at least a dozen of these small shops. These small shops serve not only as a place to buy guitars and accessories, but also give lessons and are a meeting point for musicians.
Many of these shops have deserted Gibson. As George Gruhn, a famous shop owner from Nashville said: “you have to eat so much garbage in order to be a Gibson dealer that it’s not worth it.” Frank Glionna, owner of the Music Gallery in Highland Park, IL and a Gibson dealer since the 1970s stopped selling Gibsons recently, adding “In the last couple of years, everybody bailed…. The company is in the worst place I’ve ever seen it in my decades as a dealer.”
The last time I bought a guitar, about five years ago, I bought it from Roxy Guitar, a small shop in Roxborough, Pennsylvania. I bought it for my son, who was taking lessons from the owner of the shop, Lou Mueller. Lou doesn’t carry any new Gibson guitars. Gibson asked for a commitment of $150,000 in annual sales, and only allows the shop to choose one third of the inventory it will carry. So Lou has some used Gibsons he will sell you, but no new ones.
And a look around Lou’s shop shows another problem with Gibson: the rise of the used guitar market. Lou’s shop has dozens of great gently-used guitars. Why buy new when you can get a great price on a used guitar, especially as wooden instruments often sound better as they get older?
But running a small musical instruments shop such as Roxy Guitar is difficult – Lou’s facing the same threats as the thousands of other small shops around the world – they’re struggling with competition from big box stores like Guitar Center, from online retailers like Sweetwater, and from direct online sales through eBay or Reverb (an online store selling used musical instruments and equipment). But they’re doing OK – they’re surviving by selling guitars, amps, accessories, and lessons. They’re also helped by manufacturers enforcing a minimum price policy, ensuring that small dealers won’t be undercut by large Internet retailers like Sweetwater or Amazon.
Here’s my recommendation to Gibson’s new CEO: focus on local retailers like Lou. Help Lou succeed. Understand what drives Lou’s sales and profits and help him do more. For Lou, the sale of the guitar is only the start of a relationship. Lou sells lots of parts, accessories, gadgets, and cables, and Gibson can help him with that. Gibson should bring him not only guitars, but also other products he can sell, even if it doesn’t manufacture them! Gibson should use its size and clout to survey the industry, choose the greatest new products, and bring them to Lou.
And don’t stop there! Lou makes money by teaching people how to play guitar. But guitar teachers are getting disrupted by YouTube and other online video courses. Help Lou create an online course that includes in-person lessons and help him bill for it. Work with an outside software developer to develop a generic, easily tailored web site that Lou can use to improve his web presence. Develop companion software that will help Lou put his inventory online and increase his new and used guitar sales worldwide. And help Lou expand his business into high-end ($10,000+) custom guitars – give Lou software that allows him to customize and sell a high-end Gibson.
Make Lou a success and he will recommend Gibsons to new guitar players, experienced guitar players, and everyone in-between. Make Lou successful and he’ll make Gibson successful again.
Gibson is a great brand with a great history that has fallen on hard times. It is bankrupt, leaderless, and suffering in the market. But there is a way out for the company: by focusing on what drives shops to recommend Gibson and what makes guitar players choose Gibson, the company can recover its former greatness.