Our good friend Brian Majeski, Editor of the US Music Trades magazine, has written an interesting article about the recent consumer interest in buying a guitar, and the mismatch between supply and demand it has caused to the guitar market…
One unanticipated consequence of COVID is the biggest mismatch between supply and demand in the guitar market since the Beatles made their US debut in 1964. With entertainment options limited, a growing number of consumers have decided “this is the right time to take up guitar.” However, these first-time buyers are beginning their musical journey at a time when guitar production is slowly recovering from government enforced shutdowns earlier in the year. Although most guitar makers in the US and abroad are back in production, social distancing and sanitation requirements have significantly reduced their production levels. Fewer people allowed on the factory floor, means multiple shifts and inefficiencies with output still lagging pre-COVID levels. Retailers report that they are turning away eager customers due to limited product availability. Eventually, supply and demand will reach a better alignment, but will the current shortages have a longer lasting impact? We think the answer is yes.
As long as we can remember, retailers from the smallest mom and pop to the biggest national chain have made improving inventory turns a priority. And why not? Cranking out more sales with less stock is a time-tested strategy for building the bottom line. This explains why for years, seminars on Gross Margin Return on Investment analysis (GMROI) have been a routine fixture on the programs of m.i. retailer gatherings. Lean inventory strategies make perfect sense in a market where merchandise is readily available and orders can be filled on a timely basis. It doesn’t work so well when products are in short supply and there are lengthy back orders. Now that retailers are declaring in unison, “he who has the inventory gets the business,” will a well-stocked back rooms take precedence over maximizing inventory turns? Hard to say for sure, but we suspect there will be newfound interest in maintaining “inventory reserves,” especially with products like guitars that retain their value.
Closely related to the security offered by higher inventory levels, is the security provided by improved liquidity. Most retailers we know tend to be P&L focused, placing a priority on sales growth. In the current climate, many are starting to pay more attention to their balance sheet. A stronger current ratio and less in the way of loan obligations make it possible to carry more inventory, not to mention get bumped up on the backorder list from cash strapped manufacturers. In an up market, debt financed inventory can accelerate growth. In tough times it can also accelerates problems. As Warren Buffet quipped, “You find out who’s swimming naked when the tide goes out.” We suspect that balance sheet quality will have a lot to do with who can manage through the pandemic.
COVID is prompting guitar manufacturers to rethink their strategies as well. Over the past three decades, they have developed a sophisticated global supply chain that has made “country of origin” increasingly ambiguous. An instrument labeled as “Made in America” might have tuning machines from Germany, Chinese-made pick-ups and truss rods, metal fasteners from Taiwan, plastic components from Canada, and a Mexican-made case. Guitars sourced from China or Indonesia are similarly cosmopolitan. Tapping the expertise of producers around the world has led to steadily improving product values. However, COVID has demonstrated that this type of far-flung sourcing is not without downsides. A single government enforced lock-down coupled with snarls in the transportation network can and does bring production to an abrupt halt: a guitar with 99% of the component parts is 100% unsaleable. Will COVID prompt guitar makers to shorten their supply chains and bring more production in-house to become more resistant to the next disruption? It certainly won’t happen overnight, but over the next five years product sourcing and supply chains will unquestionably look different.
Few recognized that World War II would revolutionize health care by providing the catalyst for the mass production of penicillin. It also wasn’t immediately obvious that the oil shortages of the 1970s would radically change the way people thought about “fuel efficiency.” Similarly, the long-lasting impact of the Corona virus remains to be seen. Remote working, the rise of the Zoom meeting, the flight from densely packed urban centers, the suspension of public gatherings, and an increased emphasis on home entertainment are a few of the more obvious COVID inspired transitions–a lot of change in nine-month time span, but probably only the beginning. That said, we remain optimistic that human ingenuity and resourcefulness will prevail and that opportunity awaits for those who can ride out the near-term challenges.
We welcome your comments. Email Brian Majeski at firstname.lastname@example.org
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