Gibson's financial woes

TimmyO

An interesting read

http://www.ericgarland.co/2016/09/27/gibson-rating-moodys/

earwighoney

Wow.  Great article.

I never knew how screwed Gibson are. 

guitars4you

seen much of his work on Guitar Centre and Fender - he knows his stuff - ref other previous articles, some of the scary stories have not yet reached  fruition but the under lying effect is still valid - will need to read that a few times to take it all in but the principle is all there for us to see

It certainly won't be the end of the Gibson brand, but it might mean a new owner one day, be it a buy out, a fire sale, or liquidation - - My gut feeling is we won't have to wait to long to find out more - One thing I don't see is a  serious increase in business with associated profits to finance such loans, payments and debt 

Strat54

Not surprising really. Things will need to change at the big corps as we guitarists age....and keel over! 

TimmyO

guitars4you said:

It certainly won't be the end of the Gibson brand, but it might mean a new owner one day, 

Yeah that was my thought too 

Paul_C

I wonder if the comment "I have also heard that PRS owes suppliers a lot of money and they are up for sale." is accurate.

impmann

earwighoney said:

I never knew how screwed Gibson are. 

Welcome the Music Industry... no pots, much piss to empty.

guitars4you

Paul_C said:

I wonder if the comment "I have also heard that PRS owes suppliers a lot of money and they are up for sale." is accurate.

There is no issue owing money - I dare say most businesses do - It is a case of do you have the required cash flow, sales and profits to service this debt
Money might make the world go round - but I recently read a great article the other based on debt - in that nearly all businesses borrow money, be it manufacturing, packaging, design, distribution, retail etc etc - Yet all the interest on this debt has to be paid for and the key part of the article was that the up to and around 20% of every item sold represents the total interest on the debt - And that excludes any interest via a potential payment on your credit card at the point of purchase - some even claim it is higher than 20% with quotes hinting at 30% and 33.3% - Sounds remarkably high, but when you look at a house mortgage and roughly after 25 years of repayments you have paid double the purchase price

Paul_C

I imagine it's much like any business with a long-established brand, people buy it in the hope they can either turn it around, or in the hope they can borrow a load of money on the value of the name and clear off before the investors catch up to them.

Blueingreen

guitars4you said:

Paul_C said:

I wonder if the comment "I have also heard that PRS owes suppliers a lot of money and they are up for sale." is accurate.

There is no issue owing money - I dare say most businesses do - It is a case of do you have the required cash flow, sales and profits to service this debt
Money might make the world go round - but I recently read a great article the other based on debt - in that nearly all businesses borrow money, be it manufacturing, packaging, design, distribution, retail etc etc - Yet all the interest on this debt has to be paid for and the key part of the article was that the up to and around 20% of every item sold represents the total interest on the debt - And that excludes any interest via a potential payment on your credit card at the point of purchase - some even claim it is higher than 20% with quotes hinting at 30% and 33.3% - Sounds remarkably high, but when you look at a house mortgage and roughly after 25 years of repayments you have paid double the purchase price

While this is true, it's also true to say that all methods of funding a business have a cost.  Even if the owner funds the business himself, that is an investment, and he will normally want a return on that investment to justify it.  The main reason many businesses are at least partly debt funded is that debt funding (or a mixture of debt and equity) is cheaper than pure equity - eg a business needs an additional £1M funding, the interest a bank will charge may be less than the return potential equity investors would  want to make the same investment.

Where an owner has a  close personal interest in non-financial aspects of the business the normal rules may be bent a little.  He may accept  a less than commercial return on his investment.  For example, popular pubs where ownership would give the owner a bit of status and increased social contact in the local community typically sell for prices that make the return on investment poor in purely financial terms.  I imagine some people in the guitar business accept a poorer return on their investment than they might get from investing in another type of business, because they enjoy being involved in the business.  For those people borrowing may look expensive, because the banks will want a full commercial return on their investment while they themselves are wiliing to settle for less.

chris45

From a purely business view if I was in charge I would outsource all manufacturing of Gibson to the Far East, and just maybe have a VERY small US based operation for eye wateringly expensive custom models.
So for most punters a Gibson would be a sub 500 mass market guitar trading on the logo and brand heritage, selling to youngsters.

Whitecat

chris45 said:

From a purely business view if I was in charge I would outsource all manufacturing of Gibson to the Far East, and just maybe have a VERY small US based operation for eye wateringly expensive custom models.
So for most punters a Gibson would be a sub 500 mass market guitar trading on the logo and brand heritage, selling to youngsters.

Some people think this is the direction Fender could be headed in within a few years (replace Mexico with Far East for most of it). The Custom Shop will remain in the US but that'll be the only way to get a genuine MIA guitar from them. 

RandallFlagg

I wonder how Gibson's finances stack up against other manufacturers. Is this mounting debt an industry wide issue?

Jack_

Inb4 the Gibson slagging begins.

RocknRollDave

Try saying "Gibson's current economical situation" without saying "Gibson's 2015 range"

gubble

Thank you for this article  - as a professional credit manager I thoroughly enjoyed it.

Now if anyone wants to see some really exciting accounts I'm predicting the next set that Marshall produce could be wildly entertaining.

eSully

RocknRollDave said:

Try saying "Gibson's current economical situation" without saying "Gibson's 2015 range"

Maybe so but my reading of the article was that the problems and poorly maintained debt pre-date the 2015 range by a few years. I wonder were the 1 off changes in 2014/2015 Gibsons a reaction to their debt. Trying to differentiate the year range and make it stand out from the back catalog/second hand market.

crunchman

eSully said:

RocknRollDave said:

Try saying "Gibson's current economical situation" without saying "Gibson's 2015 range"

Maybe so but my reading of the article was that the problems and poorly maintained debt pre-date the 2015 range by a few years. I wonder were the 1 off changes in 2014/2015 Gibsons a reaction to their debt. Trying to differentiate the year range and make it stand out from the back catalog/second hand market.

There were definitely problems before 2015/15 but let's estimate $20million in lost sales in 2015 really won't have helped the situation.

stickyfiddle

They've been leveraged to fuck for donkey's years now. I'm sure the 2015 debacle won't have helped but it isn't the main source of the problem, as Fender are in a similar position. 

As soon as the baby boomers start dying in serious numbers both companies will hit chapter 11, get bought out and continue on a smaller scale.

Haych

I work in the finance industry and the whole growth and expansion of businesses is something I still fail to fully understand. There seems to be a mentality that a business must grow at all costs. 

Sure, there has to be some sustainable growth but there comes a time when the whole thing is just going to implode unless your customer base expands at an exponentially greater rate than your business expansion.  Gibson, IMHO, have tried to be too big and have miscalculated and are now finding out that their customer base isn't large enough to support the growth.

At least with their consumer electronics subsidiaries technology does move on, things stop working, people upgrade etc.. I think that's less likely with wood and wires where the used market is flooded and the new stuff (especially from Gibson) is seen as particularly inferior to the old stuff.

I predict they'll sell off a few subsidiaries to recoup some cash then they'll be sold for the brand value after which the business will be asset stripped and investors will be sold down the river.

Strat_a_tat_tat

Haych said:

 There seems to be a mentality that a business must grow at all costs. 

Same with every nation's economy. The whole thing is dependant on growth.