Fender Aims to Stay Plugged In Amid Changing Music Trends

You know the rest, even if you don’t know you know the rest.

You’ve heard it — in the guitar riffs of Buddy Holly, Jimi Hendrix, George Harrison, Keith Richards, Eric Clapton, Pete Townshend, Bruce Springsteen, Mark Knopfler, Kurt Cobain and on and on.

It’s the sound of a Fender electric guitar. Mr. Fender’s company, now known as the Fender Musical Instruments Corporation, is the world’s largest maker of guitars. Its Stratocaster, which made its debut in 1954, is still a top seller. For many, the Strat’s cutting tone and sexy, double-cutaway curves mean rock ’n’ roll.

But this heart of rock isn’t beating quite the way it once did. Like many other American manufacturers, Fender is struggling to hold on to what it’s got in a tight economy. Sales and profits are down this year. A Strat, after all, is what economists call a consumer discretionary item — a nonessential.

More than macroeconomics, however, is at work here. Fender, based in Scottsdale, Ariz., is also being buffeted by powerful forces on Wall Street.

A private investment firm, Weston Presidio, controls nearly half of the company and has been looking for an exit. It pushed to take Fender public in March, to howls in the guitar-o-sphere that Fender was selling out. But, to Fender’s embarrassment, investors balked. They were worried about the lofty price and, even more, about how Fender can keep growing.

And that, really, is the crux of the matter. Times have changed, and so has music. In the 1950s, ’60s and ’70s, electric guitars powered rock and pop. Today, turntable rigs, drum machines and sampler synthesizers drive music like hip-hop. Electric guitars, huge as they are, have lost some of their old magic in this era of Jay-Z, Kanye West and “The Voice.”

Games like Guitar Hero have helped underpin sales, but teenagers who once might have hankered after guitars now get by making music on laptops. It’s worth remembering that the accordion was once the most popular instrument in America.

Granted, Fender is such a powerful brand that it can ride out the lean times. But sales of all kinds of musical instruments plunged during the recession, and they still haven’t recovered fully. Sales of all instruments in the United States totaled $6.5 billion last year, down roughly 13 percent from their peak in 2005, according to Music Trades, which tracks the industry.

Many of the guitars that are selling these days are cheap ones made in places like China — ones that cost a small fraction of, say, a $1,599 Fender Artist “Eric Clapton” Strat. Fender has been making its own lines of inexpensive guitars overseas for years, but the question is how the company can keep growing and compete profitably in a fast-moving, global marketplace. Its margins are already under pressure.

“What possible niche is left unexploited by Fender?” asks Jeffrey Bronchick, founder of Cove Street Capital, an investment advisory firm in El Segundo, Calif., and the owner of some 40 guitars, including four Fenders.

Another big player on the American music scene, Guitar Center, has already had financial strains. Like Fender, Guitar Center, the world’s largest chain of instrument retailers, is also involved with private equity. It’s controlled by Bain Capital, Mitt Romney’s old firm.

Analysts say Guitar Center is crucial to Fender, accounting for roughly a sixth of Fender’s sales — and the ties between the two run deep. Fender’s chief executive, Larry Thomas, used to be the chief of Guitar Center. He sold the company to Bain at the top of the market in 2007 for $2.1 billion, including debt.

Guitar Center has been losing money since. Moody’s issued a junk rating of B2 on Guitar Center’s debt in October 2007, and has since downgraded the company two more times, most recently in November 2010, to Caa1.

THE change in American music is evident on West 48th Street — the “Music Row” of Manhattan. The block just east of Times Square was once home to dozens of music stores, practice studios and instrument repair shops. It was the place to go to buy a Fender in New York.

Now Music Row is being hollowed out by high rents and competition on the Web. Even Sam Ash, which has been there since the 1920s, is moving to West 34th Street.

Fender, too, has had to contend with changing tastes and markets. Once it looked like the Pan Am of guitars, a storied name that might simply vanish. Leo Fender sold his company to CBS for $13 million in 1965, but Fender struggled in the ensuing years to maintain its identity inside a big corporation. Analysts said that Fender, under pressure to meet quarterly earnings numbers, made a series of cost cuts that caused quality to suffer and sales to nosedive.

Yamaha of Japan, meanwhile, began grabbing market share with inexpensive, high-quality guitars. In 1980, the problems came to a head when Fender posted a $10 million loss on only $40 million in sales.