The Decline of The All American Guitar

Fender Musical Instruments Corporation has been subject to a massive decline in sales and profitability over the past four years. The company established itself as a leader in the guitar market in 1954 with the release of the iconic Stratocaster. However, the guitar is a discretionary item and it does not have the same popularity as it did when rock music was at its height in the 1960s, 70s, & 80s.

The company has struggled its way through the recent recession, with Weston Presidio the private investment firm that owns half the stake of the company has been looking for an exit due to the lack of profitability. The firm wanted the company to go public in March but investors rejected the idea with the concern of worse growth and a dramatic devaluation of the company.

The lack of growth and decline in profitability can be explained by the drop in demand for electric guitars in general. Sales of all music instruments have dropped approximately 13% from the peak in 2005, showing the decline of consumers spending their disposable income on instruments. Even though there has been a considerable drop in demand, Fender has been limited in its ability to change prices due to the cost of labour in North America as well the necessity of keeping the brand image. There is also the issue of how guitars are produced; all the guitars that Fender produces in North America are reliant on workers. There is no single stage in the manufacturing process that is all machinery; this means that changing supply is difficult without the dismissal staff. This has led to a surplus of fender guitars in both the United States and the United Kingdom. There is a limited change in supply and price but a dramatic change in the demand.

In the graph above the situation which has occurred is depicted, with the large decrease in demand with a small change in price and no change in supply. Below is a possible scenario of surplus as Fender may not be able to change price to suit the demand for the product and struggle to adapt supply therefore the possibility of not reaching equilibrium.

Guitar retailers have also heavily suffered from this; stores such as Sam Ash, Guitar Centre, & Dawsons (U.K.) have all reported a decline in sales of fender guitars and have begun taking a loss from current stock. Guitar Centre which accounts for approximately 1/6 of Fender sales has severely declined in profitability with Moody’s issuing junk status (Caa2) on its debt. Retailers have had to generalise their stores now offering a variety of other instruments such as synthesizers where there is a greater demand.

A major factor that has affected Fenders growth and profitability is the prospering of Asian instrument manufacturers such as Yamaha. Yamaha has begun to take a dominant share in the market, with cheap high quality guitars. The company does not suffer from high costs of labour or a brand image to maintain. So Fender has suffered due to the cross demand for cheaper and high quality alternatives such as Yamaha. The price of a Standard American Stratocaster ranges £1,200-£1,400 whereas the Yamaha quality equivalent cost ranges £600-£800. During a period where less income is disposable there is a considerable contrast in prices.

The guitar manufacturer faces a greater problem as its consumers have a nostalgic demand for vintage Fenders, this leads to the resale of already purchased guitars and the presence of stores committed to only selling vintage guitars. Fender has attempted to exploit the demand for their vintage guitars by producing re-issues, but to no success. Fender has begun moving its production to Asia but have so far been unable to compete with companies such as Yamaha.