The underlying problem, and one that Gibson was quick to identify, is the decline in mainstream popularity of guitar-based music in the face of digitalisation, and the commercial rise of genres such as hip hop and electronic dance music, neither of which are synonymous with the electric guitar. Gibson has also had to contend with tough global competition, with price points for entry-level instruments falling markedly over the past 20 years or so.
Presumably these problems were deemed structural – ie, irreversible – so management was faced with a choice. It could cut its cloth to meet the new realities of the market, reducing the capital base and perhaps eschewing volume production in favour of a limited, higher-margin offering. If rationalisation proved unpalatable, as hubris usually dictates, it could attempt to preserve sales and growth rates through other channels. Management opted for the latter; initiating a series of acquisitions, including the purchase of a controlling stake in consumer electronics brand TEAC, which were largely funded through bond issuance.
It’s certainly true that a legacy brand such as Gibson brings with it a certain cache, doubtless a plus point when you’re hoping to tap the market. But even the most iconic brand doesn’t guarantee trading success in the face of structural market change. So, eventually, to no one’s great surprise, Moody's downgraded Gibson's debt rating due to the company's high exposure to leverage risks, and mediocre market performance.
The sorry tale of Gibson shows that no brand is unassailable in the marketplace, and it raises questions over the corporate obsession with top-line growth and market share. In a shrinking marketplace, surely there’s a strong argument for improving the quality (and predictability) of earnings. We’ve certainly seen examples where UK-listed companies have chased sales without due consideration to what it might mean for their resultant price point (and unit profitability) in the market, Burberry and French Connection readily spring to mind. Conversely, a brand such as Mulberry paid the price for attempting to move resolutely upmarket, and duly jettisoned a hitherto commercially viable mid-tier proposition.
Gibson’s ongoing struggle also serves to remind us about the vulnerability of the corporate bond market. Easy liquidity and low interest rates have contributed to a surge in the number of highly leveraged companies, although the systemic risk has been masked by relatively low default rates – but that could change as central banks start turning the screw.
