contributor, korn ferry institute
This Week in Leadership
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More often than not, the sound of rock is the sound of Fender. The products of Fender Musical Instruments Corp., including the iconic Stratocaster guitar, the Precision Bass guitar, and the Bassman and Bandmaster amplifiers, are as ubiquitous in rock ’n’ roll as a backbeat. The Fender sound is also integral to jazz, country and Motown music, as well as a host of genres loosely identified as world music.
Like Harley-Davidson, Fender is a brand that customers and admirers tattoo on their skins. From its humble beginnings as Fender’s Radio Service — named for founder Leo Fender — in Fullerton, Calif., Fender has grown to a global company that also owns such storied brands as Gretsch, Guild and Ovation. Today Fender has headquarters in Scottsdale, Ariz., with manufacturing in Corona, Calif., and Ensenada, Mexico.
But even the most hallowed of heritage brands can run into a rough patch. In early 1965, Leo Fender sold his companies to the Columbia Broadcasting System (CBS) for $13 million, almost $2 million more than CBS had paid for the New York Yankees a year before. CBS acquired many other fine names in music, including Steinway pianos and Rogers drums, but cost-cutting and quality issues marked their ownership. Pre-CBS Fender instruments became valuable collectables. Fender got a comeback tour in 1985 when it was purchased in an employee buyout led by William “Bill” Schultz, who had been president of CBS’s musical instrument division. Schultz rebuilt the company, but it struggled again after his death in 2006, as new management emphasized making the numbers at the expense of musical innovation. A flood of Asian imports and young peoples’ shifting allegiance further weakened the brand.
Enter Larry Thomas, a guitar player and self-professed enthusiast, who had risen up the ranks from shipping and sales to chairman and chief executive of Guitar Center, Inc., the largest chain of musical instrument retailers in the world. Under Thomas’s leadership, Fender has reclaimed its position as the pre-eminent brand in amplified music. Korn/Ferry’s Briefings on Talent & Leadership interviewed him at Korn/Ferry International’s offices in Los Angeles.
Q: Fender owns the most iconic musical instrument since the Stradivarius violin, the Stratocaster. How do you maximize the return on an asset like that without diluting it? There once was just the Stratocaster, now there are many variants
THOMAS: It’s the only instrument to be recognized as an American icon by Rolling Stone magazine. An interesting thing about the Stratocaster is that it really hasn’t changed. Typically, things change over time. Either technology changes them or its form and function [evolve], and there’s a function the product needs so the form changes. When we grew up, in most homes there was a black telephone, and then later on it became a colored telephone and then it became a wireless telephone, and today my kids don’t even have landline telephones. The Stratocaster hasn’t changed in 60 years. It was created in 1954, and it has not changed since in terms of its form or its function, the way that it looks. I bought a 1954 Stratocaster for the company last year; I paid $110,000 for it, and you have to try hard to find ones that are still authentic.
Q: How do you keep the new ones authentic?
THOMAS: My role as the custodian of a brand is to honor the past, as well as look at the present and design towards the future. In today’s world our consumers’ tastes are very fragmented. There is no one-color telephone. As a manufacturer, we don’t do long runs like Henry Ford did, where everything was black. We do short runs, and we change things. We want to offer the same authenticity through which the brand was developed, but we want to reflect changing technology and tastes to offer more choice. In the past you didn’t have much choice, but today we make small guitar necks (the fretted part of the guitar where the guitarist plays the notes), we make big necks, we make fat necks. We shape them differently. We have guitar pickups (the part of the guitar that converts the notes from the strings to an electrical current) that are hotter, we have pickups that are not hotter, we have humbucking (noise-reducing) pickups, single-coil pickups. All of those things are a smorgasbord of what we offer the customer, so that he or she can use those tools to express his or her creativity.
Q: Looking at your Web site brings to mind Harley-Davidson and some of the ways they’ve capitalized on a heritage. You have factory tours, you have involvement with the community, you keep the designs going.
THOMAS: You have to be authentic and people see that. I came to Fender about three years ago, and I’m the first guitar player to run the company in all of its years. What I saw locked up in the factory were all the things I could express my passion with, all the things that I loved about the brand. I saw a story that needs to be told. My phone is filled with photographs sent to me of people with the Fender brand tattooed on their bodies. When you have that kind of an association or dedication to a brand, it charges you with a sense of wanting to share that story. I knew if we opened the factory up to tours, people would come, and they come from all over the world.
Q: Increasingly, this is an online business. People go to Musician’s Friend or other musical instrument retailers’ Web sites. How have you changed to accommodate online instrument sales?
THOMAS: Our business is balanced between the independent dealer channel and the Guitar Centers, Sam Ashes and other big retailers of the world. It’s also balanced between brick and mortar and online retailers. Guitar Center acquired Musician’s Friend when I was CEO of Guitar Center, so I understand the value and the need for online sales. Trying to build and sustain a brand, I find that the customer experience is even more important to me in the physical sense. You cannot communicate how a golf club or a guitar feels online. But there’s a big place for online business where people either don’t have access to go out and try products, or because their jobs and busy lives make it more convenient to go online. Online is a great place to do research because you can get a sense of what might or might not work. But increasingly, we want to take ownership of the message. So we have invested a lot of resources over the last three years in our Web site, in our own Web experience. We want our Web site to be an educational source because it’s hard to get staff in stores with enough knowledge of the differences in our products and our history.
Q: How you deal with changes in demography? Today’s high school boys don’t aspire to be Eric Clapton. They aspire to be Mark Zuckerberg. Or if they’re into music, they might prefer electronic dance music or hip-hop, which aren’t really electric guitar-centric.
THOMAS: I believe what you’re saying is true, but I don’t believe it’s really changed. I think there were always guys like Bill Gates or Paul Allen around who pursued computers and software. But as the CEO of Guitar Center, I traveled to a lot of Silicon Valley companies, and while you have a lot of golf clubs floating around these offices, there are a lot of guitars too. There are a lot of closet guitar guys and girls, and they’re of all demographics. I do think the tools we use to create music today are quite different. When I was growing up, you had an amplifier and then some pedals, and you could change the sound that way. Last Christmas we had Fender instruments online at Apple that you plug directly into your USB and the guitar would track into GarageBand. Fender has partnered with several different companies on iPad apps, so you can plug your guitar into an iPad and/or your computer and there’s virtual effect pedals so you can change the sound of your pedal or change the sound of your amps. Every time there’s been a shift in technology, there’s actually been a new opportunity to create music in new ways. Music is inherent in society, and the reason Fender is the brand that it is is because the body of work in Westernized music, where Fender has been an integral part, is so vast.
Q: Let’s talk about finance. You attempted an IPO in 2012, and it didn’t fly. Why didn’t it work?
THOMAS: The timing was the main reason there was no public offering. The company was ready to do an IPO, but almost 50 percent of our business has been in Europe, and Wall Street was really afraid that Europe was going to fall in the ocean — you had the bailout, Greece, lots of noise. We felt some pressure to do it because our private equity firm had been in the company about 10 years and were looking to move on. We also wanted to renegotiate our long-term debt, which was coming due in ’14. We knew the market was rocky, but we were gathering advice and information from several banks that forecasted market improvement. At the time, the strength of the Fender brand coupled with an improving market showed positive signs. However, Facebook went public and we all know how that played out. It wasn’t the right timing, so in the ninth hour we pulled it.
Q: What did you do as an alternative?
THOMAS: As an alternative, later in 2012, we found TPG Growth as a partner, and between them and one of the guys on our board, his company, we took out our private equity. TPG and Bill McGlashan, who is a partner there, sees the world kind of like I do, and TPG really sees the opportunity for Fender to be a big lifestyle branding company. They owned Ducati at one point. They’ve owned J.Crew. They’ve owned some other big brands, and they’ve done a great job. When we sat down and brainstormed what can this brand be, there were really no boundaries.
Q: Did that deal give you capital to invest?
THOMAS: Yes, we did in fact renegotiate the debt. It gave us some dry powder. It gives us the opportunity to look at acquisitions. It gives us a chance to look at strategic growth in various categories where we may not be, opportunities to look at the world with a bigger lens.
Q: How has revenue grown since you arrived?
THOMAS: Our growth has not been high on the top line. We’re in a recession. The dealer channels are just trying to get through this economy. So our revenues have been pretty stable, but really low single-digit growth in the last couple of years. I would tell you that in our business, that’s good growth right now, because a lot of companies that we compete with have been on a decline for the last several years. Everybody’s still waiting for this thing to be over with, and it’s not over. There’s still high unemployment. But I do expect with all that we’ve done, we’ll come out of this with a big tailwind. A lot of competitors in business tend to batten down the hatch and just try to ride it out. I tend to be opportunistic.
Q: You have what the computer industry would call a huge installed base, millions of Fender players around the world. How are you going to take advantage of that?
THOMAS: Well, you know, the question is, “How many guitars do you need?” And the answer is always, “Just one more.” So we’re working hard to build our CRM (customer relationship management). We want a direct response. Apple has been the great leader and teacher. They have a direct relationship with their customer base, and those companies that have direct relationships with their customers have the pulse of their business. They know where to go. They understand, because of that relationship, what their customers need. When I got to Fender they had been in business since 1946, but there was very little customer data. It was not something that previous management looked at as a strategic priority. I look around and see what other companies have done having the data, and it’s not only Apple. It could be Ducati, which is a very small company. It could be Ferrari, who knows a lot about their customers. It could be Louis Vuitton. These lifestyle and luxury brands, these companies, see opportunities quicker and execute towards them better. We’re putting a lot of money today into consumer data and building that relationship with the customer. We’ve sold through channels all these years, and customers weren’t really incentivized to come to our Web site to give us data, but we’ve made a focused shift in the last couple of years. We’ve now got close to 1.5 million people on Facebook, and we’ve got a lot of people coming to our Web site for both product information and lifestyle content. We ask customers to register. We do surveys with them on social media. We’re very much involved with the artist community, and we ask them to look at new products and evaluate them before they’re released. We do a lot of signature models with artists. That part of our business is important because, again, we’re an aspirational brand. So if we can inspire people through the artists to want our brand, then we can create products that satisfy the inspiration as we build on it.
Q: When you were playing guitar and getting into this as a kid, did you see yourself in business or did you see yourself in a rock band?
THOMAS: No, I was like everybody else. I wanted to be a rock ’n’ roll star. I got into the business by working in a music store. Once I realized I wasn’t going to be a rock star, I knew that I needed to get a job. I ended up in a store called Guitar Center in San Francisco and because I had a good work ethic, I quickly moved through the ranks and became store manager. I went to night school, and took accounting and finance classes. I’ve never finished college. I was in college during the Vietnam War. I lost my deferment with the lottery and then I did alternate service during the war. Back then I wanted to be like Dave Mason from Traffic and I wanted to play like Eric Clapton. Those were my two biggest influences. But the interesting thing is that Dave Mason became one of my best friends, and I’ve got pictures of Clapton at home with my wife. He’s got his arm around her and she’s having a drink. I’ve met all of these heroes and then some of them have gone on to be some of my best friends.
Q: Have they influenced you in what you do in business?
THOMAS: No, I’m a coach. In some ways, I’m a player-coach, but I’m the head coach. I have flattened out the organization. I’ve broken down all the silos. To the extent I can, I’ve gotten rid of the politics. And we’re creating a transparent culture so people can say what they want to say and they’re not in fear. I’m one of the oldest guys in the company and I have a lot of experience in the industry, and I have friends in the industry, contacts. So I’ve brought a lot of relationships to the company. I try to be a mentor. I’ve had great mentors in my life, so I think mentoring is really important. I try to spend a lot of one-on-one time with my VPs, with my product managers. I don’t sit in an office all day like I did when I was much younger, staring at a computer screen. The biggest thing about leadership is the ability to shape people’s thinking about the journey, about accomplishment. It’s about what you can get done, and you recognize there’s no “there.” Because when is “there “? As a rock star, you think if you make that record, it’s going to happen, and yet they find out that after the taxes and after everything else, they have to go back to work the next day because it didn’t happen yet, right? I’d been retired for five years. I retired from Guitar Center at the peak of my career. I had five years to play golf and enjoy life, and the Fender thing came along and it appealed to all of my boyish senses. It was a chance to go play in the chocolate factory. But when I got there, I found this team of people that were pretty disillusioned. But I relished the opportunity to coach people, not to tell them what to do, but to coach them on how to think about what they need to do. What’s been wonderful about Fender is the opportunity to let people be creative. When I got to Fender, the offices were in Scottsdale, and nobody ever went to the factory. Today, three years later, the creativity comes from every corner of the factory. I’d rather hang in the factory because you get to watch all this process, and you get to see the cool stuff coming off the line. I always look at this like I’m building my very own guitar. But the most rewarding part for me is helping to empower this incredible group of passionate Fender employees to build upon the incredible legacy that Leo Fender began. It’s about harnessing all of the power and potential of these wonderful products and sharing all of the stories, creativity and joy they continue to bring to the world. That is really important to all of us.