Retailers’ fear of “showrooming ” became widespread with the rapid consumer adoption of smart mobile technologies in the 2009-2010 timeframe. In retrospect, those fears seem a little over-stated. People still go to stores. But that doesn’t mean that some categories of products aren’t prime targets for “disintermediation “. Categories of merchandise that are good candidates are those for which a digital representation is a “good enough ” proxy for the real thing. The classic case for this of course is recorded music; although audiophiles will argue endlessly about how bad an MP3 copy of a musical recording is, the fact is that most people either can’t hear it on their consumer-grade playback equipment (like an iPhone), or they just don’t care. Thus, iTunes was able to completely disintermediate the record distribution business.

But what about the things that make the music in the first place? The instruments, amplifiers, microphones, and sound processing equipment? What constitutes a “good ” piece of gear from a “bad ” one is

1. how it sounds,
   
2. how it feels,
   
3. it’s “vibe “,
   
4. how it looks, and
   
5. which legendary player, engineer, or producer uses it.
   

Those first three variables have usually been determined by trying the product out. A visitor on a Saturday afternoon to a Guitar Center will be greeted by a cacophony created by a roomful of 15-25 year-old guys attempting to play “Sweet Child Of Mine “, “Enter Sandman “, or (heaven help us) anything by Rush, through Marshall 100-watt stacks turned up to eleven. But what the Guitar Center is really doing is creating the next wave of customers with G.A.S. ( “gear acquisition syndrome ” – go ahead, Google it!). At the other extreme of the market, there are legendary shops like New York City’s Rudy’s Music or Nashville’s Gruhn Guitars- where the real musical legends actually do shop – if you hang out in one of those places, sooner or later you’ll see ‘em! A top-of-the-line guitar at Guitar Center is the “cheap stuff ” at one of those upscale stores.

The question is, what about the space between those two extremes? Is there a market for a musical equipment retailer whose offerings range from “semi-pro ” to “big time professional “? And isn’t it inevitable that such a store would have to be a physical place where the discerning shopper could talk to knowledgeable sales reps and “kick the tires “?

Enter — Sweetwater.com

The quirky little shops that used to fill that space between the two extremes seem to have all but disappeared in many areas, although you can still find them if you look hard enough. But perhaps surprisingly, one Internet pureplay, Indiana-based Sweetwater.com, has filled the space by offering products suited for people with a broad range of skills and budgets, and has overcome gearheads’ need to kick the tires with an expert staff of sales engineers, an ever-expanding knowledge base, and online technical support. The online retailer makes extensive use of YouTube, posting hundreds of well-produced videos showing off the latest-and-greatest, often featuring instruments played by famous musicians. And four times a year, the company publishes its ProGear catalog, an exhaustively detailed collection of pix and specs for “high-end ” stuff that rivals the Restoration Hardware catalog in terms of heft.

I’ve got “my own ” Sweetwater sales engineer, Danielle, and she’s great, occasionally pinging me about products that I might be interested in, willing to spend time with me on the phone discussing various options to help solve my latest music production challenge, and always following up on every single purchase I make, no matter how trivial the purchase is. Of course, being a “recovering retailer “, the first question that came to my mind was “how do they make money at this? ” After all, Sweetwater.com’s prices are competitive, so the question centers on how the company affords its incredible customer service posture.

To get an answer to that, I reached out to Sweetwater.com CEO Chuck Surack in November 2014. We couldn’t connect until after the 4^th Quarter push because Chuck wanted to stay laser-focused on his business during the crazy selling season, but we finally found some time to talk early in January.

The Sweetwater Story

Chuck Surack is himself a musician, playing saxophone and keyboards, and like many businesspeople today, he has spent some time “on the road “, in his case driving from gig to gig in his Volkwagon Bus. He described that experience as humbling, and marveled that he now leads a $400M privately held enterprise. To get a sense of how big of a player Sweetwater.com is, Chuck sized the market: “the total music products industry in the United States is about $7B, and there are about 7900 independent music stores. It breaks down like this: Guitar Center is the biggest of the bunch – somewhere around $2B as far as we know. Sam Ash is another well known brand – it’s been around for 100 years and has 40 stores – it’s privately held but we think about $400M in annual revenue. But most stores are much smaller – the average music store in the U.S. does about $800,000 a year. “

Chuck went on, “we don’t think of ourselves as another Amazon or Ebay, or a Guitar Center either. We’re trying to provide old-fashioned, old-school customer service, but still have the advantage of economies of scale. ” To that end, Surack stressed that the sale engineers manage relationships, not transactions. The operation has other highly trained staff to handle technical support and fulfillment, but the sales engineers follow the process through to completion. The CEO feels that by having everything under one roof, Sweetwater can achieve those economies of scale and compete very well against Amazon on price, and beat them on service. Exclaimed the retailer, “the model just works! Our service model is unique in this industry, and frankly it’s relatively unique in most other industries – I haven’t seen many like us. “

So, how do they keep the company’s SG&A under control so that they can be competitive on price? The CEO stated that being in Indiana is one huge advantage with it’s low cost-of-living. “I can pay my employees well for here, but they couldn’t live in LA or New York. The same is true for the real estate; I’ve got 100 acres here. Can you imagine what that would cost in LA or Manhattan? ” Another advantage is that being in one location, they receive merchandise by the pallet, whereas Guitar Center receives into DC’s and then ships to-store. Finally of course, adding a sales engineer results in more sales. “It takes them about 6-9 months to get up to speed; they go through 13 weeks of what we call ‘Sweetwater University’, 8 hours a day, 300 different classes, 80 different teachers – it’s like getting a doctorate. But once they’re on the phone with customers, after 6-9 months, they can bring in a million dollars. I don’t have to buy another location or increase my inventory. The employees are incentivized on the gross profit. We have some folks that earn multiple hundreds of thousands a year – that’s unheard of in the music products industry. “

In one interesting measure of how successful the retailer’s customer centric service approach is, Mr. Surack revealed that the customer return rate is only 2-3% (and “it drives me crazy “, exclaimed the CEO). He went on to explain that they take extraordinary measures to qualify the customer, and they also make it very easy to return products. But those measure actually boost sales.

Drucker Had It Right

All of this harkens back to something I read many years ago by 1950’s-era management guru Peter Drucker. To paraphrase: Professor Drucker explained that there are three constituencies that every business serves: customers, employees, and stockholders. He went on to explain that companies that focus on employees first will do well because happy employees equal happy customers. Or, a business can focus on customers first, and the company will do well. But if a company focuses on the stockholders to the detriment of either the employees or customers, the company will suffer.

Sweetwater is another proof that Drucker had it right. CEO Chuck Surack explained, “being privately held, I don’t have to worry about banks and shareholders. I have to worry about my wife, my kids, my employees, and the customer. So I do what I think is the right thing for the customer, and I don’t are if I make money on one particular deal or not. I believe and know that if you do the right thing for the customer, over time the money happens to follow. We teach that to all our employees the second hour they’re here – always do the right thing for the customer and don’t worry about the short-term profit. “