How the Pandemic Impacted The Industry In Unexpected Ways, And What Comes Next
Brian T. Majeski
Editor, Music Trades
“Unprecedented” is one of the more overused words in the English language, but it seems appropriate when describing the tumult of the past 20 months. The industry has regularly experienced bouts of privation, disruption, and chaos over the past century, but nothing quite like the COVID pandemic, which produced surging consumer demand, a hobbled global supply chain, and acute product shortages. Now that life seems to be returning to a more normal rhythm as we adapt to the virus, a review of the recent past is a good place to start as we ponder what lies ahead.
In the decade leading up to the COVID outbreak in 2020, music products revenues advanced at an annual rate of 4.0%, slightly outpacing the larger economy. “Pre-COVID,” the expectation was that this happy trend would continue uninterrupted. Those hopes were dashed in March of 2020 when lock-down orders scrambled the best laid forecasts and prompted an abrupt shift in consumer priorities. A torrent of government money in the following months, in the form of extended unemployment benefits, stimulus checks, and Payroll Protection Loans (PPP) amplified the impact, increasing American’s disposable income by an estimated 20% to 30%.
Flush with cash and stuck at home, spending patterns changed overnight. A few data points illustrate the magnitude of the shift. During the April 2020-March 2021 time frame, spending on “services” of all types plummeted, offset by a corresponding increase in outlays for hard goods. Food services and accommodations saw a 22% drop, transportation services were off 24%, and recreational services of all types saw a 35% decline, according to data compiled by Deloitte Consulting. Conversely, spending on recreational goods--think outdoor gear, home gym equipment, and musical instruments--surged 18%.
The impact of the pandemic and these altered priorities were felt unevenly within our industry. Products well suited for home use—fretted instruments, keyboards, and recording gear—thrived. Products destined for public use, including instruments for school music programs and sound gear, saw precipitous declines. Guitar makers in particular were blindsided by the demand surge and spent the better part of the year struggling to ramp up production. Import data reflects the magnitude of this increase. Acoustic guitar imports for the first half of 2021 came in a hair under 1.0 million units, 35% higher than any six-month period over the past ten years. During the same time frame, electric guitar imports of 965,000 units saw a comparable 35% gain over historic averages. U.S. guitar factories are also running at peak capacity with production booked well into 2022, yet retailers continue to complain that they don’t have enough product. It’s not a stretch to forecast that 2021 will be the biggest guitar year in history.
Demand for all types of electronic keyboards experienced a similar upswing in demand. Unfortunately, a worldwide shortage of micro-chips crippled production. Unlike auto makers that can muscle their way into the head of the line to secure scarce chips, the economically insignificant music industry has little leverage. As a result, production is down year over year and is nowhere close to addressing demand. In the third quarter, imports of synths were down 25% from a year ago, portable keyboards were off 33%, and digital pianos dropped a precipitous 52%. Retailers worry these shortfalls will lead to a legion of disappointed customers leaving their stores empty handed.
Issues with shipping, in terms of both cost and timeliness, are compounding the production shortfalls. The cost of a moving a 40-foot container from Asia to the West Coast has surged from approximately $3,500 pre-COVID to $20,000 today, while delivery times have slowed. Pre-COVID, it took three weeks to move merchandise from Asia to a U.S. warehouse. Now, the trip takes closer to 90 days. These delays hurt all suppliers, but the five-fold plus increase is cost has fallen particularly hard on makers of inexpensive accessories like cases or mic stands—a $20,000 shipping bill is uneconomical when the value of the container contents is only $65,000.
The logistics problem began after West Coast ports were shut down for most of the second quarter of 2020, leaving containers to pile up on the docks. Due to the resulting back-ups, a growing number of independent truckers decided it was uneconomic to pick-up containers at the Los Angeles port. They are typically compensated by the load, not hourly, and thus end up loosing money when they have to wait in line for hours to pick up a container. As one put it, “Imagine a packed Wal-Mart on Black Thursday with only one cashier to service the whole crowd. That’s what the ports are like.”
As of this writing, some 80 container ships are moored off the California coastal ports waiting to be unloaded. With ships unable to unload in California, containers are stacking up on docks in Asia. This backup, has even led some guitar and electronics plants in China and Indonesia to suspend production, having run out of space to store finished goods. These production and logistics issues have created a perfect storm. As one U.S. distributor put it, “We’ve got the orders, we just can’t get our hands on the products. At this time of year our shipping department should be working overtime. It’s at half speed.”
There is perhaps a small silver lining to be found in all the chaos. Product scarcity has all but eliminated retail discounts. Most retailers are starved for inventory, yet many are posting robust gross profits thanks to stronger pricing. One recently noted, “We have 40% of the inventory we need, we’re turning customers away, our sales are off, but our gross profit is up 1.8%.” Manufacturers are similarly struggling with inventory shortages, yet most are reassured knowing that their production is booked well into 2022.
The current predicament has led to widespread critiques of “globalization,” the fragile supply chain, and excessive dependence on offshore production. There is some merit to all of these complaints, however they shouldn’t obscure the immense benefits that global trade has delivered to consumers worldwide. Products with “multi-national” sourcing offer a level of value and quality unheard of even a decade ago. And, it’s hard to dispute that better product value has enhanced industry fortunes.
Our currently impaired global supply chain evolved organically over a long period, driven by the pursuit of enhanced product value. New conditions on the ground are triggering a reset, which will probably lead to shorter supply chains and a shift from “just in time” inventory to a “just in case” approach. There will no doubt be countless other unanticipated changes, as creative minds begin tackling supply issues. The motivation and talent are there to resume timely production and delivery, and we’re confident that these problems will be fixed. In fact, there are already indications that the shipping logjam is starting to ease. However, we’re less confident forecasting post-COVID demand levels.
In recent months the live sound business has rebounded strongly as people return to concerts, theater, and other events. Similarly, school music programs are coming back with the return of in-person schooling. There’s good reason to believe that both market segments will return to pre-pandemic levels. The outlook for frets and keyboards is less clear cut. The curtailment of enormous government stimulus funds is likely to adversely impact demand. Rising inflation could also take a toll on all discretionary purchases. Offsetting these negatives, the surge in first time buyers has created a rich opportunity for step-up sales. There’s even a historic precedent: while entry level guitar sales declined as “Beatlemania” waned, premium guitar sales thrived for another decade. The trend of working from home is another positive, as less time spent on commuting is more time available for personal pursuits like music making. As we’ve noted previously, improved teaching tools in the forms of online videos and computer learning aids also hold the promise of improved retention rates for beginners.
Mixed signals from the larger economy further cloud the forecast. Peloton and other makers of home exercise gear are attributing sharp sales declines to people “returning to the gym.” Conversely, Home Depot and Lowes are booking record sales because, “stay at home consumers are investing heavily in home improvements.” Go figure.
Ultimately, we remain optimistic because of the durability of interest in music and the diverse and prosperous U.S. economy. A little over a decade ago, as the financial system stumbled, pundits were predicting economic collapse. In retrospect, the doom sayers underestimated the resilience of nation of 300-million plus people getting up every morning and going to work. Despite shifts in political power and an intensely negative national media, the economy, along with the music products industry, has continued to progress. The past decade of Music Trades data confirms this upward trend. We suspect our future data will confirm it as well.