Musicland dances to own beat after Best Buy divestiture

DSN Retailing Today, June 21, 2004 by Laura Heller

MINNEAPOLIS -- It's been a year since Musicland Corp. separated from parent company Best Buy. Now, as a privately held company under new management, the chain is once again on solid footing and looking toward growth.

In 2000, when Best Buy purchased Musicland for $685 million (including the assumption of $260 million in debt), the company was pulling in nearly $1.9 billion in annual sales with profits of more than $58 million. Fast-forward to 2003, when, after three years of tinkering, sales dropped 8% to $1.7 billion with comp-store declines of 8.3%. Best Buy ultimately disposed of the business by simply handing off the keys, and debt, to Sun Capital Partners, leaving Musicland to its presumed fate as a music retailer in a dying industry.

"Clearly, this was a company that was not profitable or with any solid tangible direction in how to be profitable or on a path to growth," said Eric Weisman, Musicland ceo. "But there was a lot of promise."

Weisman and company believed the chain's locations were well positioned for its industry and that music and related products actually did have a profitable future, but there were several rather large tasks that needed to be tackled.

First off, said Weisman, was stabilizing the business by assessing and adding members to the leadership team, reducing operating costs, reviewing Musicland's real estate portfolio and managing the company's cash and working capital. Credit facilities were achieved through parent company Sun Capital and new arrangements negotiated with vendors and landlords.

These were all part of the first phase, which management considers completed as of February 2004. "Now we are charting a course for long-term profitability and growth," Weisman said.

Best Buy had tried to use the mostly mall-based stores to sell digital products. Many attempts at experimentation left the chain's core business of entertainment software in disarray, inventory levels low and stores in need of new merchandising.

"We were underassorted," said Michael Madden, president and coo. "We had between 5,200 and 5,400 SKUs of music and the sweet spot for Sam Goody [was] 7,200 to 7,300." Management ramped up assortment of movies and music, increased inventory by up to 80% and analyzed individual store needs and then priced accordingly.

Entrances were remerchandised to reflect new releases rather than the previously displayed T-shirts and paraphernalia. But what of the new digital hardware that had been the focus of Best Buy's efforts?

"We threw it out," said Madden. "The focus used to be on the 12% of the store that did not have anything to do with movies, music and games. In three years, it never moved from being just 12% of the business."

That was in October 2003, when the company also closed 200 under-performing stores, all prior to the holiday season. "It really was a Herculean effort to get through that first holiday," said Weisman. "There were a lot of nay sayers out there that said Musicland could not perform and would be out of business."

Looking to the future, the mantra is "refresh, reinvigorate and remodel," according to Weisman. "[Musicland] will be an experiential gathering place where people want to come as much for the experience as for what they can buy. We want to really chart the course of entertainment software retailing in the country."

Musicland's new initiatives include ramping up marketing efforts, in store events and promotions, implementing download options and in-store CD burning for digital music files, and a new positioning and store design for Sam Goody, Suncoast and Mediaplay stores.

"We have stores that haven't been touched since 1957," said Weisman. The company's first unit opened in 1956. "We're trying to touch every store in the chain and reinforcing our [three] concepts."

Thankfully, the music business is enjoying a resurgence, boasting double-digit growth in the last six months, according to Weisman. The category accounts for approximately 30% of Musicland's business, movies for 42%, with games at 10% and growing. New categories are presenting solid opportunities, said management, including books, toys, candy and gaming products.

"We have multiple tests going on with different types of products," said Madden. "We've stabilized the company and now we're trying to grow. We're in this in-between phase with lots of opportunities to explore."

The company recently announced a deal with Nokia to exclusively market its American Idol phone, complete with wireless content from the popular TV show. A second program from Virgin Mobile is soon to follow. CE will also have a small presence, in spite of Best Buy's failed initiative of the category within Musicland.

And financially, the chain is on much firmer footing, according to Weisman. "We inherited Musicland with comp store sales negative 20% to 25%," he said. "Now it's flat to negative 3% or 4%, with a group of stores running 5% to 6% better than that, and sales for the fiscal year ended February 2004 were $1.4 billion.

"We're starting to show that we can be aggressive in the marketplace," said Weisman. "We only talk in positives--negatives have left our vocabulary."