Talkin' about a revolution in music sales: superstores and CE chains record gains, while small stores are scratched off consumers' playlists

Discount Store News, March 18, 1996 by Pete Hisey

NATIONWIDE DSN REPORT -- Megastores, consumer electronics giants and national discount department stores are rapidly taking over the music business, driving hundreds of smaller specialty music stores out of business and forcing others to sharpen their merchandising skills.

Best Buy, which entered the music business in earnest only five years ago, is now the country's second-largest music retailer. It has staggered Musicland and other new players, most notably Blockbuster Entertainment, Incredible Universe and Circuit City, which are zooming up the charts. Target and Wal-Mart, with aggressive pricing of $12.99 or less for all standard compact discs--matching Best Buy's price strategy, if not its selection--are cutting into the traditional mall-based record store's customer base, while Best Buy, Blockbuster and Circuit City attack the specialists like Sam Goody, Wherehouse and Peaches.

The onslaught of the music superstores, coupled with a slowdown in hot new releases over the past six months, has wreaked predictable damage. Some 800 generally smaller music stores have closed over the past year or are teetering on the edge. Several chains have plummeted into bankruptcy, and the revolution is starting to eat its young, as even $600 million, 500-store Blockbuster Music is eyeing a sale to or a merger with a competitor.

The edge to megastores, particularly those offering expanded consumer electronics offerings, has led some chains to seek out hard lines partners. Tower Records has partnered with The Good Guys, a leading West Coast CE chain, to build combo stores and, most recently, a fully integrated joint venture, WOW!, which debuted last fall in Las Vegas. Strawberries, a leading Northeastern music retailer, has partnered with Tweeter to build a quasi-integrated unit outside Boston. In both cases, the chains are hoping to tap into the synergy created at CE chains like Lechmere, Best Buy, Nobody Beats The Wiz and Circuit City.

The old-fashioned brawl that has overtaken the industry has left few winners. Even Best Buy, the most aggressive national chain, has been forced to stabilize its pricing since margins have virtually evaporated in the new release business. Some hot new titles have a wholesale price of more than $11, making even an $11.99 promotional price at best marginally profitable; at $10.99 or $9.99--common circular prices--the losses can be enormous.

Musicland, the nation's largest music retailer, with 1,500 stores, has been spurting red ink, losing $136 million in 1995. Even its vaunted MediaPlay megastore division, which has matched Best Buy's pricing and has accounted for what little growth and profitability the company has recorded, appears to be running into a brick wall. Expansion plans for 1996 have been cut back dramatically, and the company is rapidly expanding its presence in other product areas, most notably computer software and books.

TransWorld, until recently the second largest retailer of music in the United States (unseated by Best Buy in 1995), has been hammered by the megastores. It shuttered 180 stores last year and plans call for many more closings in 1996. Formerly ubiquitous regional chains like Sam Goody, Coconuts, Wherehouse, Discount Records, Spec's and Peaches are either in danger of going out of business or are already out of business.

And there is little encouraging news on the horizon. The core consumer base is not growing, although older shoppers tend to purchase much more than their parents did at a similar age, and there is no chance that a price increase will ride to the rescue.

Still, not all is doom and gloom.

Chains like Best Buy and MediaPlay have paid heavily over the past few months for market share. Managing roughly 65,000 skus each, the inventory cost is enormous, particularly for slow-turning catalog product, and a sales slowdown in the fourth quarter (during which time few really desirable titles were released) exacerbated that problem.

But with smaller competitors dropping like flies, the megastore operators are now, or will soon be, positioned to virtually take over the business--assuming that margin-pressured businesses like Best Buy and MediaPlay can stay the course.

The major record labels aren't making things easier. In a time of declining sales, the companies have passed along hidden price increases by increasing the ratio of higher list-priced goods in their release schedules, according to Best Buy general merchandise manager Gary Arnold. The proportion of $16.98- and $17.98-listed releases is rising steadily, garnering a higher wholesale price without having to announce price increases, he said.

And those same labels are discounting heavily through their direct-to-the-consumer record clubs, and offering profoundly deeper selections. "We work hard to break a record like the Goo Goo Dolls, and then see [their CDs] offered at 11 for the price of one, and we wonder if it's worth it," Arnold said.

Arnold also noted that big box retailing is not, in itself, a recipe for success. "It's just one facet of what it takes to be successful," he said. "You don't just open them and wait for people to come." Marketing, he noted, is the key to success, and Best Buy, he contends, is "the biggest advertiser in the music business, with cable advertising running 365 days a year and four-color circulars sent to millions of consumers each week."