PRINT THIS STORY:

CHANGE TEXT SIZE:

MUSIC STORE BLUES

Flagging CD sales put retailers in tailspin

BY DON JEFFREY

FYE doesn’t have much to sing about.

A dismal year for music retailers became more so during the holidays, when sales failed to meet even modest expectations. Through Dec. 29, 2002, album sales fell 10.7 percent from the year before to 681 million units, according to Nielsen SoundScan, which tracks music sales from retail bar-code scans.

And the prognosis for 2003 isn’t much better.

“Music retailers are fighting for their survival,” said Allen Kaplan, senior vice president of licensing at Simon Property Group, the biggest U.S. mall operator, with 246 properties.

Many industry observers blame technology, particularly file-sharing services and CD burning, or copying. Others cite low CD pricing by discounters, the competition for shoppers’ entertainment dollars and a lack of consumer excitement about music in general.

“If it’s not on sale, it won’t sell,” said David Lang, president of CD World, which operates 19 stores in shopping centers and other locations in New Jersey and Missouri.

In malls two companies — Trans World Entertainment, through its FYE chain, and Best Buy, through Musicland Group and Sam Goody — control about 95 percent of the music business. Both are having problems. In January Best Buy closed 90 Sam Goody stores (see story). Many expect Trans World to close stores this year. Meanwhile, Wherehouse Music filed for Chapter 11 bankruptcy protection in January.

“They no longer need or can use the size of stores they’re stuck with,” Kaplan said. “In many cases, their profit margins and sales cannot support the occupancy costs. The consequence is that what used to be two or three stores in a supermall will soon dwindle to one.”

To combat piracy and the illegal downloading of copyrighted material, record companies have taken both legal and technological action. But the results have been mixed. The companies did drive file-sharing service Napster out of business, but such clones as KaZaA and Morpheus continue to thrive. Defenders of the file sharers say the technology enables consumers to sample new music that they can’t hear on the radio or on MTV. And the record companies, they add, also bear responsibility for declining sales.

“What drives people to download is the unavailability of product,” said John J. Sullivan, CFO of Trans World, which operates about 900 music stores. “We’re pushing for [record companies] to bring back singles, which are a good driver of business.”

That will be an uphill push. According to Nielsen SoundScan, sales of singles last year fell 61.2 percent from the previous year, to 12 million units.

Research seems to challenge the contention that downloading and CD burning encourages people to buy music in stores. According to a survey conducted last year by Peter D. Hart Research Associates for the Recording Industry Association of America, 41 percent of those who downloaded tracks from file-sharing services during the previous six months purchased less music than before, while only 19 percent bought more.

The survey also showed that 63 percent of Internet-connected consumers had acquired at least one free burned CD. “The burning is more of a threat,” said CD World’s Lang. “In stores you hear groups of people saying, ‘You buy it, and we’ll burn it.’ ”

But some point out that the same threat arose in the 1980s from home taping on cassette recorders. A bigger problem for music retailers, they say, is price pressure from mass merchants and discounters, which has turned music into a commodity. Best Buy, Target, Wal-Mart and other chains have sold CDs at or below cost as loss leaders.

This recalls the music price wars of the mid-1990s. But this time it’s worse, observers say. Back then, record companies alleviated the problem by enforcing so-called minimum advertised price policies. The Federal Trade Commission later ruled out those policies, however, and since then prices have been in free fall.

Specialty music retailers complain that they cannot compete with discounters that offer new releases at $8.99 and $9.99 (the wholesale CD price is about $10.40, and the list price is generally $18.98). These retailers have had to shift product mixes to sell more nonmusic inventory: videogames, DVDs, accessories. But these lines often have lower profit margins.

Discounting has also hurt the more profitable “catalog” sales of older music, say retailers. Consumers going to record stores to buy a hit, they point out, often bought a second album.

“A lot of impulse sales built around new releases has evaporated,” said Rick Galusha, president of Homer’s Music, an Omaha, Neb.-based operator of seven stores.

Small chains like Omaha, Neb.-based Homer’s Music are hurting as much as the giants from the drop in CD sales.

Some retailers, such as Don Rosenberg, president of the nine-store Record Exchange of Roanoke (N.C.), have found ways to meet the catalog crisis.

“My catalog,” he said, “is used CDs,” which he sells in his stores and on a Web site called The Record Exchange (trexonline.com).

Overall, catalog was holding up better than current product last year, at least through Dec. 1, the latest period for which comparison figures are available, according to Nielsen SoundScan. For that period, current album sales had declined 11.7 percent, while catalog (more than 18 months in release) was down only 8.6 percent and “deep catalog” (more than 36 months) was actually up 6.5 percent.

Some observers say online music merchants have kept catalog afloat by appealing to older consumers who don’t go to record stores and don’t care about the hits. Amazon.com spokeswoman Carrie Peters, pointing to her site’s “unlimited shelf space,” said catalog is a “big part of our business.”

Sales results clearly show that retailers are not sharing the pain of this downturn equally. Album sales for specialty retail chains fell 14.6 percent through early December, while for mass merchants the decline was only 0.5 percent, according to Nielsen SoundScan. Specialty chains still have the greatest percentage of music sales (53 percent, compared with 30 percent for mass merchants), but the gap has narrowed. Sales at nontraditional merchants, which include the online sellers, were down only 2.2 percent, but they account for only 3 percent of total album units.

As for independent music stores — traditionally the places where consumers seek and find the newest music — the situation is most dire. Those sales are down 20.2 percent. This does not bode well for the industry’s future.

Some retailers fault the record companies for not working at developing artists as much as they have in the past. Others say the problem is the music itself. The big sales drivers of recent years, rap and teen pop, are fading, and nothing has come along to take their place.

“When there’s an event, there’s sales,” said Mike Lane, a partner at Los Angeles-based 4 Entertainment, a music marketing and branding firm. By “event,” he means something that everyone is talking about.

The jury is still out on whether the Internet will ultimately be the industry’s destroyer or savior. Music price wars on the Web largely disappeared when the technology bubble burst and most online retailers went out of business.

Meanwhile, record companies are trying to confront the file-sharing threat by rolling out paid subscription services that allow legal downloading of songs. In January a half-dozen music retailers — Best Buy, Hastings Entertainment, MTS, Tower Records, Trans World Entertainment, Virgin Entertainment Group and Wherehouse Music — formed a new company that will sell music downloads over the Internet.

“In five years downloads will save the music business,” says a Forrester Research study. The firm predicts that music sales will gradually rise again as digital products take off. By 2007, it projects, digital sales will total $2 billion, or 17 percent of the $11.98 billion industry total. In 2002 they accounted for only $15 million in sales out of $11.4 billion, or about 1.3 percent.

Record companies and retailers still see the Internet as a valuable promotional tool for introducing new performers and releases, especially at a time when radio playlists are so restricted. (One radio company, Clear Channel, controls about 60 percent of U.S. rock stations, according to Forrester.)

Perhaps the future of music selling will have consumers buying the hits from the likes of Wal-Mart and catalog music from Amazon.com or another Web site — a scenario that does not cheer specialty retailers.

“The dedicated music retailer who sticks to music is really suffering,” said Lang. “If this tendency continues, it doesn’t look good for record chains.”

© 2010 ICSC. All rights reserved. | Terms and Conditions | Privacy Policy | Contact ICSC | ICSC Home |