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MUSIC CHAIN SEEKS NEW SPIN FOR FUTURE SUCCESS

By Ed Christman

Music chain Newbury Comics prefers to have strip center and freestanding sites.

Most music chains are worrying about what impact the Internet will have on their businesses, and Newbury Comics co-owner and CEO Mike Dreese is convinced that the digital download era heralds the end of the record store as it is known today. That’s why he is already preparing the 22-unit, Brighton, Mass.-based Newbury Comics for its next evolution, which will make it even more of a lifestyle merchant.

Dreese, who is famous in the music business for his originality, has also been known to get under the skin of other music retailers and suppliers with his forthright, often critical, opinions about them in public forums. But despite his role as provocateur, the major music companies applaud Newbury Comics’ performance.

“I love them. They are smart and challenging to us and they force us to be better,” said Jim Urie, president of Universal Music & Video Distribution, the largest U.S. music supplier. “They are innovative and they are survivors.”

Similarly, Pete Jones, president of BMG Distribution, said Newbury Comics management is “very smart, very aggressive, and superserve their customers.”

Danny Yarbrough, chairman of Sony Music Distribution, labels Newbury Comics at the “cutting edge in the music business.”

Newbury Comics was founded by Dreese and co-owner John Brusger, who is chief technology officer for the chain. The company began life in flea markets selling comic books, opening its first comic book store in 1978 on Boston’s Newbury Street. Soon, Newbury Comics expanded into music, specializing in punk rock, carrying imports and hard-to-find records of little known bands with devout cult followings. By 1989, the chain had seven stores.

Since then, Newbury Comics has grown to 22 stores, operating in Massachusetts, Maine, Rhode Island and New Hampshire, with sales in 2000 totaling $73 million, according to Dreese.

The average size is about 4,000 square feet, with the basic center of the store looking like a traditional record store stocking 18,000 to 20,000 music titles, and with the perimeter walls covered with all kinds of weird lifestyle products. Dreese says Newbury Comics’ best stores are doing about $5 million each, with the chain averaging about $850 per square foot, “which is way north of the average record store, which does about $250.”

Newbury Comics prefers to locate in strip centers and freestanding sites, and is ready to move beyond its New England marketplace into New York. In the current year, the company plans to open a couple of stores and relocate or expand about four others. Dreese also is playing with the concept of opening the chain’s first superstore, and is looking for real estate to accommodate a 15,000-square-foot unit.

But it has to be the right real estate and at the right price.

“We try to be opportunistic about real estate,” Dreese admitted. “We don’t want to do long-term deals; we typically do five-year deals. We want short leases with lots of options, so we can have a way to escape.”

And there can be plenty of reasons for an escape, Dreese pointed out, citing changes in the music industry, the market a store is located in and the overall economy. Four months ago, for instance, “everything changed” for the economy, although he added that developers still won’t lower rents to reflect that change.

“It will take them six or eight months to throw in the towel” by lowering rent levels, he complained.

Another profound change music merchants must deal with is the Internet and the digital distribution of music.

“The Internet is revolutionary, and there will be many winners and many losers because of it,” Dreese said.

Music retail already has been going through tough times because of discount merchandisers like Best Buy, Circuit City, Wal-Mart and Target, he observed.

Dreese argues that the coming era of digital distribution means music retailers will play a lesser role than portals like AOL or Yahoo. Because of that, “the bulk of music specialists are going to be wiped out,” he said.

But when music retail chains start falling, Newbury Comics, Dreese predicts, will be left standing, thanks to its super lifestyle store and its direct e-marketing to customers.

To accomplish the latter, the chain began a frequent-buyers club last year that collects demographic data, information about customers’ musical tastes and the radio stations they listen to. Using that information, Newbury Comics e-mails marketing alerts about upcoming album releases based on the customer’s tastes, and sales.

“We do about 20,000 e-mails a week,” he said.

Newbury Comics’ best-sellers only marginally reflect those of the Billboard 200.

Newbury Comics presents itself today as a full-line record store, but its bread and butter is still alternative rock music, particularly new and developing artists. During the recent Christmas holiday, Dreese reported that Circuit City, one of the chain’s main music competitors, carried only about 20 of Newbury Comics’ top 100 titles. Conversely, he points out that Newbury Comics’ best-sellers only marginally reflect the best-sellers of the Billboard 200, and even this minimal overlap has come about only since rap music burst into the mainstream.

Although 75% of Newbury Comics’ revenue comes from music, management has long considered itself a lifestyle store, selling accessories essential to the alternative rock lifestyle.

“We used to run adds in the early punk magazines in 1981 and 1982 that carried the tagline ‘Newbury Comics, lifestyle consultants,’” Dreese recalled. “We really meant it then and that is true today.” In addition to music, each Newbury Comics store has sections for Doc Martens boots, comic books and jewelry.

Newbury is also quick to spot a hot licensing opportunity before it takes off, and has made killings on the Pokémon fad, Teletubbies, Spice Girls and Austin Powers.

“We are good at selling the ‘[tick]-off-your-parents stuff,’” he said. “Our No. 1 sticker right now is ‘Smoke crack and worship Satan.’”

Newbury Comics not only spots emerging trends, it also is good at setting them.

“We are in the copyright-creation business, otherwise known as the trend business,” he said. “We are the first to sell these copyrights, creating brand equity for our vendors, and they know it.”

To ensure that Newbury stays in front of the curve, it measures how trendy its inventory is, Dreese said.

“A year ago, only 37% was 18 months old or less; this year, it’s 65%, so we have just about doubled the freshness of the product. If we are going to be a trendy company, we don’t want to live off our catalog, as far as trend product goes.”

Not only does such product move quickly, it produces profits well above the 30% to 35% gross margins that music provides for retailers. ”

“Our profits in that category are currently running about 55%, and we have a goal of increasing our gross profit by 80% to 100% next year,” Dreese said.

But despite the search for high-margin items, Newbury Comics will not succumb to the temptation of getting into the private-label business, another high-margin area.

“We are a marketing company, not a manufacturing company,” he said. “It is our job to go out and find the very best products and market them. A lot of retailers forget that.”

Retailers that manufacture their own private line “lose every time on taste,” Dreese said. “If you manufacture 100,000 bottles of glitter nail polish and put your own label on it at half the cost, by the time you have sold a third of them, that item could already be over. You should now be selling something else, but instead, those merchants let their product go stale on their shelves, and then they are in the markdown business. We mark down almost nothing.”.

Getting back to discussing music, Dreese observed that with Newbury Comics’ expansion into the suburbs during the 1990s, it has diversified beyond the alternative rock genre to include expertise in rap music and electronica dance music. It is in the latter genre that Dreese now sees opportunity, with plans under way to open a store targeting that lifestyle. That store might carry only fashion items, or it might include music from the genre as well, Dreese said.

Newbury Comics grew by about 20% every year in the 1990s, and by 50% to 60% in the 1980s, Dreese said. With that type of growth, the chain has had some growing pains along the way. For example, he admits that until about five years ago, “We used to be really messy.”

To rectify the problem, one of the chain’s best store managers was put in charge of merchandising.

“So, now we have a really organized crew that ... when new product comes in, they go out and set it up; when we are trying to test new displays, they set it up; and, during the holidays, they run around and upstock stuff. They also build new stores and design new fixtures.”

Also, with the company’s growth, Dreese found that “certain individuals had trouble” growing with the company. But instead of firing management employees who are not keeping pace with growth, Dreese says he is loyal to employees who work hard.

“We redefined the roles for those people because they are very valuable, and we don’t want to lose them.”

“We don’t expect our employees to put up with a lot of [stuff] from customers,” he said. “Customers, particularly those over 30, want to have their asses kissed, and for a young person making $7 an hour, its not worth it to kiss ass.”

Newbury Comics management likes to empower its employees, and it lets them do their jobs. That’s one of the ways Dreese helps to keep the entrepreneurial spirit alive at the chain. Management also has learned that the way “you treat your people matters a lot in terms of the productivity,” he added. “A lot of people forget that, and they try to nickel-and-dime everybody. We tend to invest all of our money in our people and our computer systems.”

Similarly, “we don’t try to get the best price from our vendors; we want the best service. In general, way too many people in the world are worried about saving the last penny. We have always operated with the philosophy that we want good trading partners; so it’s OK to leave a little profit on the table for the other side.”

Another way Newbury Comics retains its entrepreneurial edge is by not having any plans to meet; there is no operating budget, no labor budget, no open-to-buy and no capital budgets, Dreese said. While some may consider that a recipe for disaster, Dreese said the company has been profitable in every one of its 23 years, and often records annual double-digit comparable-store gains. But he declined to reveal profits.

Despite the company’s strong financial performance, Dreese said he has never considered going public. On the other hand, at some point he said he knows he will have to consider doing an IPO.

“It’s something that is almost a necessity if, in the long run, we want to empower our employees really strongly with ownership,” he said.”

Ed Christman is senior retail editor at Billboard, the music industry trade magazine.

 

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