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THE DAY THE MUSIC DIED, STORES DIVERSIFIED

By Ed Christman

These may sell better than CDs, but the store next door might not like it.

With music album sales down nearly 3 percent last year and 8 percent so far this year, music specialty merchants are working hard to find other things to sell besides music.

Up until the beginning of last year, the U.S. music industry had enjoyed a decadelong growth run, but sales peaked in 2000 and have been backsliding since then. Industry observers cite lots of reasons, including the signing of weak artists by record labels; the growing strength of mass merchants in music sales; the high list prices, and slow sales, of CDs; the death of the cassette format and the impending death of the singles configuration; the proliferation of free music over the Internet and through file-sharing; and the increase in counterfeit CDs that are sold for $5 on street corners in every major U.S. city.

But the main reason for the downturn in sales, music merchants and label executives agree, is CD-burning.

Retailers say that every day in their stores they hear talk of CD-burning, whereby friends will each buy one album and promise to burn it for the others.

“Sam Goody has [catalog] CDs priced for 18.99; if you go and burn five CDs, you can save $100,” pointed out Mike Dreese, CEO of 21-unit, Newtown, Mass.-based Newbury Comics. “The people who want something for nothing used to join record clubs and get 11 CDs for the price of one. Now you can really get something for nothing. Music sales volume is in the crosshairs of price and disc-burning.”

By later this year, BMG Entertainment, EMI, Sony Music Entertainment, Universal Music Group and Warner Music Group are all expected to have embraced copy-protection technology. But even when CD encryption is employed, it is expected only to slow the CD-burning trend, not stop it, since there is nothing young hackers love more than a new challenge.

They’re not all here for the music anymore. But will they keep coming?

In the meantime, music sales continue to decline. During the five-week period ended Jan. 5, Albany, N.Y.-based Trans World Entertainment, which runs 973 stores, recorded a 3 percent comparable-store gain, but a breakdown of the chain’s product lines shows that while its movie business was up 43 percent and video games were up 72 percent, music was down 11 percent.

Newbury Comics’ Dreese said that things are even worse this year.

“Our top 50 [best-selling music titles] are down 40 percent to 50 percent from a year ago — by far the most dramatic drop in business in our 15 years of keeping records,” he said. “Three weeks ago, for the first time, our No. 1 video outsold our No. 1 music title.”

This diversification into other lines has been going on for the past few years, according to Larry C. Gaines, president of Wherehouse Entertainment. To stimulate revenues, the chain began looking at other products two years ago and hired an executive to oversee business development, research new products and explore how the chain should sell them.

The DVD has proved to be one such promising product. It has gone from about 300 titles to 3,000 in the Wherehouse stores, straining wall space and necessitating the use of floor bins to handle the overflow. Wherehouse also has a greatly expanded electronics area and has increased its presence in such trend merchandise as pins, posters and stickers. Moreover, Gaines said, the chain is “working on a couple of tests of new products, that I hope to roll out later this year.” He declined to name them.

Laurie Clark

David Lang

While movies in DVD format are the booming product line in what used to be referred to as record stores, music merchants say they will continue looking for other products to bring in, because eventually the DVD will meet the CD’s fate and reach saturation. When Best Buy acquired The Musicland Group in February 2000, it immediately expanded the Sam Goody chain’s portable consumer electronics beyond boom boxes and Walkmans to include video games, Palm handhelds and other products. Musicland’s music sales make up 49 percent of the chain’s total sales and are dropping.

Trans World is also trying to limit its dependence on music, according to Robert J. Higgins, the company’s chairman and CEO. “We are expanding DVD,” he said, “even though it is a little lower [profit] margin than music. We need the growth in sales.”

The same goes for the Edison, N.J.-based Wiz chain. As Laurie Clark, senior vice president of marketing and merchandising, put it, the “dollars shortfall” due to weakening music sales is forcing music retailers “to migrate into other categories.”

The only alternative to carrying other lines of merchandise is to reduce the size of stores, merchants say. “If music sales are going away, you would have to contract your inventory to remain profitable,” Clark observed.

In the course of turning to other product lines, it makes sense for retailers “to complement the music business,” which is why so many music specialty merchants are taking in DVD, CD-ROMs, recordable media, storage cases, cleaning accessories and electronic games, Clark said.

“They are all natural progressions for music retailers,” she said. But, she cautioned, it is important “not to go crazy and take in everything, because that will confuse the consumer. You need to take things in that are an extension of what you are selling, things that lend themselves to the same customer so you can bring it together [and] it’s one story.”

Compact Disc World was an early explorer of other product lines to the point that today “we don’t view ourselves as a music retailer anymore, but as a lifestyle retailer in which music is a main ingredient, [though] not the only ingredient,” said David Lang, president of the 10-unit, South Plainfield, N.J.-based chain. “We carry candles, incense and many other items that will fit into a music or pop culture lifestyle.”

Newbury Comics is also at the forefront of the trend. In addition to lava lamps, Doc Martens boots and trend merchandise, the merchant has brought in clothing that will complement the rock and dance lifestyles. Among the chain’s best-selling items are jelly pops called “SpongeBob Squarepants,” based on the popular cartoon TV show.

“In six weeks we have sold 5,000 of them, and they cost 50 cents and we sell them for $1.50,” Dreese reported. “So far this year we made more money off of that than on any music title we have sold.”

So far, as music merchants expand their product offering, they say that only occasionally do they run afoul of exclusivity clauses and usage stipulations in shopping center leases. Randy Davidson, president of the Sound Shop chain, says he has had no problems with exclusives and hopes that he will not have any in the future.

Newbury Comics is going into its first enclosed mall in Providence (R.I.) Place and expects to include five or six racks of clothes in its store, as well as a dressing room. “We are located immediately adjacent to Hot Topic, and they will probably be cranky about some of the stuff we will carry, but I can’t imagine our presence won’t help their business,” Dreese said.

But CD World’s Lang recalls running into a problem with an exclusivity clause. “In one center, we were looking at a space next door to a Party City, and for a couple of days, negotiations centered around ‘what is a party item,’” Lang said. “We sell strobe lights and black lights, and they could be party items.”

Lang recalls a deal at another center more fondly. “I was talking to a real estate agent, and I asked about exclusives,” he said. “And when he answered, ‘No exclusives in this center,’ then he was talking my language.”

Retailers must still ensure merchandise is geared to the same customer.

Diversification helps the music retailers with another major problem: competition from Best Buy, Wal-Mart and other giants. CD World has to be able to differentiate itself, Lang said. Other products “help us with margins and make our stores more attractive; some of our customers go right to our Simpsons stuff, and eventually they buy music and other things, but that separates us from the big boxes.”

Another potential threat might be less easy to get around, though. If major labels have their way and get to sell music directly to the consumer over the Internet, music store sales would go into a steep dive. So far the labels’ efforts have met with abysmal failure, but who knows what the future holds?

But slumping music sales and the impending digital future is giving merchants enough cause to worry. “It is having a very significant effect on the way we look at real estate,” said Newbury’s Dreese. “With leases coming up, we wonder if the stores will have a good business three years from now. We are fortunate in that we have stores that could probably go down 25 percent in revenue and still break even.” But he wonders what will happen if they lose 30 percent or 40 percent of their revenues.

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

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