Big boys turn up volume on sales

Music-only retailers hit as diskeries cater to megastores

Record companies have developed a big addiction.

As record sales slip — dropping by 5% last year, with no uptick in sight — and the number of blockbuster acts dwindle, record labels have come to depend on “superstore” retailers such as Wal-Mart, Kmart and Best Buy and the huge numbers of discs they can quickly sell.

These monster chains carry a limited stock of records –perhaps 4,000 or 5,000 units, compared to more than 20,000 and up for flagship music-only retailers — and specialize in fare that will appeal to the widest possible audience.

And music-only retailers are feeling the fiscal squeeze. Fiscal wounds inflicted by the downturn of the biz have been deep at national music chains such as Trans World Entertainment, Tower Records and Wherehouse Entertainment.

That may not be music to the ears of the dedicated record-bin digger, but it’s exactly what the labels want to hear. The mass-merchants’ business model is all about driving the biggest number of bodies past its racks.

“Wal-Mart has more than one-third of the entire population of the United States walking through its doors every single week,” says Handleman Entertainment Resources prexy Gerry I. Lopez, whose company keeps the music shelves stocked at Wal-Mart and several other mass merchants. “To be able to sell a couple million copies of an album in a few weeks, you need these kind of retailers involved — otherwise it just couldn’t happen.”

The proof is in the charts: Over the past few years, first-week sales have ballooned for the top echelon of acts and become a crucial benchmark in gauging success. ‘N Sync topped them all with its sophomore disc “No Strings Attached,” which sent 2.4 million units out the door in week one. Since then, acts like the Backstreet Boys, Britney Spears, the Dave Matthews Band and Creed followed suit with debut weeks hovering at or even above the 1 million mark.

Mass marketers have capitalized on those bows, growing their slice of the total music-sales pie from less than 25% in 1996 to almost 30% in 2001.

When the biz was growing, that wasn’t a big issue for the specialty chains. But during last year’s contraction, grabbing market share meant taking it from someone else. According to SoundScan data for 2001, unit sales for the mass-merchant camp were flat with 2000 despite the overall downturn, while sales at the specialty stores sank nearly 8%.

The power of mass merchants gets even more pronounced in the realm of the mega-hits: They have sold 50% of Creed’s five-times platinum release “Weathered,” 59% of ‘N Sync’s most recent effort, “Celebrity,” and a whopping 67% of the wildly successful “Now 7” pop compilation.

That shift is evocative of the rise of nationwide music chains themselves more than a decade earlier, which sent a lot of small- and medium-sized independent record sellers to the scrapheap. That retail is scaling up yet again may be the natural next step in that trend, observers say.

“There’s been massive consolidation, to the point where the regional chains all but don’t exist anymore,” says one distribution exec on the label side. “It’s the larger companies that always move to dominate the business.”

Compounding the specialists’ woes is the mass merchants’ ability to sell CDs at cost — or even lower — to drive traffic through the stores and hook consumers on bigger-ticket items like TVs or furniture. That practice went into high gear in 2000, after federal regulators outlawed minimum pricing agreements between labels and retailers.

Vince Szydlowski, senior director of product for Virgin Megastores North America, maintains that music specialists can present formidable competition on factors other than price, including expertise, depth and the ability to promote something beyond the next cookie-cutter hit.

“We’re able to offer something special to the consumer and do a better job selling the services like the racks don’t,” he says. “We’re not only paying attention to that one monster record, we’re also focused on the other 10-15 releases that come out that week — we try to maintain a much wider scope.”

Still, the biz’s laserlike focus on hits and the mass merchants’ aggressive pricing have taken a measurable toll on some of the biggest music chains. Tower Records has posted seven consecutive quarters of losses; it flirted with bankruptcy until an increased line of credit, extended last October, gave it some breathing room. Shares of publicly held Trans World Entertainment have sunk more than 70% since skimming $30 in 1998. And the Wherehouse made plans last fall to sell off more than 60 stores in a bid to return to profitability.

Adding to that are the problems faced by the industry at large, including online piracy, the maturation of the CD format and a downturn in the overall economy. Those general woes hurt specialty chains more, however, because they don’t have as many other product lines to dilute the risk.

They’re trying to change that, weighting their product mixes far more heavily toward hot markets like DVDs and videogames and away from aisles and aisles of music catalog that used to set them apart.

“It’s not very exciting to walk into any retail environment that makes you feel like you’re in a library,” says a music exec. “It’s not a very fun place to shop.”

Many insiders expect that trend toward diversification to continue as the big retail players look for a hedge against lousy music years like 2001 — leaving hard-core catalog hunters to head for the smaller independents, or into cyberspace, where the near bottomless resources of etailers like Amazon and CDNow await.

That means the days of specialization may be numbered, according to Joe Pagano, senior VP of Enterprise Entertainment at broadline entertainment retailer Best Buy.

“Music competes on the same field with games and movies for the entertainment dollar,” Pagano says. “The retailers that hold their own in all those areas are the ones that will prevail.”

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