DVD, fallen rivals sustain last music chain

Tower is the latest retailer to file for Chapter 11

Goody hasn’t “got it” anymore, the Wherehouse is now nowhere, and Tower has crumbled to the fallow ground of Chapter 11.

Indeed, in an era dominated by big-box retailers, Albany, N.Y.-based Trans World Entertainment is the last large, national music and video specialty chain still standing.

Earlier this year, specialty chains Tower and Musicland both filed for protection under Chapter 11, their officials stating that they couldn’t compete with Wal-Mart’s loss-leader pricing on music and movies.

Its own bread basket raided by the deep discounting of mass merchants and the growth of music downloads, Trans World has found the strength to go on by swallowing its fallen rivals.

Trans World — which paid $41 million in 2003 to acquire 148 Wherehouse Entertainment stores — swooped in earlier this year to pick up 335 Sam Goody and Suncoast stores from Musicland. It also bid for Tower’s stores.

Trans World will add 30 new storefronts on its own this year to the 1,100 locations it already operates, mostly under the F.Y.E. (For Your Entertainment) brand.

“Trans World has a deep understanding of the business,” says analyst Joseph Gomes, who covers the retailer at McGinn Smith. “They’ve been extremely successful at going out and snapping up other chains. It weeds out underperforming stores and then goes back to upgrade its entire Trans World network.”

Now selling about $350 million worth of DVDs each year, the chain’s timely shifting of its product emphasis toward DVD and away from music CDs several years ago has been key to its survivial.

For its most recent fiscal quarter, ended July 29, DVD and VHS represented 35% of Trans World’s business, up from 27% the year earlier. Music’s share of the pie, meanwhile, dropped from 58% to 47% during that time.

Conversely, at floundering Tower, music represented about 65% of the pie at the time the chain filed for bankruptcy protection in mid-August.

“By the fourth quarter, DVD will be our biggest product category,” Trans World prexy Jim Litwak says. “I think that once we recognized we wanted to a be an entertainment company as opposed to music, that was a key mind shift. We are a customer-focused company in a much bigger way. Today (shoppers) say they want movies, and we have to respond to that.”

Trans World also is considered the first entertainment specialty chain to tackle the threat of downloading with an in-store digital solution. Through this year, Trans World is launching Mix and Burn music-downloading kiosks into 25 F.Y.E. stores. Shoppers can select from more than 1 million songs for their personal digital players.

“Having a broad array of entertainment makes us relevant,” Litwak says. “And being the last man standing certainly makes us relevant.”

Trans World isn’t out of the woods yet. Similar to Tower and Musicland, slipping CD sales have led the retailer to bleed red ink over recent earnings periods.

However, studios are rooting for Trans World to pull through, as it is one of the few retailers left dedicated to entertainment. A typical F.Y.E. store carries 8,000 DVD titles, eight times the selection of an average mass merchant outlet.

“Part of their formula for success is a commitment to catalog,” says Jeff Baker, Warner’s senior VP and G.M. of theatrical catalog. “Going forward, they have a big opportunity in high-definition software. Now, there are limited titles available, but over the next 18 months, it’s not likely that every chain will be stocking hundreds of these titles.”

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