February 23, 2006

The Day the Music Died

The news that Musicland (Sam Goody and other stores) had gone into Chapter 11, and then this past week that they had been taken over by Trans World Entertainment (FYE, Wherehouse, and others), reminded me of something I had written recently.

Rob Hand and I have been collaborating intermittently on a book about the growing concentration of retail power, how trade promotion plays a major role in facilitating it, and its effects on manufacturers and consumers. By coincidence, one of the examples I wrote about is the recording industry - how retailers are being driven out of business and how among the effects are less innovation in product and less choice for consumers.

Here's what the book says:

In addition to the damage retail concentration is doing (and will do much more of in the future) to consumers, it is also important to note how it is and will impact small manufacturers (and, by extension, consumers and the economy as a whole):

Fewer stores mean fewer opportunities to get on shelves.
Fewer small retailers mean less opportunity for a start-up to start small and expand.
Elimination of regional brands also kills opportunities to start small and expand.
Slotting, by creating an auction mentality, creates a situation in which the retailer has an incentive to carry fewer brands on their shelves. The tendency will be to give all, or most, space to the one or two brands in a category willing and able to pay the most for it.
The demand for logistical efficiency means fewer vendors - thus retailers will work more with a few vendors in each category (same effect as slotting) and also with manufacturers who can cover many categories. Brands that specialize in a single category will be driven out (these are often the most innovative brands, because they specialize on their particular category and understand it in depth).

A product category where the effects of concentration at both the retail and supplier level have been showing up clearly has been recorded music. CD retailing reached a 57.9% concentration level in 2002, up from 46.8% in 1997, according to the Census Bureau (they do a business census every five years). There were then five major distributors of music, but the merger of BMG and Sony has since brought it down to four, who among them control about 85% of the market. There are a great many record labels, leading to the perception that there is a lot of competition, but they are almost all distributed through one of the big four, and most of the important labels are owned by the distributors.

As the control of the music business has narrowed into the hands of a few retailers and a few distributors, what has been the effect on the business and on us as consumers?

The neighborhood record store remembered fondly by us boomers as the place where we bought our 45s has long disappeared (along with the 45s), replaced first by large music stores and mall chains such as Wherehouse, Sam Goody, Tower, and others. These bigger stores offered (we use the past tense intentionally) a wide range of products - the latest rock, country, and pop hits, of course, and the popular oldies, but also lesser-known acts and newcomers, as well as less-popular genres such as jazz, classical, and music from foreign artists.

The fact that they carried newer artists who hadn't yet established a name meant that they played an important role in the music system. Music is a hit-driven business; the labels put out dozens of releases that fail, hoping that they get just one or two that are hits. If they are successful, the handful of hits pays the bills. To ensure that the hits keep coming, the labels must groom a steady succession of new talent, again hoping that one or two out of many might develop into the next Britney or U2 or (they dream) Beatles. For this to happen, though, there must be an outlet for these new artists, a way for them to develop and become known.

That outlet is disappearing.

The majority of music now is sold not through the music stores we have just named, but through Best Buy, Wal-Mart, and other discounters and category killers. And these stores do not devote thousands of square feet to CDs (a typical FYE store is 5,000 square feet, Tower's might be 10,000-15,000) - instead they have a few aisles, perhaps 100-200 square feet. In such space, of course, they can offer nothing but the hits. A Wal-Mart store will offer CDs by the most popular current acts in rock, rap, hip-hop, country, and pop, together with some of the most popular oldies and standards to appeal to the parents (and perhaps some Latin music, dependent on local demographics), but they offer little if anything outside the mainstream. Best Buy might have a bit more, but not much. Certainly none of these stores have any room for unknown new artists.

And the stores that do offer a wider range? Having lost the big sellers to the giants, they are dying. Let's look at some recent financials for the biggest music chains:

Wherehouse declared bankruptcy twice in a period of a few years and was sold to Transworld Entertainment in 2003.
Transworld Entertainment (FYE, Coconuts, Camelot, Wherehouse, others) saw their sales drop by 6% (from $1.41billion to $1.33b) from 2001 to 2004.
Musicland (Sam Goody, Suncoast) was bought and then dumped by Best Buy. Its sales dropped 26% from an estimated $1.9b in 2000 to $1.4b in 2004. In early 2006, they went Chapter 11 and have now been absorbed by Trans World.
MTS (Tower) had a sales decline of 4% (1.02b to 0.98) between 1999 and 2002, losing money every year. They declared bankruptcy in 2003.

Businesses must grow or die. No company can suffer prolonged losses of this type and survive, and the prognosis for stores of this type, according to most analysts, is not good

These conditions are not entirely due to the incursions of the retail giants; sales have been flat or down for several years throughout the industry. Why? Well, the music industry has been badly damaged of course by downloading from the Internet and other forms of piracy. But not everybody believes that recent sales decreases have been caused only by piracy - many observers cite a lack of innovation in music, a blandness*, a dearth of exciting new acts, a growing unwillingness on the part of the labels to try anything new. And the labels themselves admit, in moments of honesty, that they have cut back on developmental expenditures.

One reason is that there is less opportunity for the developing acts because of the decline of their principal outlets, the music stores. Another is that there is less money available for developing acts because of the tremendous amounts of money the labels and distributors are required to give the discounters and category killers.

The labels and distributors are caught in a bind. They know that Wal-Mart, Best Buy, et al. are destroying the music industry and that to do business with them is to commit suicide, but at the same time they can't stop doing business with them because that would also be suicide. Since the latter would be quick suicide while the former is slow, they not unnaturally choose the slow alternative, hoping that some miracle will come along to save them.

*The reader is advised to take with the usual grain of salt any comments on the younger generation's music in a book written by middle-aged men.

For more news and commentary on a daily basis, visit our blog, TPMtoday . Among the topic in the past few days:

P&G Sells Gillette Deodorant Brands to Henkel

India's Retail Market

Help wanted: Wal-Mart hiring marketers

Wal-mart struggling overseas

P&G suing private labelers

Previous blog posts on related topics:

Wal-mart and the labels

Retailers as labels, part 2

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