Retailing records series; (part 4) Records become a commodity and face real estate prices and profit margins (IV)

Rather than making things easier, Universal’s Jump Start program made things even more difficult. To get a discount on CD prices, retailers not only had to dedicate 25 percent of their shelf space to UMG product (not a hardship, as UMG accounted for close to 30 percent of sales), but also had to provide a third of the stores’ prime marketing space to UMG for free.

This space included the endcaps, hit walls, and listening stations, all things that record retail used to beef up its bottom line; a month worth of space on an endcap could cost a record distributor thousands of dollars, which added to a store’s net and helped keep the lights on. And even if a retailer did not join the Jump Start program and get the discount, Universal wouldn’t buy that space again. Further, UMG would no longer provide co-op advertising dollars. Just like in radio, these “split” ads helped the retailer get traffic into the store. The record company paid for space on the store’s or chain’s advertising, each company promoting its hot program records for the month or week.

With the largest record company in the world stopping the practice, retail was well and truly screwed. So while the Jump Start program looked good for retailers on paper at first blush, it mostly benefited Universal. It no longer paid for space that used to cost it. If retailers chose to get the discount, Universal got the space for providing the discount. If they didn’t give Universal the space, they didn’t get the fee anyway. It might have left them with more space for the other three companies, assuming the other three majors saw fit to pick up the slack. It was a lot of slack, however, in a time of diminished returns.

The proof of the problem’s seriousness lies in the obvious financial trouble that retail is facing. The phrase Fortune Magazine correspondent Andy Serwer used to describe the situation at Tower is “hemorraging money… . Solomon and his family are surrendering 85 percent of the company’s equity to the bondholders. And the company is for sale. And it sure beats the heck out of me how this company will make a go of it long term.”

Add to this the devastating effect of the terrorist attacks on New York and Washington, D.C., on September 11, 2001. Sales growth had already started to slip, falling from a 9.3 percent increase the previous year to a 3.3 percent decrease. The attacks shut down virtually everything in America for a week. The emotional vulnerability, shock, and sadness the nation felt was coupled with the physical problems of all air traffic being grounded so checks could not be transported, the stock markets closing (and the commodities exchange effectively getting wiped out in the collapse of the World Trade Center), and certain financial records being lost. The record business had ceased to continue sales gains the previous year, slipping from a 1999 peak of $14.6 billion to $14.3 billion. In 2001, the slide continued to $13.7 billion.

Thus, when Best Buy purchased Musicland in 2001 for $685 million, it thought it had bought at the bottom of the trough. It was wrong. In 2003, it basically gave the chain to a Florida investment firm in exchange for assuming the company’s debt. Another chain, Wherehouse Entertainment, filed for bankruptcy twice over the course of nine years. Still other chains fight the good fight, closing stores to try and shore up their profits. By 2003, total recorded music sales slid to $11.9 billion, lower than 10 years earlier.

This slump doesn’t only affect the chains. The independent record store has nearly fallen by the wayside. Many of the owners of the stores that remain open think about shutting down on a daily basis. “This industry is in trouble,” said the owner of a 14-year-old Illinois shop. “I’m scared. I love what I do.”

Some stores and chains have survived, by filling a niche market. A small California chain, Amoeba Records, beat the larger chains at their own game by actually paying a staff for their musical knowledge. Chicago’s Dusty Groove put much of its inventory online, leading some to describe it as “one of the most exciting record stores in the country.” Gary’s Record Paradise in Escondido, California, caters to an audience that wants rarities, oddities, and specialties. “Where-house and Sam Goody have a fast-food mentality,” Gary’s owner Eustaquio Kirby said. “They are not really record stores.”

Science of Shopping author Paco Underhill agreed. “The industry views music as a consumable product: You consume music in the same way that you’d drink a Pepsi. Amoeba thinks of music as a tradable commodity, a durable good that has long-term value.”

What this means is that these stores carry used records and CDs. With a 70 percent margin on a used CD, they can moderate the margin needed on their new albums.

But even these stores may feel the pinch as the rental rates for retail (and all other) properties spike. By fall 2005 in New York, the rents drove even revered specialty stores out of business, noted the ARChive of Contemporary Music’s Bob George:

CBGB’s was not the only East Village institution to disappear at the end of August, as venerable soundtrack and theatrical shop Footlight Records closed down the bricks part of their operation. While the store is now dark, this vast historic collection documenting the lively arts will be largely kept intact through a generous donation of over 25,000 recordings to New York’s ARChive of Contemporary Music.

For nearly 30 years Footlight has been one of America’s most important sources of out-of-print and hard-to-find LPs and CDs. As the name implies, theatre and film materials were their primary focus, but the store also stocked one of the largest inventories of recordings by cabaret singers, big bands, crooners, and pop vocalists from the ‘20s to the present time. Fans, collectors, and the music industry itself often combed the bins for just the right satisfying sound. Ron Saja, Footlight’s owner since 1993, tells of the time film director Nora Ephron came by to search for music to enliven the soundtrack to Sleepless in Seattle. However, as early as 1991 sales were inching toward 50 percent online at Footlight, heralding the eventual demise of their high-rent physical space.