Retailing records series; (part 5) Records become a commodity and face real estate prices and profit margins (v)

The same issues caused huge international record seller HMV to pull out of the U.S. market after five years. “In our case it was about the fact we had very poor real estate deals,” said the chain’s CEO Alan Giles, “where the majority of the stores we had were either poorly located or over-rented and that always gave us a mountain to climb.”

Had the music business thought ahead far enough, it might have found in MP3s (or some other digital compression format) the answer to many of its most expensive problems – but, then, it has those infamous control issues. “Prerecorded media will disappear,” Todd Rundgren postulated early in the 1990s, not accounting for the record industry’s stubborn, backward reaction to the digital retail space.

You will never go out to buy a prerecorded CD. All you will do is buy blank media and say, “Okay, I want this particular record, or I want these songs off of this record, or I want to buy six pounds of Michael Jackson.” They’ll just download it to you and it will appear on something like a MiniDisc, and you can listen to it at home, or you can pop it into your portable player or listen to it in your car. It’s just the delivery medium will be different. It will be much more efficient, I think. They won’t have to send the record to the pressing plant and press and send it to the record store. All the packaging that you just throw away anyway will just disappear.

With the digital transfer of music files, the medium becomes whatever bottle the end user chooses to keep the lighting in. “The web eliminates two-thirds of the cost factors,” the Smithsonian Institute’s Richard Kurin pointed out. “You don’t have to produce a hard product and you don’t have to pay a middleman. The prospect is for greater dissemination.”

Of course, the digital space still accounts for less than 10 percent of the record industry’s sinking sales. We’ll see, however, as stores close down, people have fewer and fewer choices about where they can actually buy records, and those stores offer fewer and fewer choices as to the kinds of records customers can buy. It turns into a vicious cycle – the fewer places to buy records, the fewer potential sales.

Then there are the space considerations. Retail density ranges from 5.5 CDs per square foot of floor space at a Tower location to 20 per square foot at a smaller independent store. That means the 10,000-square-foot store (with the half-a-million-dollar rent) we looked at earlier would carry between 55,000 and 200,000 titles if it stocked nothing but CDs. Of course, most record stores carry far more than just CDs, if only for the margin. And as Doug Mashkas, owner of a store at the high end of the density spectrum (carrying 30,000 CDs and 10,000 DVDs in a 1,500-square-foot space) admitted, the effect is “not very pretty.”

Figure most stores stock less than 10 CDs per square foot, and carry an inventory of between 10,000 and 100,000 CDs, depending on floor space and inclination. Even if they carried only one copy of each title (not a likely scenario) and crammed the racks at the high end of this inventory, they could still only fit one-third of all available titles.

Certainly the department stores sell only the hits. And as the dedicated record stores give up more space to higher-margin items, they can devote less space to marginal music and catalog items. The fewer stores selling deep catalog, the less deep catalog gets sold. And if you wondered why 0.45 percent of the records sold accounted for over 50 percent of the sales, just try and find some of the other 99.55 percent of the available titles with any regularity at most record stores.