MUSIC AT RETAIL – BETWEEN A BOULDER &
A HARD PLACE

Distributors and brick & mortar retailers are circling each other this holiday season, trying to find middle ground where both can eke out a profit during the most critical selling time of the year.

The cold hard facts of this XMAS selling season is that the number of music retailers who have shuttered over the past 12 to 24 months vastly outnumber those that have opened. Even big box stores ala Wal-Mart, Target, Best Buy and the like are decreasing shelf space for new music releases in favor of games and DVD offerings that sell at higher price points and better margins.

To stay in the game, music distributors are being forced to give bigger and bigger concessions to retailers, cutting into the distributors’ bottom line and making it even harder for emerging artists to find a place on store shelves. Welcome to the behind the scenes battle of the 2007 XMAS selling season.

DISTRIBUTORS DO THE HUSTLE

According to Burnside Distribution Corp. VP and owner Bill McNally, about 40% of his company’s sales occurs during this critical 4th quarter. To make up for industry wide lost markets & revenue, this year Burnside sought non-traditional retail outlets, online stores, mail order companies and overseas.

Burnside starts preparing– hiring extra warehouse help, checking inventory levels & prioritizing shipments - late in the summer. “September 1st,” he exclaims. “Fourth quarter really starts sooner than this and getting all of our ducks in a row happens starting in August.”

Warner Music Group’s Contemporary Christian distribution arm, Word Distribution must start their holiday selling season in May in order to be ready to exhibit at the International Christian Retailer Show in July.

Helping smaller stores compete more successfully with the big box retailers and online outlets is part of Word Distribution’s policy & strategy. According to Word’s VP of Marketing, Laura Neutz, “We are working with them anyway we can to make their store a destination, giving them products that they can use as loss leaders, so that they can draw the customer into the store,” she says. “We do everything we can to help with that by making it price sensitive and giving [customers] something extra that they wouldn’t be able to get online.”

Word provides retailers with inventive items for customers who come into the store and pre-order a title and has increased their advertising budgets for catalog presence.

Burnside also provides support for their smaller retailers via their Fall Restock program, which offers a better discount and extended dating.

Specialized marketing plans for individual releases are must suit the artist and their audience. For instance, this season they are handling the distribution for releases by alternative rockers Need to Breathe and country legend Randy Travis, to name two of dozens.

According to Neutz, “Need to Breathe is going to have street teams, go big on MySpace and Facebook and will have a more grassroots approach to reach their demographic. The Randy Travis record will be marketed heavily through radio and a little less grassroots. We’ll go through more traditional outlets to reach the older customer” she says.

RETAILERS STRUGGLE TO FIND THE RIGHT PRICE POINT

New England-based Newbury Comics knows all about competing with the big box boys. For years this small chain has protected their bottom line by selling trend merchandise — t-shirts, action figures, games, Christmas decorations, gag gifts in addition to the music and DVDs it offers to customers.

Mike Dreese, Newbury’s CEO, points out that they don’t get the casual foot traffic that a store like Target or FYE in a mall would get. “The occasional buyer just doesn’t come to us,” he admits. “Indies have a very regular customer base, so they need to figure out how to expand the basket (i.e. swag) rather than just getting lots of people in to just buy their record.”

That said, Dreese reports that the amount of material brought into Newbury is directly tied to vendor programs. “We run all the crazy rebate programs that vendors do and we’re constantly demanding things,” he says. “How deep we buy has very much to do with the kinds of levels of discounts we’re able to negotiate and extract.”

It all has to do, he says, with the magic price point of $9.99 for a new release. “The sweet spot for us is to be able to pay $7.50 or $8 for something and feature it at $9.99. Same as Wal-Mart. Every product that’s above that is at a disadvantage.” For instance, it’s extremely difficult for Newbury to make any kind of margin on a release that wholesales at $11. “It’s got to be [on the floor at] $14.99 and we just don’t like that. We’re not going to feature it in a marketing campaign.”

One of the changes that Dreese has seen this year is that the store is getting $2 and $3 rebates on titles based on proven sell through. “That’s a big shift,” he says. “There are fewer marketing dollars out there for positioning, but there’s a lot of money available on proof of sale.”

And that’s made him more aggressive. “We aren’t being particularly polite about it. It’s a tough market and we’re trying to fight for every scrap we can,” he explains. “I would say on average we are paying 50 to 75 cents less per CD this year than we were last year and that’s just due to discounts and deals. There’s just a lot more pay for performance type programs that we put out there. We say, ‘Look, we’ll buy $200,000 of your stuff, but we want a $2 rebate for a period of sixty days.’”

According to Dreese, in order to reach beyond their loyal customers, the company has changed their marketing and advertising focus over the years. So much so, in fact, that their ad buys have gone from $3M three years ago to under $500,000 this year. Most of that money has shifted to their eNewsletters that go out to 90,000 opt-in subscribers a week. During the holiday, two mailings will go out, giving Newbury 600,000 to 700,000 email impressions during that time.

Even as he spends some time worrying about his bottom line, Dreese is buoyed by the fact that he won’t have to deal this year with flailing Tower Records and Virgin Records stores. “Last year they sold a ton of friggin’ CDs at very low prices,” he reports. “Those people that used to be Tower loyalists have now become Newbury customers. We used to share a lot of wallet with them, now Best Buy is our biggest competitor.”

CANADA’S TKO

Smaller retailers north of the border compete with big box stores and Boxing Week – the 6 days between Christmas & New Years when Canadian retailers slash prices in order to clear their inventory to avoid additional taxes in the new year.

Keith Parry, Manager of the triple threat retail, distribution & record company, Scratch Records, says he’s careful about promoting sales before Christmas. “We do extra advertising: handbills, flies and whatnot, but it’s sort of tricky because you can’t advertise to close to Christmas or people will wait. We look forward to a slow part of December in our store. It gets busy around the 10th and then it blows out during Boxing Week.”

Scratch, Parry reports, looks to vinyl as its sales savior. “We’d be cooked if it wasn’t for vinyl,” he says. “Indie stores are doing well with vinyl and we still need CDs, it’s not like they are dead, but the numbers are down.”

Despite the best efforts of retailers and distributors, it’s unlikely that CD sales will be up this year. Even obtaining last year’s numbers may be a miracle.

David John Farinella has been covering the inside of the music business since 1989. His first book, “Producing Hit Records: Secrets from the Studio” is now available in bookstores around the country and at the website producinghitrecords.com.