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DVD Reaching CD Parity at Music Stores

8 Apr, 2004 By: Erik Gruenwedel

Amoeba Music, a San Francisco-based trio of independent music stores featuring eclectic artists and hard-to-find fare, including vinyl albums and laser discs, is expanding its DVD video repertoire from a 65/35 percent mix with music CDs to 50/50 by the end of the year.

Newbury Comics, a 24-store music retailer based in Newbury, Mass., is reconfiguring its stores to accommodate up to 40 percent more DVD feature film titles.

Virgin Megastores, with some of its 20 retail locations in the U.S. approaching 70,000 square feet, continues to see challenges to the music industry and, as a result, is “re-evaluating” and “re-allocating” shelf space to growing DVD departments.

Strong second-half U.S. retail music sales in 2003, spurred in part by CD albums from OutKast, Alicia Keys and Ludacris, couldn't overcome a 12 percent first-half decline and finished down 6 percent compared to 2002, according to the International Federation of the Phonographic Industry.

With ongoing anemic sales at music retail—despite assertions to the contrary by the U.S. recording industry—it is not much of a surprise that music retailers are supplanting CDs with movie DVDs.

A Call to DVD
Wherehouse, the financially troubled music retailer acquired last year by Trans World Entertainment, cited the failure to increase DVD inventory at the expense of music as a significant cause for its fiscal woes.

“The prior management didn't have the resources or the inclination to grow the video business, which has been increasing [throughout Trans World's businesses] over the last two years in heavy double-digit increases,” said Fred Fox, EVP of merchandising and marketing at Albany, N.Y.-based Trans World. “I've deployed a gross-margin-return-on-investment analysis on every inch of every store. While music has a higher margin, if [video] will turn faster, it can certainly win that game.”

In a related matter, Trans World last week announced it would initiate a 100-to-1 reverse stock split for all outstanding shares of common stock.

Tower Records and Video, which emerged last month from bankruptcy protection, announced earlier this year that a principle component to its near term survival was expanding DVD movie offerings to 40 percent of its product mix.

“We've been very focused on the DVD side of the business,” said CEO Allen Rodriguez. “It's certainly growing rapidly.”

To underscore its commitment to the DVD format, Tower has aggressively pursued both urban and Latino DVD fare, establishing in-store sections, end caps and signage, in addition to working closely with several distributors, including Maverick Latino, Ventura Distribution's Urban Works and Studio Latino.

“We're finding that it is such an untapped market for us,” said Rick Timmermans, director of video and merchandising at Tower. “It's a whole new audience for us.”

Accepting DVD Begrudgingly
Among some music retailers, however, the encroaching DVD juggernaut is as much an anomaly as a market reality.

Take Duncan Browne, COO with Newbury Comics. He admitted DVD is “playing” positively compared to the CD. He agreed — with a caveat — that the format has the most significant growth of any of his major categories of product.

“We are going to expand our shelf space for DVD without impacting music space,” said Browne. “Whether it is posters, comics, toys or movies, we are constantly shifting [retail] space around either because we have decided to quadruple the number of Curt Schilling bobble heads [for the beginning Boston Red Sox baseball season] or another reason.”

Mike Boyter, co-founder of Amoeba, agreed video has become a savior to music retail, but is quick to add that Amoeba's 6-to-1 ratio of music titles to video is proof the company isn't sacrificing its traditional music roots.

“It's really a separate life force,” said Boyter of the video department. “That's what people want now. They want more DVD product because more and more people have DVD players.”

Intent on competing with Best Buy and other big box retailers, Amoeba is stocking its DVD shelves with independent material, foreign films and hard to find releases.

Rather than sell 5,000 copies of the latest smash hit, Boyter said he is content selling a couple hundred of a particular title and having a broad catalog.

“We are not in the Tower situation where we feel like we are diminishing our music inventory for movies,” Boyter said. “But I know that is a direction that a lot of music stores have gone in.”

In the end, Browne understands Tower's need to embrace DVD for survival as a reality facing all music retailers.

“Some ships are more skewed than others,” Browne said. “Any music retailer is in that same ocean, to continue that metaphor.”

DVD Music Video to the Rescue?
Unit sales of music DVD doubled in 2003, according to Video Store Magazine Market Research, reaching 18.7 million discs sold, versus 9.1 sold in 2002.

The International Federation of the Phonographic Industry reported that global sales of DVD music videos in 2003 increased 67 percent to $1.8 billion, and now represent 5.7 percent of overall music sales.

By comparison, VHS and other music video formats tallied combined global sales of $200 million.

Japan, the world's largest market for DVD product, saw a 39 percent increase in sales of DVD music videos, according to the IFPI. Top selling artists include Coldplay, U2, Michael Jackson, Avril Lavigne and Led Zeppelin.

“DVD growth has been fantastic,” Jay Berman, IFPI chairman/CEO, told Billboard. “There are probably a lot of lessons to be learned in terms of the DVD format. I think we still have a couple of years of substantial growth.”

Vince Szydlowski, senior director of product of Virgin Entertainment Group, including Virgin Megastores, isn't so sure.He said sales of music DVDs, like any format, depend on the release and where it is situated in the stores.

“We made an effort to get them out of the DVD department and onto the music floors,” said Szydlowski. “Half of it is just awareness from a music consumer's perspective.”

Milking a DVD Cow
With many music retailers embracing DVD movies, some wonder whether the format has reached the saturation point.

“We are starting to see a plateau in DVD sales in general,” said Virgin's Szydlowski. “It is not as aggressive as last year or the prior year.”

He admitted that as an early adopter of the DVD format, coupled with mass merchants such as Sam's Club, Wal-Mart and Costco trading heavily on price, there tends to be a leveling effect on Virgin's business.But Szydlowski expects music to continue to be challenged in the coming year, with a 10-percent decline in sales that will result in a comparative increase in shelf space for DVD.

“We are going very aggressive where it is almost one-for-one music against DVD in our campaigns, including browser bins that feature ad hoc titles,” he said. “It is getting a lot of representation. You can't walk into a Virgin Mega Store and not know we carry a large selection of DVD.

“We recognized two years ago that DVD was going to get us through the challenges on the music side.”

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