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Troubled Music Stores in Tune With DVD

7 Jul, 2003 By: Thomas K. Arnold

Are music stores evolving into a new breed of video specialist that caters to movie buyers rather than renters?

It certainly appears that way, as what used to be known as record stores transform themselves into home entertainment emporiums where DVD is an increasingly significant part of the mix.

“In general, DVD is keeping us alive,” said Russ Solomon, founder of the 98-store Tower Records and Video chain of West Sacramento, Calif. “If we didn't have DVD, we'd be in big trouble.”

“DVD is very important to us, and growing,” said Patrick Brown, general manager of Twist & Shout, an independent record store in Denver. “Music, of course, is still the bulk of our business, but the way music's been lately, we've had to look at how we can diversify and find other kinds of products people are going to come in and look for.”

Music retailing has weathered three consecutive years of declining CD sales, and everyone's feeling the pinch.
  • Best Buy ditched its red-ink-plagued Musicland Stores subsidiary, and new owner Sun Capital Partners is planning to renegotiate leases and close more stores -- on top of the 160 locations shuttered during the 2-1/2 years Best Buy ran the show.
  • Bankrupt Wherehouse Music stores continue to disappear from the retail landscape. At last count, the Southern California-based chain was operating just 160 stores, down from more than 500 three years ago.
  • Tower posted a loss of $13.8 million for the quarter ended April 30 and a decrease in revenue of 11.3 percent. The chain has hired a Los Angeles-based investment banking firm to assist it in finding a buyer.
  • And the Seattle Business Journal recently reported that five veteran music retailers closed their doors within the space of a few weeks.
DVD is leading the charge to the rescue. The National Association of Recording Merchandisers' (NARM) latest annual membership survey shows that DVD sales in music stores soared to a record $2.69 billion in 2002, up from $1.87 billion in 2000 (no 2001 figures were reported). Add VHS to the mix, and total video sales for last year were $3.36 billion. Music sales, in contrast, fell to $8.93 billion in 2002 from $10.46 billion in 2000.

“Retailers are looking for product diversity to improve their bottom lines, and certainly a big part of that is DVD,” said Susan L'Ecuyer, director of communications for NARM.

Jeff Fink, president of sales and marketing for Artisan Home Entertainment, said music retailers represent “a growing part of our business and a growing part of our focus.”

“They're very important. We're seeing big growth, especially as the music business becomes more questionable and complicated. They're turning more and more of their attention -- and shelf space -- to DVD,” Fink said.

Indeed, virtually all the big music chains are continuously upping their commitments to DVD. At Tower, video sales -- mostly DVD -- account for 24 percent of total sales, up from 17 percent three years ago. In the VHS-only days, packaged-movie sales never rose above 12 percent.

CD sales, by contrast, are at 67 percent “but dropping,” Tower's Solomon said.

Accordingly, Tower continues to beef up its DVD sections, weeding out VHS and even CDs to make room. Solomon said Tower stores have at least 9,000 DVDs in stock, and at some locations the DVD inventory is as high as 13,000 units.

Twist & Shout only began carrying DVD movies a year and a half ago, right before Christmas 2001, Brown said. But already, DVD sales account for 5 percent of total revenue, and Brown expects that percentage to grow significantly.

“We just moved the video section from the back of the store all the way to the front, and expanded it from one row to 1-1/2 rows,” Brown said. “Music is still our focus, but given how much space we have dedicated to DVD -- which in our store is not a huge amount -- it's giving us very good returns.”

The same holds true at Electric Fetus, a three-store chain with storefronts in Minneapolis, Duluth, and St. Cloud, Minn. In the past year, “DVD has grown 500 percent, both in selection and in sales,” said buyer John Kulstad.

If there's a downside to DVD's growth in music stores, it's the market dominance of mass merchants like Wal-Mart and Target Stores, with their rampant, and drastic, first-week discounting of top hit titles.

But that's hardly an insurmountable challenge, music retailers say. Many won't play the price game, preferring to rest on their selection.

“The mass merchants are the mass merchants -- they never carry the catalog, the number of titles, that we have,” said Tower's Solomon. “They're in a different business.”

“We're used to dealing with mass merchants from the music side, and we're just prepared to cope with that,” said Twist & Shout's Brown. “We sell more mainstream movies, but our focus is really on the independent stuff. Art films, foreign films, cult films -- that's really what we're moving.”

Electric Fetus' Kulstad agrees. “Why would we want to carry the latest box office boffo blockbuster if Target and Best Buy are going to sell it below our cost?” he said. “And we don't necessarily believe that's what our customers are interested in. We're a fairly serious, full-deep-catalog record store, and we're taking the same approach with movies.”

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