Record Retailers Face Music, Plan Closures

Record store operators are pleased to report that rubber duck toys, talking Ozzy Osbourne action figures and CD storage cases are flying off the shelves.

But a boom market in knickknacks won’t keep hundreds of stores from closing in the next few months as buyers shun their core product -- recorded music.

Best Buy Co. is expected to announce on Thursday the closure of about 150 of the roughly 1,300 Sam Goody and other stores in its Musicland division, according to insiders.

The move by one of the country’s largest record store chains is only one in an anticipated round of closings prompted by last year’s 11% decline in album sales.

Torrance-based Wherehouse Entertainment Inc. is expected to close 30 of its approximately 400 stores in the coming weeks, company executives said. Trans World Entertainment Corp., owner of FYE and other stores, plans to shutter about two dozen of its 900 locations.

Albany, N.Y.-based Trans World said Tuesday that its holiday sales declined 2% to $406 million on a comparable-store basis from the year-earlier period. Executives said an even steeper decline in CD sales was offset by revenue from other merchandise.

The new store closings accelerate a trend that already was underway because of back-to-back annual declines in record sales.

The problem has been aggravated by price wars with mass merchants such as Wal-Mart and Best Buy’s own discount electronics outlets.

“The music business as a whole is in disarray,” Best Buy Chief Executive Brad Anderson recently told investors.

Badly damaged chains, including Best Buy’s Musicland, could begin closing unprofitable stores even before their leases expire, analysts and executives said.

Worse, some industry executives are convinced that several retailers will fold completely in the coming months. Because music-based retailers stock more older, “catalog” albums -- which generate bigger profit margins for labels -- their disappearance would be especially troubling, record executives say.

“This could be the worst year for bankruptcies the industry has seen,” said the head of a major music distributor.

Even some major players were obviously caught off-guard by the rapid deterioration in record retailing. Only two years ago, for instance, Best Buy bought the Musicland chain for $685 million. The company has said it expects the division to post a loss of at least $80 million for the year ending Feb. 28.

“The best solution for Best Buy is to exit as much of this business as possible as quickly as they can,” Goldman Sachs analyst Matt Fassler said.

During the late 1990s, the five major record labels helped bail out already shaky retailers by subsidizing advertising costs for chains that agreed to price albums under company guidelines.

But in 2000 federal regulators forced labels to halt the practice on the grounds that it was anti-competitive.

Several state attorneys general also sued the major labels and music retailers over the practice, which prosecutors said illegally inflated the price of CDs. In late 2002, five major record companies and three retailers agreed to a $143 million settlement.

Record executives warned that without the advertising subsidies, music retailers would slip into oblivion. Now, “it’s absolutely coming true,” a label executive said Tuesday.

So troubled chains are pinning their hopes on such extras as toys, concert DVDs and video games.

“You have to diversify if you want to stay alive today,” said Alayna Hill, who co-owns two record stores in Rochester, N.Y., and sits on the board of the Coalition of Independent Music Stores.

“If there’s a big release, people do react and people want to buy that record,” Hill added. “But as far as people just going into record stores for the heck of it, it’s not the case anymore.”

Kevin Cassidy, senior vice president for retail operations of West Sacramento-based Tower Records, said his company muddled through the Christmas season by relying on sales of toys, music accessories and music-oriented DVDs.

In addition, he said the chain -- which plans to close four of its 100 stores in the next two months -- had improved its staff’s sales skills and begun more promotions based on older albums that big-box stores might not stock.

But Cassidy said the slow holiday is only a prelude to more bad news: “The first 90 days of the year are a desert for new releases.”