Boom in Compact Discs Fuels Franchising Moves

With the price of compact disc players dropping and more and more recordings becoming available, franchised stores that sell the plastic-and-aluminum discs look like the next natural extension of the recorded music industry.

Ed Dempsey hopes so.

Dempsey owns Compact Disc Warehouse Inc.--believed to be the first of what has become an increasing number of retail stores in the nation to sell compact discs exclusively. He now hopes to become the Ray Kroc of compact discs, franchising his retail formula across the land.

Dempsey’s vision of a society free of tape hiss and scratched vinyl records has been fueled by the soaring sales at his Westminster store, which he expects will total $1 million this year.

Sales were much slower, “kind of ho-hum,” Dempsey recalls, for the first six months after the store opened in November 1984. But traffic now is so great that later this month the store will move from its present 1,200-square-foot location to a 2,400-square-foot site two doors west. That store will become the first franchise and the franchisee will be the store’s manager and Dempsey’s founding partner, Randy Sequerira.

Although few are predicting the imminent death of the cassette tape and vinyl album industry, compact discs are clearly on a strong growth curve.

Industry officials are projecting sales of about 2 million disc players this year, up from the 1 million players that were sold in 1985 and from the 200,000 in 1984, the year CD players were introduced in the United States. The technology debuted in Japan and Europe a year earlier.

“Discs hit so fast they caught everyone by surprise,” Dempsey said. “Everyone” includes U.S. manufacturers, who missed the trend completely and thus may have ceded the next generation of electronic equipment to the Japanese.

U.S. sales of the discs, which can hold twice the amount of music as a vinyl record, are expected to reach 50 million this year, up from 1985 sales of about 22.6 million and 1984 sales of 5.8 million discs.

Those numbers have enchanted not only Dempsey, but also John O’Brien, chairman and president of LaserLand Corp., an Aurora, Colo.-based company that plans a “preemptive strike” in the CD franchising business.

To finance O’Brien’s plan for a chain of 100 CD retailers within three years, the company filed Monday with the Securities and Exchange Commission for an initial public offering of 1 million shares of common stock at $3 a share.

Proceeds will be used for working capital, sales and marketing, and for the “test tube” store that O’Brien hopes to have open in the Denver area within 60 days.

Favored Path

As with other enterprises from burger stands to muffler shops, franchising increasingly has become the favored path for businesses and entrepreneurs alike. Banks often look more favorably on a loan to establish a franchise, and consumers tend to like familiar labels.

Both O’Brien and Dempsey plan to sell their franchises for $25,000.

For that fee, Dempsey and O’Brien will provide franchisees with a computerized sales and inventory system and an anti-theft system. Dempsey estimates franchisees will have to spend another $75,000, mostly for inventory, before opening for business; O’Brien figures a LaserLand franchisee will need $200,000 for an inventory of discs and players.

Dempsey plans to limit his stores to disc sales.

Compact discs have become consumer favorites because they are smaller and lighter than records and are less easily damaged than either tapes or vinyl records.

Unlike tapes and records, which are touched and worn by tape heads or needles, nothing touches the compact disc, which is a hard plastic sandwich with an aluminum sheet in the center.

In a process something like reverse Braille, the laser “reads” microscopic pits on the first layer of plastic in the disc. The amount of light reflected back by the aluminum plate is converted to digital coding which then reconstructs the original sound waves.

Considered Durable

Although compact discs are considered more durable than tapes or records, they are not yet cheaper.

Compact discs typically retail for about $13-$16, which is at least $5 higher than a tape or record.

Why would a consumer want to buy a disc rather than a tape or a vinyl record?

“They sound 10 times better,” said Russ Peterson, part owner of Compact Disc Unlimited, a retail shop in Costa Mesa. In addition, discs have all the music on one side, will not wear out and never will need cleaning, “unless you eat on them,” Peterson said.

Retail prices seem likely to fall as global production of the discs begins to catch up with demand. Prices of the players have sunk near the $100 mark and may go even lower, said David Vernier, editor-in-chief of Digital Audio and Compact Disc Review, the Peterborough, N.H.-based magazine for disc nuts, which has grown from zero to 80,000 subscribers in two years.

At present, there are only about 16 compact-disc plants in the world. All are in foreign countries except LaserVideo Inc., which has plants in Anaheim and in Indiana.

And making a compact disc is a much more exacting and expensive process than making a cassette tape or a vinyl record. In the manufacturing process, “even a small particle of dust can make an error (on the disc),” Vernier said. By contrast, he said, “you could almost do record pressing in a garage.”

Expansions Planned

Despite the multimillion-dollar investment required to set up disc production, there are plans for at least a dozen plant expansions or additions around the world.

Anaheim-based LaserVideo, a unit of Chicago-based Quixote Corp., will open a new $50-million plant in Huntsville, Ala., next month that will be capable of producing 60 million compact discs a year. The Anaheim plant can produce only about 2.5 million discs a year.

In a joint venture with N.V. Philips, the Dutch electronics concern, Delaware-based E.I. Du Pont de Nemours & Co. is building a 160,000-square-foot compact disc plant near Charlotte, N.C. Philips and Sony Corp. pioneered the audio disc technology.

Even with the increased production from the Alabama plant and the expanded production from disc plants around the world, “it will be several years before the industry catches up with demand,” said a spokeswoman at LaserVideo.

And sales still have a distance to go before they intercept vinyl album sales, which totaled 167 million in 1985, or $1.28 billion, and cassette tapes, which totaled 339 million last year, or $2.41 billion, according to the Recording Industry Assn. of America, a New York-based trade association.

But those in the CD business say they are confident discs will overcome.

“I don’t think there is any question that CD will overtake records, unless there is something out there we don’t know about,” said Vernier.

Compact discs’ greatest potential may not be in music but in pure information storage. Digitally encoding the music on two record albums, a typical disc’s capacity, requires about 540 megabytes of information. That is equivalent to about 250,000 typewritten pages of information, which would require about 1,500 floppy discs to store.

That means a single compact disc can accommodate all the information in an entire set of encyclopedias.

Statistics like that prompted Dempsey to set aside his concrete-cutting business for discs. “I thought this would be the coming deal so away we went,” he said.

Jeff Rowe is a free-lance writer.

COMPACT DISCS’GROWTH IN THE MARKET

1985 1984 Change Compact Discs $390,000,000 $103,000,000 +278.6% Tape Cassettes $2,410,000,000 $2,380,000,000 +1.7% Vinyl Records $1,280,000,000 $1,550,000,000 -17.4%

Source: Recording Industry Assn. of America