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COMPANY TOWN : Pessimistic Note : Record Retailers Not Hopeful New Releases Will Perk Up Flat Sales

TIMES STAFF WRITER

With only 46 shopping days left until Christmas, record retailers are questioning whether an onslaught of potential superstar releases can salvage what has been a flat year in pop.

Despite earlier industry projections of double-digit growth, retailers have sold only 454.5 million albums since Jan. 1--barely a tenth of 1% more units than during the same period last year.

After three years of dramatic growth, the $12-billion domestic music market hit a wall in May, when sales began to slip.

Analysts attributed declines in album sales over the past six months to the fact that music fans are spending money on other forms of entertainment such as video games, computer software and interactive on-line services. In addition, price wars with discount houses have driven down profit margins for retail chains, triggering several bankruptcy filings this year.

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“Optimism is not the prevailing mood in the music market these days,” said Russ Solomon, chairman of the Sacramento-based Tower Records chain. “Even if we have a great holiday sales season, retailers are going to be lucky if the year ends flat. Everybody is just struggling to survive.”

Nerves are on edge as mountains of new product from more than three dozen heavy hitters such as Madonna, Garth Brooks, Bruce Springsteen and the Rolling Stones begin to pile up on the shipping docks of the nation’s largest record retail warehouses.

Music merchants typically count on superstar albums to draw consumers into stores and hope to sell an additional 130 million albums before the holiday season peaks. However, recent poor showings by anticipated blockbusters from Michael Jackson, Green Day and other big name artists have dampened the spirits of retailers and raised concerns among record label chiefs, many whom are struggling to meet year-end sales forecasts.

Executives at several large record conglomerates said privately this week that they are nervous about record stores being able to pay their bills in January. They also fear the prospect of millions of potential returns.

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“The return policy poses a risk for the record business across the spectrum,’ said Harold Vogel, entertainment analyst for Cowen & Co. “There is certainly cause for concern.”

Music manufacturers are less at risk than retailers because growing international record sales count for about two-thirds of industry revenue.

Although few seasoned observers were surprised by the lackluster domestic performance of new albums by aging icons such as Rod Stewart, Elton John and Bon Jovi, executives are still grumbling about duds delivered by touted young acts such as the Red Hot Chili Peppers, Lenny Kravitz, Candlebox, Blind Melon and the Spin Doctors.

Albums by Blues Traveler, the Dave Mathews Band and Bone Thugs N’ Harmony sold respectably this summer, as did the soundtrack to the film, “Dangerous Minds.” Releases this month by the Smashing Pumpkins and Tha Dogg Pound also stand out as potential contenders among the avalanche of new rap and rock acts that retailers have been banking on to deliver big numbers.

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But so far, only Hootie & the Blowfish’s “Cracked Rear Mirror,” TLC’s “CrazySexyCool,” Live’s “Throwing Copper” and Alanis Morissette’s “Jagged Little Pill” have broken out of the pack to rank among this year’s top 10 multimillion-sellers.

The quality of new releases isn’t the only problem for record retailers. The compact disc explosion, fueled primarily by baby boomers replenishing old vinyl record collections with more expensive CD versions, is bottoming out. Distribution sources acknowledged this week that record companies are beefing up efforts to find a new digital format to replace the CD.

Indeed, business got so bad this year that several record retail chains, including Los Angeles-based Wherehouse Records, have filed for bankruptcy protection.

Even giant retail chains such as Minneapolis-based Musicland and Albany, N.Y.-based Trans World Music Corp. began to feel the pinch by the summer. Blockbuster Entertainment Corp., the massive Ft. Lauderdale, Fla.-based chain, stunned the industry when it announced this month that cash flow in the third quarter for its music stores dropped from a pallid $5.9 million on $118.5 million in sales to $3.3 million on sales of $125.8 million.

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Blockbuster and other chains blamed tepid sales not only on a dearth of commercial blockbusters released in the first three quarters, but also on cutthroat competition from discount houses such as Best Buy and Circuit City, which sell CDs below cost in hopes of luring consumers into their stores to buy electronic goods and other products.

Discount houses--which purchase the top 100 CDs from manufacturers for about $10.80 each and sell them for less than $10--captured more than 10% of the music market in 1995.

Profit margins have dropped so low for record store owners these days that some chains make more money collecting advertising and product placement subsidies from record companies than they do by selling albums, sources said.

Although record companies profit handsomely by selling to price-slashing discount houses, analysts said the practice may come back to haunt them. Because domestic record store owners order albums on a consignment basis, anything that does not sell can be returned to the manufacturer after the holiday season.

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Instead of returning product this year, retail chains have been using it to stock the shelves at newly opened super-store divisions. Industry sources estimate that between $500 million and $1 billion of unsold CDs could come flowing back to manufacturers in January.

One record label president, who spoke on condition of anonymity, offered a bleak assessment of the situation.

“The word concern hardly conveys the mood shared by manufacturers these days,” he said. “The retail community is already dancing on a tightrope. If Christmas doesn’t bail them out, the industry is in deep [trouble].”

Retailers question the spectacular sales growth reported in recent years by the Recording Industry Assn. of America, the Washington lobby group that represents the nation’s biggest record companies.

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Last year, the association declared that the value of annual domestic shipments of prerecorded music and music videos exceeded $12 billion--a 20% increase over the previous year.

The problem with that figure, critics say, is that it is based on the number of albums shipped--not sold. The calculation also assumes that albums sell for an average suggested retail price of $12.50--about $1.50 more than the price that retailers now charge for best-sellers.

Sources at several record companies believe the $12-billion estimate is at least $1 billion too high.

* THE TIMES MUSIC INDEX: A look at the weekly CD and cassette sales and year-to-date record company market share. D4

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