Irvine Music Company Used Wholesaling to Boost Its RPMs

It’s 5:20 p.m., and Todd Semm is in a hurry.

Jesse’s Books & Music of Cottonwood, Ariz., needs 300 CDs, and the Federal Express truck is arriving in 10 minutes at the Irvine warehouse.

Standing at the shipping counter, Semm must make sure the packing list matches what’s in the two boxes in front of him and that the shipping label has been properly scanned into the tracking computer.

“If it doesn’t go out today, we’d have to send it at a more expensive rate to the customer,” said Semm, assistant warehouse manager at Super Discount CDs, a wholesale music distributor owned by Irvine-based Upsilon Corp.

Higher costs and shipping delays are the two things that Super Discount’s customers--about 600 small music stores nationwide--can ill afford this month.

Because music tends to be a last-minute purchase for many shoppers, this week is the equivalent of the Super Bowl for Super Discount. The company makes about 20% of its annual sales--and 50% of its annual profit--between Thanksgiving and New Year’s. Last year, Super Discount accounted for about 75% of Upsilon’s $6.8 million in sales.

This holiday season is a particularly challenging one for Upsilon owners Jeff Walker and David Hurwitz, whose 8-year-old company is growing rapidly.

In April, Upsilon moved into a warehouse six times larger than the old one. The move was fueled by a surge in Super Discount’s music store accounts, which doubled over the last year.

Everything about the new operation is bigger. The wholesale business today employs 20 people, up from 12 a year ago. The warehouse can stock up to $5 million in inventory, or about 500,000 CDs, up from about $800,000, or 80,000 CDs, at the old location. Rent has tripled to $8,500 a month. And to better manage the operation, Walker and Hurwitz spent $120,000 on new computer and security systems, which carry a $2,200 monthly payment.

But if all goes according to plan, the investment will begin to pay for itself this quarter, thanks to a strong December. Super Discount’s new digs, which have been running in the red since the April expansion, will turn profitable.

Including its three music stores in Orange County, Upsilon’s sales for the first half of this month totaled $325,000, up 11% from the same period last year.

Most retailers are preoccupied with monitoring inventory this week, but the music industry generally is spared this annual nail-biting exercise.

Because of distributors like Super Discount, music merchants can replenish fast-selling albums the morning after placing an order.

Super Discount customers can place their orders by fax or e-mail as late as 3 p.m. Pacific time each weekday. That gives customers in the Midwest and East almost until the end of the day to place orders, and gives Super Discount several hours to pull and pack orders and still meet Federal Express’ pickup deadlines.

The same holds true on the supply side. Super Discount places orders daily with the six major record companies on the West Coast. Those shipments arrive the following day.

About 550 of Super Discount’s 600 customers are one-store businesses, and filling their orders is tedious work. Of the 300 CDs requested by Jesse’s Books & Music, the most copies of any single album is six--for Chumbawamba’s “Tubthumper.” The rest are for one or two copies of CDs by dozens of different artists.

It takes nearly 40 minutes to fill Jesse’s order, which totals about $3,000 and fits neatly into two small boxes. Super Discount didn’t have about 40 of the CDs the store wanted.

The repetitive nature of the work makes it hard to find employees. Turnover is high, Walker said. Semm, 20, started at Super Discount in May as an order puller making $5.50 an hour. Today he makes about $8 an hour as assistant warehouse manager.

Super Discount will ship between 600,000 and 700,000 CDs this month. While that is up dramatically from a year ago, it is only about 20% of what the new, bigger warehouse can handle, Hurwitz said. The two biggest sellers: Celine Dion’s “Let’s Talk About” at 6,800 copies, and Metallica’s “ReLoad,” at 5,000.

Hurwitz and Walker got into the wholesale business in 1994 as a way to more quickly expand their company, which at the time consisted of two CD Listening Bar stores in Irvine and San Juan Capistrano.

“We’ve always been pro-growth, but after we opened our second store we realized it was going to be very hard to grow it more than 5% to 10% a year without having to add more stores,” Hurwitz said.

Walker came up with the idea of wholesaling the top-selling titles, and they bought a mailing list of 200 independent music stores for $100. Being merchants themselves, they decided on a strategy they knew would quickly win them customers: low prices.

Initially, the plan attracted dozens of small, independent store owners, such as Richard Carnes, owner of Poor Richard’s Music in Vail, Colo.

“They have the lowest prices by far. They are about a buck [per CD] under anybody else,” said Carnes, who stocks about 10,000 titles in his 1,200-square-foot store, the only music shop in Vail.

Hurwitz and Walker hired a sales staff, which began cold-calling every name on the mailing list.

Along the way, they got some unforeseen help. A major competitor, Alliance Entertainment Corp., filed for bankruptcy reorganization in July and plans to close its Santa Fe Springs warehouse at the end of this month.

That leaves the larger and more established Valley Records of Woodland as Super Discount’s primary competitor in the West. Valley carries a larger catalog of titles--150,000 versus Super Discount’s 85,000--but its prices are higher.

The low-price strategy has made Super Discount an emerging power in the music distribution business.

“In the grand scheme of things, they are definitely an up-and-coming aggressive company,” said Cory Connery, Los Angeles branch sales manager at WEA Corp., the distribution arm for the Warner, Elektra and Atlantic labels. “They are not an established player, but they are a big player. And with the growth potential they have, their future is all in front of them.”