By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
By Eric Nicholson
Flat sales? Wasn't 1995 the year generic music broke, and Alanis and the Blowfish got bigger than Jesus? It was, and they did.
But it is hard for even the most savvy company to show a profit when it is forced to offer its product at a price only a fraction above wholesale.
Unless that company is also selling home appliances and computers.
While independent record stores have been declining, garnering a lot of attention and tsk-tsks, few people seem to have noticed who was hijacking the customers--Best Buy and Circuit City.
Best Buy and Circuit City's price strategy is simple: Get customers in the door with $10 CDs and hope that, while they are there, a salesman can convince them to buy a new television or computer or whatever.
While hardly original as a business strategy, the approach has been wildly successful.
Even Big Bucks Burnett, clerking at Pagan Rhythms after closing his own music store, admits he has succumbed to the temptation.
"I went into [Best Buy] to buy the first Beatles anthology, because I knew we wouldn't get it on the day it came out," he says. "While I was there, I bought this $70 Magnavox CD jam box. It's a great little unit. That's how they do it. I was like, 'Oh great. Now I'm part of the problem.'"
When other music retailers realized the problem, they also realized it was almost impossible to compete.
"Obviously they [Best Buy and Circuit City] are the lowest prices in any market that they are in," says Vinny Losasso, director of video operations at Amarillo-based Hastings Books, Music & Video. "Other retailers have to respond to them. They either try to compete or not, and take what they can get. I mean, the margins aren't great to begin with, and if you are selling CDs at or below cost, it's really hard to make money."
Last year alone, about 300 music stores in the United States closed their doors, and analysts predict that up to 500 more may close this year.
All of which leaves Lavon Pagan feeling a little vulnerable. His Pagan Rhythms is still open, but he's had to adapt to changing times.
"I have been forced to scale back in terms of new titles," he says. "To say I stock half of what I used to is an understatement. Were it not for used CD sales, I would be out of business."
While Pagan and other store owners lay much of the blame at Best Buy's feet, the electronics retail giant isn't willing to accept it.
Gary Arnold, vice president of music marketing at Best Buy, plays down his company's effect on music retail. "I wouldn't say that Best Buy is even the least expensive place in the free world to buy music. I mean, open up your Sunday paper, and I guarantee that you'll find offerings from record clubs," Arnold says. "The record club's offer clearly states, 'Buy 11 for the price of one.' That has an impact on retailers, too."
Arnold may be partly right. More people are buying music through record clubs or ordering it over the phone through services such as MCI Communication Corp.'s 1-800-Music Now. But smaller retailers are clearly responding to Best Buy's impact in the industry.
For example, Musicland, which operates more than 1,400 stores throughout the country, was forced to cut drastically its prices in December 1995--by as much as $5 per title--to keep up with the discount Joneses.
Between them, Best Buy and Circuit City are staking out a growing share of CD sales, but spokesmen for the two companies contend that their low prices are not being used as a carrot to entice consumers into the store.
"That's one of the true misconceptions about Best Buy. Best Buy is what we call a 'low-price provider,'" Arnold says. "Sometimes we will aggressively price a product and sell it for about cost or a little below. But what you have to understand is that, out of 10,000 titles, at any one time we may have four titles that are aggressively priced like that. The other 9,996 titles aren't going for that much less than our competitors."
Paul Raycoff, vice president of marketing at Circuit City, says his company isn't trying to lure customers in with low-priced CDs. It is merely laying the groundwork for future big-ticket sales.
"We're very aggressive with our CD prices, but that's consistent with all our prices," Raycoff says. "We certainly didn't think getting a customer to buy a $10 CD is the same as getting someone to buy a $2,000 television. But if we get some customers in here who know that $10 is a good price, we can show them that $2,000 is a good price too, and they'll think of us when they're ready to make that purchase."
But Losasso, of the Hastings chain, thinks Best Buy's pricing strategy is working so well it may almost be too successful, hurting Best Buy as much as it is hurting other retailers. "I think what they originally created as a loss leader, a way to attract business and make money off their washers and driers and all their other products, has turned into a monster," Losasso says. "They are doing so much business just in CDs and videos that it is eating into their overall margins.