Accidental Deaths

Wars between the electronics giants are killing Dallas' independent music stores

Customers wandering into VVV Records last week found one of Dallas' more venerable music stores in its death throes. Tables were cluttered with merchandise and five-for-one specials, and price tags hung from everything that could be hauled away. There was a distinctive smell in the air, a musty odor of defeat emanating from a blend of dust, old cardboard LP covers, and fading walls stripped of concert posters.

After 17 years, VVV owner Neal Caldwell was closing shop, the latest independent record-store owner in Dallas to look the future in the eye and realize his time is past.

Caldwell's store at 3906 Cedar Springs--tucked in a strip center, and not much bigger than a living room--once drew customers from as far away as Oklahoma. They came to find a meeting place of the like-minded: hard-core music aficionados who appreciated obscurity, and a store owner who could discuss little-known recordings at the most arcane level. Some customers respected Caldwell's expertise so much they would let him make their musical selections.

In turn, Caldwell, now 45, considered the store his tribute to music--local music specifically. He plastered the back wall with posters from Dallas shows featuring area bands, and filled his bins with artists such as the Telefones, the Doo, the Ejectors, and the Devices.

But no more. "I guess I'll have to get a real job now," Caldwell says. "Which may be promising, but probably won't be fun."

Like many independent shops run as much from the heart as the wallet, Caldwell's store generally operated on a thin margin. These days, that margin is slipping away.

Caldwell's is the third independent Dallas music store to shut down in the past year. Direct Hit in Exposition Park and 14 Records on Lower Greenville had already shuttered their doors by the time Caldwell gave up the business. The same scene is being repeated throughout the country as small stores succumb to the changing reality of the CD business.

Ironically, it is not the once-feared superstores such as Blockbuster Music that are driving Caldwell and others under. In fact, even Blockbuster Music appears to be teetering on the brink.

Rather, stores that sell only music and CDs--small and big alike--are becoming accidental casualties in a much bigger war, the battle for dominance of the lucrative home-electronics market.

Fighting for their share of customers out to buy computers, stereos, televisions, and home appliances, national chains such as Best Buy and Circuit City are using discounted CD prices to lure customers through the door.

Unlike stores which only sell music, the electronics-retail giants don't really need to make much profit on their CD sales. In television and newspaper advertisements, the chains trumpet bargain prices, which often undercut music-only stores by several dollars per CD. The idea is to get customers in the store and hope they are tempted by the other, more expensive merchandise to be found there.

As if that weren't enough, other retail chains are picking around the edges of the business. Discount stores such as Target now stock racks of the most popular selections. Chains such as Borders Books & Music incorporate a wide array of CDs, and handy listening stations, in their stores.

Mixing the sale of CDs with that of other merchandise is proving so successful that non-music stores now sell 28 percent of the CDs in the United States, according to the Recording Industry Association of America.

The competition is proving too much for many smaller operators, guys like Caldwell who cannot match the fire-sale prices.

It is an exaggeration to say--as some do--that the days of independent music stores are over. Large chains naturally concentrate on big-selling albums, and there will always be some customers searching for hard-to-find recordings that aren't profitable for mass retailers to stock.

But the niche for stores like VVV is clearly getting smaller. Only the wily will survive.

Pagan Rhythms, another landmark independent store on Greenville Avenue, is hanging on for now, mainly because it traffics heavily in the secondhand market, buying and reselling used CDs. Located next door to a Blockbuster Music, the store has been run for seven years by Lavon Pagan.

"I will survive," he says. "If I have to buy CDs for a dollar and sell them for three, I'll do it. I will not be run out of this business."

Pagan need look no further than his own cash register to see the fate he is trying to avoid. Big Bucks Burnett, who used to own 14 Records, is now a salesman in Pagan's store.

"Dallas is a great example of what is happening in independent music retail," says Burnett, a 37-year-old who looks more than a little like Wolfman Jack. "Dallas needs to wake up. Three semipopular indie record shops have closed in the last year.

"It can happen to anybody."
The biggest fear independent music-store owners such as Caldwell and Pagan used to have was of the big record chains, stores which had the muscle to buy in bulk and turn a profit off volume.

Alarms went off in small shops everywhere when Sound Warehouse swept across the country in the early 1980s. There were dire predictions of what the future held for little operators.

Sound Warehouse, the biggest of the chains, was later consumed by Blockbuster Entertainment, which decided music sales would fit nicely with the marketing strategy that had made it the Titan of home-video rentals.

The advent of huge, national chains was tough, but independent stores managed to survive by offering customers variety and music savvy not available at stores pushing Top-40 hits.

Josh Venable, co-host of "The Adventure Club" on KDGE-FM 94.5, is a longtime patron of the independent stores, even though he once held a job selling CDs at a Best Buy store. "Indie stores hire people based on what they know [about music]. At Best Buy, I was never asked a lot of music questions on my application. I mean, it's obvious by the people who work there," Venable says.

"But then you go to Bill's [local indie store] and you say, 'I want Carter's [Carter USM] first record.' And they go, 'Someone over here is looking for 101 Damnations. Do we have it on vinyl or CD?' They know what you are talking about."

Expertise is one thing. Price is another, and starting in about 1989, Best Buy and other chains began to win the battle for the wallets of music customers, despite their employees' suspect credentials in music lore and trivia.

Ironically, even Blockbuster Music--once considered the 800-pound gorilla of music sales--is now looking like a scared chimp.

Prospects looked much brighter for Blockbuster Entertainment when, in 1992, the company paid almost $185 million for the Sound Warehouse and Music Plus chains. The company later acquired the Super Club Music chain, completing its full-scale invasion of the retail music business.

The company counted on the kind of success it had achieved in the video-rental market. But Blockbuster Entertainment apparently wasn't prepared for the cutthroat competition it would face, says Don Kulak, president of the Independent Music Association. Within three years, Blockbuster Music's cash flow had dropped nearly 30 percent to $33.1 million. The chain was compelled to close 34 stores in Texas in 1995, leaving it with 78 in Texas and 510 in its chain.

The company is still battling rumors of its imminent demise or sale.
Earlier this year, Tom Dooley, deputy chairman of Viacom Inc., Blockbuster's parent company and home of Paramount and MTV, announced at a media conference in Paris that the company was searching for a buyer or partner for its retail music operation.

A Viacom spokesman tried to shrug off the announcement, saying Viacom "had no plans of selling at this time" and that the announcement "was taken out of context."

But in what context would that kind of statement sound positive?
The business community has long expected Blockbuster Music to fail. Since Viacom bought Blockbuster Entertainment in September 1994, business analysts have predicted the music operation--which accounts for less than 2 percent of Viacom's total business--will be eliminated. Blockbuster Music regularly pulls in the least money among Viacom's 10 major business markets.

Such gloomy predictions are adamantly disputed by representatives of Blockbuster Music, who say the company is doing better than ever. "Those are just rumors," says Mariesa McClafferty, director of public relations at Blockbuster Music's company headquarters in Fort Lauderdale, Florida. "Business is going good. We are opening new stores in new markets."

Blockbuster employees apparently can relax--for the moment. The Internal Revenue Service recently gave its approval for Viacom to continue spinning off its cable systems stock, a deal which could bring the company $1.5 billion in cash.

This windfall could be used to pay off debts, making it less urgent to jettison Blockbuster Music.

Even if the IRS had vetoed the deal, Viacom chairman Sumner Redstone reportedly isn't the type to accept a defeat such as folding the music division. With the retail music industry in an overall slump, Viacom isn't likely to find a solo buyer for Blockbuster Music right now, anyway, although there's nothing to stop Redstone from splitting up Blockbuster Music and selling it off in pieces.

As Blockbuster Music's future appears uncertain, selected chart-topping CD titles have started showing up in Blockbuster Video stores, indicating that the company may be thinking of merging the music and video operations.

Having Blockbuster Music join their ranks would provide little solace for the smaller, mostly independent music-store owners who have failed in the past few years.

Some of the blame for the shakeout in the industry can be pinned on the country's changing musical climate. In the 1980s, underground bands played in rented VFW halls and abandoned warehouses, and fans shopped at stores like VVV.

In the green-hair-and-nose-ring 1990s, "underground" bands play in 15,000-seat venues. Popularity means bigger sales numbers, and bigger numbers catch the eye of large chain stores.

The edge independent music stores used to have over national chains was wide selections and savvy salespeople--owners like Neal Caldwell who knew their merchandise.

But national chains are getting better at the game.
Now, in almost any store that carries music, shoppers will find a wide variety of titles. The music sections in Barnes & Noble and Borders Books & Music are bigger than many music stores. Best Buy stocks more than 65,000 CD titles.

The past few years have been tough for all music retailers, says Bob Roberts, vice president of marketing for the North Canton, Ohio-based chain, Camelot Music. "The music industry, for the past 18 months to two years, has seen the number of stores devoted to the music category dramatically increase, and for the first time ever, in 1995, there were flat sales in music," Roberts says. "Retailers who entered into the business during this time expended a lot of dollars and basically got no return on their investment. This is the cause of a lot of heartache in retail."

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.

"If they would just raise their prices to reasonable amounts, it would be better for everybody. I mean, they have put a lot of retailers out of business. They may have created a monster they can't get rid of. And I don't think we've seen the last of it. It's like the gas wars of the 1970s. With their competition with Circuit City, I can see it getting worse before it gets better."

Russ Solomon, chairman of Sacramento, California-based Tower Records, sympathizes with his fellow retailers. He thinks mass merchants have created an unlivable situation for the entire retail music business.

But he is hopeful for the future.
"In all honesty, it's been difficult, and that's not just me talking. That's everybody in retail," he says. "There's no way you can stay in business with a 15-percent profit. But things seem to be turning around. The bloom is off the sage, so to speak.

"They [Circuit City and Best Buy] fucked it up. It's getting a little better. They finally realized they need to make at least a little profit off entertainment software."

Record companies may prove to be the saving grace for embattled music-only stores. Already, they are exploring ways to bring about a cease-fire in the price war between Best Buy and Circuit City.

Major labels such as Sony and Warner Brothers are beginning to insist that retailers stick to Minimum Advertised Price (M.A.P.) policies, which force retailers to pay for their own advertising if they cut prices too far. One label, PolyGram, has even said it will refuse to sell to any retailers who sell below cost.

Advertising money is the heaviest hammer record labels can wield in shoring up prices for their CDs.

One reason Best Buy and Circuit City can sell CDs so cheaply is that they, like most other national music retailers, don't have to pay for all CD advertising. Record labels pay for in-store displays and, in the case of Best Buy, national TV and color print advertising.

If the retail stores sell too cheaply, the labels can cut off the flow of advertising dollars, meaning the superstores would have to foot the bill for advertising themselves.

"With the new policies in place by the labels, it will almost be illegal for us to price CDs the way we do. We probably will have to raise our prices a little bit," says Best Buy's Arnold.

The labels may be making the right noises, but Pagan says he is worried that discussions of the stricter M.A.P. policies may be a smoke screen by record labels.

"The labels have tried to come up with a way to make retailers share the profits for a long time," he says. "That [M.A.P. policies] is all horseshit. It's window dressing, done to pacify their old accounts, people they have been doing business with forever.

"To think that they are selling at $2 below my cost is bad enough. But the fact that they are doing it with full-color ads and commercials paid for by the label is unreal."

Burnett thinks that Best Buy is too big for record labels to fight.
"I read in Billboard a year or so ago that Best Buy accounted for 9 percent of total CD sales in the country," Burnett says. "9 percent. That's a lot for one company. So when Best Buy speaks, the record labels are going to listen."

Clearly, Best Buy isn't upping its prices yet.
But the prospects for music buyers in Dallas are not entirely grim.
It appears that the Tower Records music chain is coming to Texas, eyeing potential Dallas sites in Deep Ellum and near the Galleria.

"We're looking at a couple of different locations in Dallas," confirms Kevin Cassidy, head of Tower's Southwest Record Retail Operations regional office. "Nothing has been finalized. We'd like to get things done and open up there in late summer or fall of '97.

"We're looking to come in at a neighborhood of 20,000 to 25,000 square feet...open up a big superstore there, like we did with our most recent store in Denver." Tower is one of the few chains in the discount-store era that has stuck to its guns as far as prices are concerned.

But the hard-core fans know a chain like Tower cannot replace true independent stores such as the ones Dallas has lost.

Don Kulak of the Independent Music Association says the death of independent record stores means the death of the music industry. "The consumers really lose out," he says. "Because it's the indie stores that really take a chance. They're the ones who break the new artists. Without them, the record industry will stagnate."

As he packs it in at VVV Records, Neal Caldwell feels the same way.
"Music is art, and they [Best Buy and the other chains] have taken all the art out of it," he says. "They've made it faceless, and nameless--even meatless. A music store is a work of art. Granted, it's retail, but it is art, and independent music stores have to bring that back to the public.

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