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A Closer Look At The Top 200: Music Retail Isn’t A Business For The Weak-Hearted

...the seismic changes that have reshaped the retail landscape over the past 25 years. Shifting consumer demand, the rise of a national chain, not to mention the internet have given the roster a near complete makeover.

How big have the changes been over the past two-and-a-half decades? Of the 100 retailers that appeared on our first sales ranking in 1991, 60 are no longer doing business: 49 of the vanquished closed their doors outright, and the remaining 11 merged with another retailer. Some of the closures can be chalked up to a changing marketplace. Twenty piano and organ dealers who appeared on the first list, including once formidable operators such as Organ Exchange and Vern Schafer’s Colton Piano were victims of a shrinking home keyboard market. Others could be traced to succession problems: second or third generation family management lacked the skills or interest to keep the business afloat. A number of retailers including Reliable Music in North Carolina and Nadine’s in Los Angeles succumbed to Guitar Center’s aggressive store roll-out that began about 15 years ago. Then there were the proprietors, who upon reaching retirement age, just closed down. As for the mergers, seven out of the 11 were executed by Guitar Center, including the purchase of the Music & Arts chain and the Musician’s Friend direct response unit; Sam Ash acquired New York’s fabled Manny’s Music; and J.W. Pepper acquired its former print music rival, Malecki Music.

As the changing roster illustrates, the mortality rate among retailers is high. However, there never seems to be a shortage of aggressive newcomers willing to fill the void. The fallen have been readily replaced. Fourteen of the 25 biggest retailers on this year’s Top 200 didn’t make the 1991 ranking, including prominent players like Sweetwater Sound, Full Compass, Sheet Music Plus, and Kraft Music.

The high turnover engenders special respect for those who have successfully sustained their businesses over a multi-decade timespan. Doing so requires a few critical ingredients, foremost of which is able management at the helm. When noted novelist Theodore Dreiser described the rise and fall of family fortunes with the phrase “shirt sleeves to shirt sleeves in three generations,” he could have been discussing music retail: Subsequent-generation managers who inherit the business, but not the skills or commitment, are a common cause of retail failure.

Another critical ingredient for longevity is adept risk management. Much has been made of Guitar Center’s recent struggles with an outsized debt burden in the aftermath of the 2007 Bain Capital acquisition. However, it’s hardly a unique story. Numerous independents have faced the same problem, only on a smaller scale. Bain borrowed heavily ($1.5 billion to be exact) expecting Guitar Center to grow significantly. Unfortunately, they didn’t plan for a serious recession, and when sales failed to meet ambitious projections, the company was hamstrung by an excessive debt load. New owners Ares Management have attempted to address this problem with a debt restructuring, but the success of the transaction remains to be seen.

Like the ambitious and optimistic Bain strategists, there have been no shortage of independent music retailers who have bet heavily on ambitious growth, committing to expensive leases, adding staff, and loading up on inventory. When the growth failed to materialize, like Guitar Center, they struggled, and in some cases even folded. Retail is ultimately about selling, but as our casualty list forcefully illustrates, sales skills have to be complemented with a grasp of finance and an appreciation of risk.

Being in the right place is also helpful. When the annual market for home organs consistently topped 200,000 units, San Diego-based Organ Exchange was held up as a model of good management. Their sales training was exemplary, their promotions consistent and hard hitting, and their profitability was the envy of the industry. Unfortunately, Organ Exchange’s unique set of skills weren’t applicable to other industry segments, and the company faded away as demand for home organs collapsed.

The industry’s long running retail success stories deserve accolades. However, some of the prominent failures deserve note for their contributions. In 1996 MARS Music rapidly rolled out a chain of 40,000-square-foot music stores that proved too large, never made money, and led to a messy bankruptcy in 2002. MARS investors took a bath, but the company’s heavy investment in merchandising forced other retailers to improve their stores, and consumers ultimately benefited.

In 1999, an ambitious group of entrepreneurs persuaded Microsoft founder Paul Allen to invest $16 million to launch an internet music retailer dubbed zZounds. Their ambition wasn’t paired with an adequate understanding of sales, inventory control, and financial management, and the business went bust two years later. However, zZounds deserves credit for paving the way for other online retailers. And as a footnote, the zZound website continues to thrive as a division of American Musical Supply.

Retailers who participate in “sharing groups,” that open their books and compare notes have benefited from those who have expanded too quickly, implemented ill-conceived sales or compensation strategies, or just screwed up. In effect, retail failures have made a positive contribution to the industry’s collective wisdom.
In the early 1920s, Baldwin Piano & Organ Company executive Philip Wyman created one of the first truly national dealer networks, complete with formal sales agreements, inventory and consumer financing programs, and ample promotional support. Previously, most piano companies had sold through company stores or through a handful of regional retailers. Sharing his decades of experience in a 1955 Music Trades interview, Wyman declared, “Music dealers usually have a 20-year life expectancy.” After two decades, he noted, a majority close because of the owner’s retirement, loss of interest, new competition, a “mistake,” or some combination of all of the above. Phil Wyman wouldn’t recognize much in today’s music industry, but his actuarial analysis is as true today as it ever was. This isn’t a business for sissies.

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