Brian T. Majeski
To say that the COVID pandemic had a seismic impact on the music products industry is something of an understatement. Government “lock down” edicts to contain the disease hamstrung brick and mortar retailers while providing a powerful tailwind for their online competitors. School programs were curtailed due to the impossibility of reconciling social distancing protocols with the realities of an instrumental ensemble, yet stay at home orders unexpectedly spurred demand for guitars, keyboards, and recording gear. Factories that were ordered to shut down in March 2020, have spent the last twelve months scrambling to fill outsized order backlogs. Their efforts, however, have been hampered by widespread raw material and component shortages, not to mention lengthy shipping delays. As the pandemic subsides and the degree of normalcy returns, the looming question is, “what are the long-term effects of all these disruptions?”
After being blindsided by the COVID pandemic, we’re not particularly confident in our forecasting skills. That said, a few prominent trends worthy of note.
The retail music industry has been consolidating for at least three decades now. In 1980, the three largest U.S. retailers controlled less than 10% of music products sales. Today, they account for nearly 40% of the market. COVID accelerated that trend by forcing hundreds of smaller retailers to close up. Some lacked the skill or initiative to continue, others saw the pandemic as a good time to retire. Whatever the reason, these are retail storefronts unlikely to return anytime soon. In and out of the music industry, the consensus is that there is too much retail space.
Retail consolidation may prompt more manufacturers to sell direct to consumer, as dependence on fewer large retailers carries additional risk. At present, we estimate that only 30% of industry suppliers have direct sales capabilities, compared with 100% of companies in the sporting goods, housewares, apparel, and consumer electronics industries. Our industry has never been on the cutting edge of marketing and distribution strategies, but eventually it follows the lead of larger industries. So expect more direct selling. It won’t happen overnight, but post COVID, it’s an issue that every supplier is discussing.
Online sales will continue to grow--anyone who has had a positive online experience, is likely to be a repeat customer. However, online specialists face daunting challenges in the form of rising costs of doing business. With Facebook, Google, and Amazon raising prices, securing crucial first page search results is becoming increasingly expensive. Surcharges from FedEx and UPS combined with “free shipping offers” are eroding gross margins. As one retailer noted, “freight use to be a revenue item, now it’s a big expense.” Remitting sales tax to 15,000 tax jurisdictions and securing customer privacy are additional burdensome costs. Collectively, these expenses are why several high-profile online sellers were on the financial brink last year.
Don’t count out brick and mortar. After a year of lockdowns, we suspect the hunger for a “non-virtual” in person experience will drive a lot of customers into stores in the coming months. In addition, many brick and mortar operators responded to lock down orders with a remarkable display of ingenuity, investing in better websites, offering remote lessons, and providing curbside pick-up and contactless checkout. Brick and mortar dealers also generated hundreds of millions in revenue using platforms like Amazon, eBay, and Reverb. Those who developed these capabilities will no doubt be able to thrive as the world opens up. An increasingly diverse array of available music products and expanding SKU counts also offer opportunities for highly specialized retail formats.
Faced with acute product shortages and lengthy backorders, retailers are rethinking “just in time” inventory strategies. After decades of making inventory turnover a priority, there is a renewed emphasis on carrying back up stock. It’s a change that favors retailers with better balance sheets and may weed out weaker players, further accelerating consolidation.
As for the durability of the current increase in demand, we’re uncertain. Historically, music products sales have been driven by a combination of external forces that include the state of the economy, demographics, technology, and musical trends. In the past year a half two transitory factors were added to this mix. One is the closure of restaurants, theaters, concerts, and most public gatherings that led consumers to seek new entertainment options, including music making. The other is the trillions of dollars in government transfer payments that fattened consumer wallets. The unanswered question is, what happens when public gatherings resume and the government cash spigot turns off?
In the just released Music Trades Top 200 retail report, we track the revenue growth and productivity performance of the leading U.S. music products retailers. The past may be no guarantee of future performance, but a close look at how various retail sectors performed provides invaluable insights into the direction of the market. People smarter than us, should be able to use this data to get a clearer picture of what the near-term future holds. For more details on the report.