Musicland Is Taking Different Online Tack

NEW YORK‹Musicland Stores, the largest music retailer in the U.S., has revealed an Internet commerce strategy that is more ambitious‹and potentially more profitable‹than those of some of its competitors.
The news comes as statistics from the '98 holiday selling season indicate healthy increases in online sales of entertainment products. But Wall Street's initial reaction was unenthusiastic.
In the latter part of the second quarter, most likely in June, Musicland expects to launch four World Wide Web sites dedicated to selling music, movies, video games, computer software, portable electronics and accessories, sheet music, music and entertainment books, and licensed merchandise. The sites will be pegged to Musicland's four retail concepts: the music chain Sam Goody, the video concept Suncoast Motion Picture Co., and the entertainment superstores Media Play and On Cue (BillboardBulletin, Jan. 12).
Online music sales heated up during 1998 and especially during the holiday season. Jupiter Communications has estimated that U.S. online music sales jumped 269% last year to $135 million from $36.6 million the year before. Jupiter projects sales of $281 million this year.
Media Metrix, a firm that measures traffic on Internet sites, says that during the four-week holiday period that ended Dec. 24, 1998, the number of "unique visitors" to online books, music, and movies sites increased 17% over the preceding four weeks. "Unique visitor" means that a person who visits a particular Web site is counted only once, no matter how many times he or she returns to the site during the reporting period.
Although the overall online market is heating up, Musicland has some ground to make up in tapping into it. Of all the major U.S. music retailers, it is the last to enter the high-flying world of electronic commerce. Trans World Entertainment announced the debut of its Web site in November. National Record Mart debuted two sites in December. Other major music sellers, such as Tower Records, Camelot Music, and Best Buy, have had online stores for more than a year.
Moreover, Musicland has to compete with Internet-only merchants, such as Amazon.com, which attracted 7.8 million visitors to its books and music site last November, according to Media Metrix, and music sellers CDnow and Music Boulevard, whose sites pulled in a combined 4.8 million visitors that month.
Judging from the reaction of the stock market, Musicland's announcement did not produce the investor excitement that is typical whenever a company reveals Internet news. On the day of the disclosure, Musicland's shares initially increased 18.8% to $15, but they finished the day just 37.5 cents, or about 3%, ahead at $13, on New York Stock Exchange trading that was nearly four times heavier than usual. The next day, shares fell 2.8% to $12.6875.
Commenting on Musicland's entry into E-commerce, Marcia Appel, senior VP of corporate advertising and communications, says, "The timing wasn't right before. We wanted to make sure that when we did it, it was the right time for our consumers, for our stores, and for our shareholders."
In a prepared statement, Musicland chairman Jack Eugster says, "During 1998 we very successfully focused on our two prime objectives of profit improvement and debt reduction. At the same time, we began the development of a unique Internet strategy that will come to market in 1999 and will rely heavily on our core strengths of aggressively advertised brand names, broad merchandise lines, and efficient operations."
DIFFERENT TACK TAKEN
Musicland believes that its online strategy might give it an edge in profitability over some of its competitors. The retailer's Web operations will be different from many other online music merchants' in that it will fulfill "most orders" from its own distribution center in Franklin, Ind. The company says that the center, in addition to supplying stores with product, already ships more than $23 million worth of special orders to consumers a year.
Most online music orders are fulfilled by one-stops such as Valley Media and Alliance Communications. The only other major music retailer that does its own fulfillment is Tower Records/Video. Amazon.com also ships its own orders. Analysts say that companies handling their own distribution could post better profit margins than those that use third-party wholesalers. Margins in online selling are notoriously thin because of fulfillment costs and aggressive pricing.
The company says it plans a full marketing campaign for the launch of the Web sites that will encompass most media. Musicland stresses that it spends $65 million on advertising annually and indicates that the Web sites will be plugged in the regular ad campaigns.
Musicland will have another advantage over many other brick-and-mortar retailers because it operates the most stores‹1,346‹and each outlet can promote the Web sites. The company says that it rings up more than 2 million transactions a week at its stores.
But that may not give it an advantage over the pure Internet retailers like Music Boulevard and Amazon.com, which have forged costly but high-profile alliances with much-trafficked Web portals like America Online and Yahoo!.
The company says it plans to spend $3 million to $5 million on its Internet launch. By contrast, Trans World Entertainment said it would spend $1 million on its Web site.
STAFF IN PLACE
Musicland began putting its online plans in rapid motion after it hired Karl Sowa last June from Internet company GeoCities. Sowa's title is managing director of electronic commerce. Two other people have been hired for the online operations, the company says, with more expected to come aboard.
Many online retailers, like Wherehouse Entertainment, have added a digital-delivery component to their Web sites. But Musicland declines to say whether digital distribution of music for sale will be a feature of its online store.
Musicland says it has signed deals with companies to provide databases for music and movies that provide reviews, product information, and sampling.
Although late to enter Internet commerce, Musicland has experimented with the concept for several years. It tested cyber-selling with online service providers CompuServe and Prodigy.