Indies Try To Counter Mass-merchants' Deep Discounts

Surrounded by deep-discounting mass merchants, the nation's independent stores are responding this holiday season with marketing strategies of their own.

Some are holding the line on pricing, while others are trying to keep pace with the big-box chains, which have been loss-leadering music for as little as $8.99. Some indie-store owners express resignation that music has been permanently reduced to loss-leader status for all music retailers.

The Record Exchange, based in Charlotte, N.C., is one of many retailers that have refused to bow to price pressure. The nine-unit chain was offering new titles from $14.95 to $16.95 during the Thanksgiving weekend. A customer-rewards program provides $2 off new releases.

Likewise, members of the Coalition of Independent Music Stores (CIMS) avoided discounts in favor of more effective messaging and in-store events to lure customers, CIMS president Don VanCleave says. Indeed, the best independent stores rely on service, specialization, and street-smart marketing to survive (Billboard, Dec. 7).

MUSIC NO LONGER profitable

But citing a lack of profitability in selling music in recent years, Record Exchange president Don Rosenberg says his chain no longer views itself as a music-specialty operation. The majority of the Record Exchange's profits come from used goods and DVD.

"I'm not in the music business anymore. I'm in entertainment," he says. "I'm into used DVDs, DVD rentals, and accessories and videogames. We are buying and selling used goods. And the new music is merely a loss leader, like it is for everyone else."

Similarly, retailers like Gallery of Sound (an 11-unit chain based in Wilkes Barre, Pa.) and Bull Moose Music (a nine-store chain based in Portland, Maine) are choosing to compete with mass merchants on pricing and are looking to alternate business lines like DVD and videogames to compensate for music losses.

"We're diversified; we sell other products. We always have, but now it's more of an issue," Gallery of Sound VP Joe Nardone Jr. says. "We've got whatever hot merchandise is out there, because we need to keep the traffic in our stores."

Nardone says his chain was "pretty much" using music as a loss leader over the holiday, with new titles priced around $10 on the Friday after Thanksgiving, which is known as Black Friday.

"If that's the game that's on, then that's the game that's on," he says. "You have to decide if you're going to play [against the mass merchants] or not. And it's sad to say, but I think the guys who decided not to play are hurting more—unless your mix is so diversified that you don't rely on the hits."

Bull Moose was selling the bulk of its new titles for $8.99 on Black Friday. President Brett Wickard says that while he "doesn't get a lot of joy" from selling music at a loss, that's business.

"Loss leading isn't new to our industry. Our job as retailers is to make a profit off the whole package," he says. "That's the American marketplace. We're not given some government-granted right to sell music. We have to out-compete other people and prove the value of having a music-specialty store."

Creating a splash

Wickard adds that retailers have to look at the customer in the bigger picture when engaged in competitive pricing.

"You look to create a splash in the marketplace," he says. "You're pretty much throwing away a day or two to get the word out among customers that you're aggressive and you want their business over the holiday season. And hopefully that customer then goes and tells a bunch of their friends."

Nardone says retailers are learning to live in such an environment—like it or not.

"You take the heat in the first week, you get a more comfortable sale price the next week, and you go with it," he says. "You still have a store full of CDs to sell."

But VanCleave wonders if there's a greater price to be paid for loss leadering, especially when it comes to the perceived value of the CD.

"When is the industry going to look at the damage that is being done?" he says. "The customer is definitely going to think the CD is worth $9, and the labels are going to have to lower the price to get it there if everyone else is going to survive."

Rosenberg adds, "The problem is when your entire industry is a loss leader for somebody else, it doesn't bode well."

But retailers like Nardone argue that the value debate is history.

"The argument about the value of music, it's over. CDs are a $10 item. The industry needs to get real and change the structure," he says. "Those $18 CDs, which is the list price of some catalog, look real bad in the rack. You're looking really stupid at $18. Because at $18 you're saying, 'Go away. Go buy something else.' "