Top Indie Stores Hang Tough

Although the ranks of independent stores are thinning amid a 10.5% drop in the U.S. music market, many in the industry say there is a strong core of resilient indie merchants that can weather any storm—whether it be from the economy, technology, or loss-leadering competitors.

Certainly, more indie stores will close, with some businesses expected to shutter after the holiday selling season. And even the healthy independent merchants are not without fear of what the future holds for the business as a whole.

The major factors hurting all of retail are CD burning and loss-leader pricing by mass merchants and consumer-electronics chains. Nielsen SoundScan data indicates that the independent-store sector is being hit the hardest—with sales down 19.7%—but no one has numbers on how many stores have closed.

Tony Brummel, leader of Chicago-based independent label Victory Records, says, "Unfortunately, it's a consolidating landscape. Our database is getting smaller every day. Several years ago, it had thousands of stores; now, it's only 600 or 700 that matter." In Philadelphia, Universal One-Stop sales manager Chuck Burns estimates that about 20 of Universal's indie accounts have closed their doors this year, while Bruce Ogilvie, a principal in Irvine, Calif.-based Super Discount CDs & DVDs, says, "We have the highest percentage of independent retailers we have ever had on our credit watch."

There is a consensus that urban retailers, as well as dance stores, are being hit the hardest by the industry downturn (Billboard, Oct. 5). Kelvin Anderson, owner of VIP Records in Long Beach, Calif., will testify that being an urban retailer is not easy right now.

"I have been through a lot of ups and downs, and I have never seen anything like today," Anderson says. "I have never been challenged where I don't see a way out. I have never been fearful of my future in the business the way I am now."

On the other coast, Sy Lerner, owner of Hot Waxx in the Jamaica section of Queens, N.Y., says, "This is the first Christmas that I am reducing my inventory [instead of] increasing it."

In addition to urban merchants, retailers who are dependent on hit product are having an especially hard time. "The independent stores that know their customer are doing fine," says Ron Strabala, manager of Electric Fetus in Minneapolis. "The independent stores that rely on selling hits aren't going to make it. They can't compete on a playing field where the boxes and chains are selling product below their distributor cost."

HANGING ON FOR THE HOLIDAYS

Many are predicting that more independent merchants will go out of business after the holidays. "There are a lot of independent retailers that have been doing this for a long time [and] are not having fun anymore because it's too hard," one longtime one-stop executive says. The executive predicts that such operators will close up shop and look for an easier, more lucrative way to make a living.

According to multiple sources, that's what Bob Hoyt—owner of the Record Express chain in Connecticut—is doing. The nearly 30-year-old regional chain has been quietly liquidating its stores all year, going from 16 units down to two, with the remaining stores expected to close by year's end. Hoyt did not return calls for comment.

Michael Kurtz, executive director of indie-store coalition the Music Monitor Network, says his members are holding their own, but even "our healthy ones with great marketing strategies are holding their breath. We don't know where the music industry is headed."

But for all the problems plaguing music retail in general and independents in particular, label sales and distribution executives insist that you just cannot beat good independent merchants at their game. "You can spin the numbers any way you want, but the independent retail base is quite healthy and having a great year," Mercury Nashville head of sales Ben Klein says. "They are leading the way for a lot of Lost Highway artists," he says, referring to the label's alt-country-leaning imprint.

Sony Music Distribution VP of alternative-music marketing Josh Rosenthal agrees. "There is a type of consumer who doesn't want to shop at Wal-Mart or at a chain and likes the personal contact and the interaction they get at an indie retailer. I don't think that customer is going away."

At the Coalition of Independent Music Stores, Don Van Cleave, president of the organization, says, "My group has done a great job of hanging on. They have diversified their [product offering], they do a lot of promotions, they try and stay relevant to their customers. It's not all about price."

The independent stores have many advantages over the chain and big-box competitors, not the least of which is their small size. Since the owner is often the operator, the small independent store typically is more in tune with its customers. Such stores often are able to identify and exploit a musical niche and generally are more crafty at developing a competitive edge. They also tend to have more knowledgeable employees and excel at service. The best stores generate some of the highest sales numbers per square foot in the industry.

George Balicky, VP of marketing at Galaxy One-Stop in Pittsburgh, says that the wholesaler's successful independent customers tend to have some, if not all, of the following ingredients: "First, they buy their new releases at Best Buy. They specialize in product that the big boxes don't have, whether it be 45 oldies or used stuff like CDs, DVDs, and games. Also, they have diversified into other products besides music—like gifts, books, and coffee."

Other ingredients that help the successful independent merchant are 12-inch singles and membership in a coalition. Above all, the street-smarts of indie merchants can help them survive and thrive. While Balicky, among others, cites buying new releases from Best Buy as a favored tactic, independent merchants say that is their second option when it comes to sourcing product less expensively. A preferred strategy—which flies in the face of the majors' terms of doing business—is buying the much cheaper parallel Canadian imports to compete with the discounters. Moreover, many accounts also jump street date every chance they get, selling hit product before it is available at the chains.

Since buying cheaper goods is not enough nowadays, most successful independent accounts—like the music specialty chains—have diversified into other product lines. Barry Levine, VP of marketing at BMG Distribution, says that alternative-leaning independent stores have supplemented their offerings with lifestyle items like toys, candy, and videogames, while urban independents are turning to cell phones, pagers, personal services, and clothing.

That is the case at Criminal Records in Atlanta, which sells a lot of such pop culture goods as toys, Kiss figures, and Japanese robots, as well as comic books and magazines, according to owner Eric Levin. "We are as excited about the day that good comics arrive as the day when good music arrives," he says. "We cultivate good readers by convincing them to buy something that's a good read, not crap, that one day might be worth something. Similarly, our customers come into a store where the people behind the counter are as excited about the music as they are." For all these reasons, Levin says Criminal is "not suffering" in the down market.

VIP Records' Anderson says, "I used to say that the other stores with other product are not record stores. They are a thrift shop. But you can no longer depend [solely] on music. Today, you need other product." At VIP, the store has been bringing in DVDs and a fashion line of T-shirts and sweatshirts. That move has helped stem the tide. "My business is down 12% this year, but if I just relied on music, it is down 18%."

Similarly, Bob Stanford of Soundtracks in Huntington, N.Y., says, "I am still alive and well; we seem to have found our little niche as an adult [music] store. It's not all about price. We do all right with the classic stuff; we don't do good with the hits." As an example, he says, "we are doing more DVD business, and again, we won't do good with hits like Lord of the Rings, but we will sell the old one [the Ralph Bakshi cartoon movie] that the chains won't have." Also, he notes, CD burning may be a problem for some stores, "but our [older] customers don't do it."

Another factor helping many independents is "their relationship with a coalition," BMG's Levine adds. In addition to the two national coalitions, Music Monitor Network and the Coalition of Independent Music Stores (CIMS), there are many local urban coalitions. Waterloo's John Kunz in Austin says of CIMS, "The coalition is a great support group. It's like having a business partner/analyst/braintrust all rolled into one." Even more important, some say, the coalitions enable indie stores to extract cooperative advertising funds from the majors.

More coalitions are on the way. In Atlanta, Criminal's Levin is helping to form the Assn. of Independent Media Stores, which will launch in January 2003 with 31 outlets across the U.S. And as a tip of the hat to product diversification, he says the group deliberately used "media" in its name because it did not want to be beholden to music.

MAJOR LABELS TO THE RESCUE

It also does not hurt that the music manufacturers are actively trying to help indie stores survive the ascendency of the loss-leadering mass merchants, the only retail sector to show a sales increase this year. "Consolidation has raised the profile of the independent merchant," Jive head of sales Bob Anderson says. "We need to strengthen them as best we can."

In fact, a new one-stop agreement being rolled out by Universal Music & Video Distribution is all about making sure the independent merchant "stays healthy and is better-served," one source in the Universal camp says. That agreement calls on one-stops to pass through privileges to independent merchants. Citing the tough conditions for indies, the source says, "They are stuck with defectives and can't make returns. If we do a rebate on a title, many of the one-stops pocket it. We are doing this to help independent retailers, not to smoke their sources of supply."

That type of thinking is also circulating at the other majors. At WEA Corp., president John Esposito says, "We are going to surround and support indie retail as part of our agenda in the most meaningful way ever. We are not just going to pay attention to them, but we are going to go over the top about them, with policies, relationships—everything, because I am terribly concerned about them."

The music manufacturers have already stepped up their support in other ways, the head of an urban-based one stop says. "The manufacturers are realizing that they need these guys, so they are sending in the free goods and helping out by buying light boxes," he says, referring to illuminated window and in-store displays.

EMI Music Distribution is also looking for ways to bolster the independent sector, senior VP of sales and marketing Ronn Werre says. He says there will always be a place for indies "that are strong in providing service and expertise." On the other hand, he adds, "whether you are big or small, if you lose sight of the consumer now, you can tip the hourglass over and the sands [will begin] to trickle through."

Criminal's Levin wonders why everyone is getting all worked up about the health of the independent community. While he admits that "there is a layer of stores that is not going to be here in five years," he believes it is the music specialty chains that are in trouble, not the independents. "The Towers, the Musiclands, and the Wherehouses—they are dead men walking. Eventually, they will be gone." All that will be left, he argues, will be the mass merchants and the independents.