Traditional Music Stores Get Makeover in Changing Market

Tower, among the first of the music superstores when it opened in 1960, was cut off by EMI Group, Sony BMG Entertainment, Warner Music Group and Universal Music Group. It was said to have owed Warner $20 million. The fall of Tower less than 2 years after it emerged from bankruptcy as a slimmed-down chain with new owners, comes as rival Trans World Entertainment remakes itself as a retailer less reliant on CD sales. Label and Tower officials declined to comment. Trans World, which purchased 400 stores from bankrupt Musicland earlier this year, once had CD sales representing more than 60% of its annual revenue. But during the 2nd quarter ended July 29, music accounted for 47% of the chain’s sales, down from 58% a year earlier, while those of DVDs were 35%, up from 27%.

During a conference call with analysts Thurs., Trans World CEO Robert Higgins declined to answer a question on whether it would consider buying Tower. Tower, which has undergone 3 management shake-ups in the past 4 years, hired crisis management specialist Joseph D'Amico as CEO this month and is said to have retained an investment bank to sell the chain. In addition to Musicland, Trans World also purchased Camelot Music Holdings, Strawberries, Disc Jockey, Spec’s, Wherehouse Music and others.

“We never talk about acquisitions and what are plans are with acquisitions,” Higgins said. “We look at most things when they are available and if the situation is something that makes sense to us, we pursue it.”

Trans World is undergoing major changes. It plans to have 900 of its more than 1,000 stores operating under the For Your Entertainment (FYE) banner by the end of 2007, Higgins said. Trans World currently has 546 FYE stores (521 mall-based, 25 freestanding).

All Trans World stores, except 200 Sun Coast Motion Picture Co. outlets acquired from Musicland, will operate as FYE by year-end 2007, CFO John Sullivan told us. So far all outlets in Long Island, N.Y. and Philadelphia have switched, he said. Mall-based Sam Goody stores acquired from Musicland are being rebranded FYE and 80-90 freestanding rural locations also are being renamed, CFO John Sullivan. Trans World purchased 400 Musicland stores, but ended up operating 287, Sullivan said. The acquired Musicland locations contributed $63 million in revenue 2nd quarter and are expected to add $290 million for the year, CFO John Sullivan said. Six of Musicland’s former 50,000-sq.-ft. Media Play stores opened as FYE outlets in the Buffalo and Salt Lake City areas in June, Higgins said.

Trans World has tested new concepts for years as it fought declining CD sales. It introduced the subscription- based Download Zone on its website in 2004, but it met limited success. It plans to test a download-to-burn music service at its stores in the 3rd quarter, using technology gained in buying music download service Mix & Burn earlier this year. Trans World will test Mix & Burn’s service using its 3rd-generation listening and viewing stations (LVS). It may add video to the mix in 2007, Higgins said. Trans World also has tested standalone FYE Video and FYE Games stores, but didn’t expand it.

In cutting back its CD and VHS movie selections, Trans World is expanding its mix of CE products including digital audio players, satellite radios and cellphones, company officials said. The chain’s CE and accessory sales rose 35% and 41%, respectively, in the 2nd quarter, on 10% and 25% gains in same-store sales, company officials said. Trans World’s “other” category, which includes CE and accessories, accounted for 11% of 2nd-quarter revenue, up from 9% a year earlier. Trans World’s CE business could continue to grow as music sales decline, Sullivan said. Sales of videogames, which posted a 10% rise in same-store sales, were 7% of total revenue, up from 6%, company officials said. In contrast, the chain’s music sales declined 5% on a 16% drop in same- store sales, company officials said. Trans World had expected music sales to bottom out at about 40% of the chain’s annual revenue, but now “we're not so sure,” Sullivan said. The decline in CD sales is “happening faster than we thought,” he said.

Trans World’s 2nd-quarter loss widened to $7.7 million from $7 million a year earlier as it incurred $4.4 million costs related to the integration of Musicland operations, the company said. The loss came despite Trans World’s registering a $3.5 million gain on the sale of an investment, the details of which weren’t disclosed. Trans World ended the quarter with 1,091 stores, having open 12 new outlets and closed 28 in the 2nd quarter.

Tower also had tried to expand into new technologies over the years. It introduced an Internet-based music service in 1995 and more recently added download-to-burn kiosks for music in its stores. The chain never appeared able to return to heights hit under the management of founder Russell Solomon, when it grew to about 240 stores with $1 billion in annual revenue. Tower expanded rapidly in the mid-1990s, funded by a $110 million bond offering. The growth came amid the emergence of Wal-Mart, Target, Best Buy, Circuit City as major forces in CD sales and the arrival of on-line sellers like Amazon.com.

U.S. music sales fell 0.5% percent last year to $12.3 billion. Last year, 39% of music buyers made purchases at a traditional store, down from 50% a decade ago, according to the Recording Industry Association of America. CD sales have declined 25% from a peak of 942 million in 2000, the same year Tower was at peak. In 2003, Tower’s parent, MTS Inc., tried to sell the chain, but there were no takers. Less than a year later, the Solomon family lost all but 15% of the company after it filed for bankruptcy protection.