Retailers Don't Expect To Be In A Celebratory Mood Over Year- End Music Sales
Ed Christman
While retailers expect that music sales will be better during the Christmas shopping season than the rest of this year, most are still anticipating a case of the holiday blues.
"Last year was such a bad Christmas for music sales, that if we can't top that, then we've got a serious problem on our hands," says a purchasing executive at a retail chain who asked to remain anonymous because he isn't authorized to speak about sales projections.
The executive expects year-end sales to be up from last year, which would be the first time since 2003 that fourth-quarter U.S. recorded-music sales haven't posted a year-on-year decline.
But that's one of the more optimistic forecasts. Others say they assume year-end recorded-music sales will slide in line with the rest of 2009, when year-to-date sales have dropped 14.5% from the same period last year, according to Nielsen SoundScan.
A strong release schedule could help slow the decline. High-profile releases expected this fall include albums by Jay-Z, 50 Cent, T-Pain, Leona Lewis and Shakira (see page 15). But merchants and distribution executives say it's too early to assess the impact of this year's slate.
"Overall, [U.S. CD sales] are down about 20% this year," says Universal Music Group Distribution president/CEO Jim Urie. "It may get better due to a strong release schedule, but it won't provide a major improvement."
Most industry executives say the distressed economy, weak CD profit margins and the increasing displacement of physical music product in brick-and-mortar stores by other entertainment products will make it difficult for holiday sales to remain steady over last year, much less show an upswing.
The CFO at a leading retail chain says that while he expects some U.S. economic indicators to show improvement in the fall, "it will be 2011 before we see any serious spending out of consumers, and it won't be at previous levels."
The wild card is U.S. monetary policy, according to the executive. "If they don't focus on strengthening the dollar, I worry that hyper-inflation will kick in," he says, adding that hopes for a near-term economic recovery will be dim "if the dollar is not strong and foreign investors start pulling out."
Bruce Ogilvie, co-owner of music and video distributor Super D, says he doesn't expect the current rate of decline in U.S. physical music sales to accelerate during the rest of the year, following a 21.2% fall in CD sales during the first six months of this year from the same period in 2008. "If the economy got better, it would help things," Ogilvie says.
Other problems include tightening trade credit, declining marketing funds and slowing product turns, according to the president of a retail chain.
"The music industry has kept trade credit on an even keel, but the other ancillary product lines have increased credit restrictions," he says. "In the old days, we could sell a deep catalog title in six months, but now we need a year, which creates financing needs in order to be able to carry the product for a longer period of time."
That means that business has become more capital-intensive, the chain president says. Since retailers have to maximize gross margin profits, that means that they have to factor in how long it takes to sell, he says, cautioning that chains will be very conservative with their music budgets in the fourth quarter.
These issues will contribute to a further shrinking of the music footprint in many stores, the chain CFO says.
Making matters worse, DVD sales have been much weaker this year, retail executives say. But they are divided on whether the poor sales have been due to a weak schedule and tough economic conditions or a secular decline in the DVD format's popularity among consumers, many of whom have already stopped buying CDs.
Whatever the answer, DVDs have supplanted music at the front of most home entertainment superstores, thanks to aggressive marketing by film studios. This year, studios are being just as aggressive with DVD catalog, merchants say. But they may be backing off from releasing big DVD titles close to Thanksgiving weekend, due to fears of a possible price war, says a Wall Street analyst who follows movie studios. The analyst notes that intensive promotional pricing last year led to a pricing battle, triggered by pressure from big-box retailers on the studios to provide them with unusually large promotional budgets.
Alliance Entertainment president Alan Tuchman says he assumes that floor space dedicated to music will continue to dwindle right through the holiday shopping season. "The labels have made it very clear to me that they want to manage the CD down . . . because they fear it is cannibalizing potential digital sales," he says. "The labels see it as a declining business and will no longer invest in it" beyond the big-box merchants.
But Tuchman says labels should view the CD as a different business from digital downloads, and one that targets a different demographic. If the labels look at it from that perspective, and cut prices and invest in other music merchandisers, then the CD can be incremental business for them, he says.
"Christmas depends on how much real estate we have left," Tuchman says. "We don't see much of a change in pricing from the label side . . . so we think music will continue to fade. By Christmas merchants will have a much smaller music section, so I am not bullish."
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