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The Music Industry

by Tim Gillespie

Things have slowed down! Kids are out of school out for summer, the rest of us are thinking about vacations and weekends (at least in the northern hemisphere). If you go into a U.S. music store now, you have a 50% chance of being alone in a wilderness. Summer is a traditionally slow time for music retailers. This year is no exception.

Even though the Internet is an up and coming medium for reaching on line stores, music retailers are still the biggest segment for my business. So I get a chance to talk to retailers in all major U.S. markets and many smaller markets. This gives me an opportunity to get a look at this industry and form my own opinions as to what is happening. This time of year music dealers usually have a little time on their hands and we get a chance to talk about these things. I feel lucky. I have developed a business friendship with many music store owners. We talk and exchange ideas and just get a know each other a little better this time of year.

I know there are many reasons why many music stores are having a tough time. A lot of stores are doing fine, but I think plenty are struggling at least a little. I hear about it almost every working day. I don't claim to be an expert on retail sales cycles and influences driving the music industry, but I have made a few observations that I think hit close to the mark. Here are some of the reasons I hear from time to time. When we talk about what musicians are doing, this is the direction of the conversation.

1. There are no big names or groups that kids are trying to emulate. Make no mistake about this. The music retail industry is supercharged by big names that appear on the scene and garner huge audiences. These fans become inspired to take up an instrument and attempt to emulate their favorite groups. This can be a huge infusion of cash in certain music stores. It can also cause some stores to identify with a certain form of music.

I have made the observation there are plenty of groups touring these days, and Red Rocks Amphitheater (arguably one of the finest amphitheaters in the world) has a full schedule and jam packed parking lots. But the owners of music stores insist none of these groups are driving large scale business to their stores. Groups like the Beatles and Led Zepplin don't come around every decade. But what about groups like U2 and The Phish (to name just two). When these groups come to town, our population takes a noticeable turn upward. Aren't they driving some segment of business?

2. Everyone turns their attention to summer and being outside. I admit I fall prey to this one. This one seems to ring true to me. Some music stores are deserted in the summer. I have heard stories about total receipts for the day being slightly over a hundred dollars. No music store can possibly put up with this very long. That kind of money will not even pay the utility bills.

Sure enough every August, customers come roaring back to buy everything from band instruments to guitar music. August in the music industry can be a time of relief. But for the past few years, it has not matched historical highs for sales.

3. The big box stores are taking market share. No question about this one. They are taking market share. They are setting the tone for pricing too. I have heard numerous retailers complain that companies like Fender Guitars sells to Guitar Center at prices below what other dealers can get. This in turn allows Guitar Center to sell at below dealer costs. I suspect there is some truth to this.

The stories about Guitar Center employees getting no training and being subject to high turnover makes me want to stay away from them. In the long run this may be a mistake on my part but I choose to put principle above all else. Either you are helping people or hurting them.

They are no the only big box store but they seem to be the most noticeable. I mentioned in an earlier column they have gutted several markets and put many retailers out of business. Experience and knowledge that is lost forever. If they hold true to the typical strategy for new large scale entrants to markets, low prices are around only as long as there are competitors. Then the deals go away.

Their stock price fluctuates and they have been downgraded a few times but that may be a sign their strategy for entrenchment has not matured yet. They may prove to have the best formula when this new adjustment of market share is established.

Click here to see their annual report dated May 9, 2001.

http://biz.yahoo.com/

4. The Internet seems to be another big reason. I think there is quite a bit of truth to this one. I have heard ebay described as the new music store front. I know several dealers that use ebay to sell old equipment and as a vehicle to sell over the Internet. A few store owners have actually sold off their store front and concentrated on their web sites. They would not do this if the web based sales were not superior in some way.

At first I never bought anything over the Internet. Now I am willing to buy almost anything on line, but I always do at least a little research on the company before I exhibit any trust. It is too easy not to know who you are doing business with.

I use the Internet to check prices and make sure I know the current street price for most things I am interested in buying, but then I often go find it locally. Small local retailers live a fragile existence. Sure they can make a bunch of money, but just as often they are just getting by. Plus they love their business. I like that.

Virtual stores like Amazon.com and Borders.com are easy to do business with. They are not going away any time soon and you don't even have to leave your house to buy something. The Internet is not only a good place to buy music gear and books, it is also a competitor to people playing their instruments. It can actually stop people from becoming a musician because they would rather surf the net. There seems to be some truth here too, although I do not know for sure.

For the life of me I do not know why people would ever buy a guitar before they play it, but it happens every day. This is a trend I cannot explain unless you make the assumption they don't know the difference between instruments of the same model. No two guitars play alike. I know that for sure!

I know there is a new trend for music stores to service only what they sell! This has arisen from people buying instruments over the Internet or through mail order catalogues and taking it in to a local music store for proper setup and repair. When they need to rely on someone they go to the local store. But believe me, store owners know when a guitar comes in they did not sell. This trend seems to peak right after the new year as many store owners tell me they are inundated with requests to fix broken or partially constructed instruments after the holidays.

One retailer in Michigan told me a past customer bought a violin over the Internet, only to receive it completely unassembled. After the customer paid to have it assembled, the value of the instrument was comparable to what you would buy for under $100 in a music store. I am told the customer has $150 in it at the end. This store owner was clearly frustrated at losing the sale, losing a customer and watching the customer get burned in the transaction. Then when the customer fails to learn to play the instrument, they sell it. This creates even more competition for the local store. You see, they have an incentive in making sure you hang on to your instrument. They don't want to compete with it!

To be fair, I have read posts claiming of good customer service and great deals at both big box stores and Internet resellers. But there are horror stories too. A search on guitar newsgroups brings up stories of both kind.

When I ask musicians what is driving them and where they do business, I get a slightly different answer.

Everyone is willing to site some groups that have inspired them to become a musician, but no one group seems to stand out as far as I can tell. I think guitars are attracting new users as well as ever. Fretted Instruments as a part of the entire range of musical instruments is still increasing. This implies the industry is still growing.

It seems that musicians are still purchasing hoards of instruments and electronic equipment. I get letters from people that tell me what new guitar they are playing and music they are buying. I also get some frustrating stories of transactions with local music stores. Not everyone thinks their local music store is doing a great job.

I know of a few incidents where someone has called me asking for a store where they can buy one of my books. I have actually called the store to verify their stock levels, only to have the customer travel several miles or more to find the store is out of stock. This has happened more than once! Compare that to ordering on line and you can begin to see what new challenges lie ahead for the typical music retailer.

So what does all this mean? There are manufacturers of musical equipment and accessories, there are customers, and there is the distribution system that connects these two groups. This is not a small industry. In the U.S. alone, I have identified over 8,500 different music stores in 50 states and Guitar Center alone had over 213 million in sales for the first quarter of 2001. This is up from 175 million from a comparable period (last year this quarter). This is not small change!

My own hypothesis is that we are a very large group of consumers willing to spend large sums of money to help us play, but we are a very diverse group of people that splinter into many different musical subsets. Many different forces are driving music interest, but there seems to be no great unifying force today. All this does is bring up more questions. Is music splintering into smaller groups? Are musicians crossing over into multiple areas of interest or are they simply focusing on their particular segment? Are we waiting for the next coming of the Beatles or are we past the time when a single band can hold the interest of the world community? Are there any potential new forms or twists on music that can create a whole new type of music or are we rehashing the same old thing?

I try hard to predict the future, like other music professionals I have to! I am also in a position to see wholesale change taking place right now. I see players, companies and segments taking on new challenges, entering into new areas of potential growth, and changing the rules of doing business. It is all happening right now and anyone who looks can see it. I just have a hard time understanding exactly what it all means! Do you know?