Changes are afoot at Best Buy that could have significant ramifications for the retailer's relationship with record labels.
The consumer electronics chain recently chose Walmart rackjobber Anderson Merchandisers to handle all music buying and merchandising for its stores, according to industry sources.
That move adds weight to Best Buy's new campaign to extract lower wholesale CD pricing from labels and a separate effort to eventually shift to scan-based trading.
According to sources, Best Buy is demanding a wholesale price of less than $10 for all regular CDs, which is lower than the typical $10.35-$11.86 wholesale price for most superstar releases. Moreover, it is seeking this lower price point for the life of a title, not just during the first few weeks when most new titles are sold to music accounts at discounts.
In addition, for new titles not expected to sell 1,000 units in their first week, Best Buy is requiring a wholesale price of $7.50 or less from major labels and a $7 wholesale price from independents. Finally, it says it won't advertise any regular CDs at a retail price of more than $10.
Best Buy representatives didn't respond to requests for comment, while an Anderson spokesman declined to comment.Working with Anderson adds considerable leverage to Best Buy's argument for lower pricing. But the chain's position would have carried even greater authority several years ago when its aggressive music operation was a widely respected retail partner of the majors. Since then, however, its standing among label executives has fallen after dramatically scaling back its music inventory, moving what it has left to the back of its stores and perpetually struggling with sloppy merchandising and out-of-stocks on hit titles.
The majors haven't turned a deaf ear to calls for lower pricing. Trans World Entertainment's test pricing of all single CDs at $9.99 received the support of Universal Music Group, Sony Music Entertainment and EMI Music (Billboard, July 24, 2010). And UMG's "Velocity" pricing initiative experimented with lower wholesale prices to enable new releases by current artists to retail for $10 or less (Billboard, March 27, 2010).
But Best Buy's demand for lower wholesale CD pricing is facing label resistance. A senior executive at a major label complains that if labels honor the chain's request, they'd gain little in return.But maybe labels should worry about what they might lose. They would do well to recall Anderson Cos. president/CEO Charlie Anderson's warning in a 2010 Billboard interview (Billboard, July 17, 2010). Anderson said he believed big-box retailers might stop carrying CDs within three years if labels don't embrace several urgent measures, including lower wholesale pricing and scan-based trading. "There will come a day when they say, 'It's just not worth it anymore,' " Anderson predicted.
That day could come sooner than many executives think, warns Bruce Kirkland, president of Tsunami Entertainment, a marketing and management firm that has been involved in arranging exclusive album releases at Target (Pearl Jam) and U.K. chain Tesco (Simply Red, Faithless).
Despite the shrinking amount of floor space they devote to music, big-box retailers have been "doing their utmost to preserve the physical disc, and it's incumbent on the [music] industry to create more interesting products and entertain new commercial strategies," Kirkland says. "I feel that the CD is in deep trouble. If you accept that as a premise, the big danger is, will the big-box retailers get out of music?"
Even if labels manage to retain a toehold in the big boxes, Kirkland cautions, they might be looking at little more than, say, two A-frame fixtures per store-one for new releases, the other for budget catalog-and promotions largely limited to the Christmas shopping season or major events like the Grammy Awards.
Where does scan-based trading figure in all of this? If the majors could accommodate it, they might avoid the difficult choice between offering lower wholesale pricing or facing further inventory reductions at big-box merchants, because merchants wouldn't have to pay for music they carry until it is sold. The upside for labels is that retailers are widely expected to give them more input into what titles they carry in stores.
But while scan-based trading is easy to implement for new titles, it still leaves the issue of how to account for the significant amount of legacy inventory already in stores. Beyond that, most music merchants' computer systems aren't yet capable of handling the demands of scan-based trading.If these issues aren't soon resolved to the satisfaction of big-box merchants, the majors may soon find themselves displaced from Best Buy or Walmart.
"They are like the guy with his finger in the dike," Kirkland says. "When Tower Records was in danger of going out of business, every record label should have reached into their pocket to help save Tower. They didn't. So they should do something this time. Once that horse is out of the stable, it is gone and you are not getting it back in."