Business Matters: Why Vinyl Ain't All That

The vinyl resurgence continues. Vinyl sales in the U.S. are up 33% through June 9th, according to Nielsen SoundScan, a blistering pace compared to the 15% gain through the same week in 2012 and the 18% gain in all of 2012.

In short, consumers are choosing vinyl in greater numbers. But if the industry could choose the most cost-effective and efficient physical format for its supply chain, it wouldn’t be vinyl.

Vinyl has two main drawbacks: it’s expensive and it’s non-returnable. The high cost of vinyl results in lower margins and the dedication of more resources. Vinyl is plagued by delays because of the complexity of manufacturing. Shipping delays are frequent as a result. On a per-unit basis, manufacturing a vinyl LP can easily cost double or triple the cost of a CD. Vinyl is also heavy and not inexpensive to ship. Vinyl that is not packaged correctly can be damaged in transit.

One-way, or non-returnable, product can be difficult for labels, distributors and retailers. One-way product cannot be returned to the label or distributor. As a result, retailers tend to order one-way vinyl releases conservatively. In contrast, CDs tend to be returnable product and retailers can — and are encouraged to — place larger orders.

The result can be an inefficient supply chain. Labels, distributors and retailers often face shortages. Retailers that want to larger orders filled are often disappointed because labels also tend to be conservative. When manufacturing vinyl, labels don’t want to over-order and end up sitting on too much inventory. These factors and frequent delays mean vinyl is often released to retail after CDs and digital versions hit stores.

The impact of conservative orders by labels and retailers can be seen in sales numbers. Daft Punk’s “Random Access Memories” sold 19,000 vinyl units in its first week of release. But vinyl sales dropped 86% over the next two weeks. That’s a greater decline than CDs (down 74%) and digital albums (down 85%). Maybe vinyl buyers were more likely than CD buyers to buy during the week of release. But any retailer that faced a shortage would not have been able to fill demand. CDs are less likely to face shortages, and digital albums are never out of stock.

Keep in mind first-week digital sales include a lot of preorders. In the case of Daft Punk, digital preorders were aided when iTunes made the album available for streaming in its entirety. If consumers had as easy an option to preorder vinyl, the decline in vinyl sales over the next two weeks would have been greater than 86%.

The same trend can be seen in sales of the latest Vampire Weekend album. Vinyl sales dropped 85% in the three weeks following its debut week of 10,000 units. CD sales dropped only 78%. Digital albums fell 90%.

But vinyl has its upsides, too. Vinyl has sparked new interest in music. Vinyl is behind the success of Record Store Day. Vinyl has made independent record stores financially healthier and has spawned the openings of vinyl-only retailers. And many vinyl releases now come with codes for digital downloads — a convenient merging of physical and digital.

Consumers are simply falling out of love with CDs. Some of those sales are going to vinyl– not because of vinyl's supply chain characteristics, but because some people really love vinyl. This transition is not necessarily bad, but it does create issues that need to be managed.

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