Label executives may gnash their teeth about the razor-thin profit margins they derive from the $5 CD being sold in corrugated fixtures and at speed tables in Walmart and Best Buy. But they like the sales bump that this year's new popular consumer item is giving the industry.
Indeed, some label sales and distribution executives credit the $5 CD with reclaiming floor space previously lost to other product lines in big-box stores. Some even predict the $5 CD will help extend the life of CDs at such retailers.
While budget CDs and cut-out titles have long sold for $5 and less, Walmart's expanding rollout of $5 CDs beginning in January proved key to revitalizing sales. In the last five years, CD sales have declined 18%-20% annually, and in first-quarter 2011, CD sales were down 12.8%, according to Nielsen SoundScan. Since the end of the first quarter, CD sales are down only 1.9%, for an overall decline of 5.1% for the format year to date.
On the negative side, sources speculate that even though all album sales are up 2% this year, dollar volume is almost certainly down.
Titles placed in the $5 bucket range from deep catalog albums to hit releases nearing the end of their initial run. With the latter titles, labels are using the $5 price point as a liquidating strategy to avoid returns when sales slow.
Along with the location provided by the high-profile bins, one sales executive says the program with Walmart is succeeding because it provides "an impulse purchase based on the surprise of seeing well-known titles at a low price."
After Walmart started finding success with the $5 CD, Best Buy jumped in with its Treasure Bin, and sources say Target is considering getting into the $5 CD market. "It's getting stores to carry titles that they normally wouldn't have in stock," the head of sales for an East Coast-based major label says. "You see a title that normally will sell 20 copies a week jumping to 400 copies."
The head of sales for a West Coast-based major adds that consumers are clearly embracing the lower pricing. "That has given all of us optimism about the physical format," he says. "It shows that we still have a physical business, even though the mainstream press seems delighted to report the CD is done."
The West Coast executive says his label's sales are about 55% digital, 45% physical. But digital sales aren't eclipsing physical sales with the same speed the CD enjoyed when it topped the cassette, or even as quickly as the cassette did when it supplanted vinyl, he adds.
The downside is the reduced margin. "It still costs as much to make a $5 CD as it does to make a new one," the executive says.
Indeed, one major-label distribution executive says he's not a fan of the $5 CD because of the slim margin. "We do it with titles that make sense but are getting pressure to do it more," he says. "We are all supporting a bad initiative that is not helping the industry." He argues that the increased floor space is actually a false triumph, and that the $5 CD is eating into overall music space in big boxes, leaving manufacturers with "less space devoted to music where we can make money," he says. "I personally think it is bad news, because it is a race to the bottom. None of the suppliers win in that kind of race."
However, the growth of simultaneously released deluxe editions with higher price points, complete-catalog boxed sets and extravagantly packaged reissues of classic albums are helping the industry counterbalance the low margins on $5 CDs as well as the overall downward pressure that the CD has experienced in the last five years.
As a result of the increased demand for both budget and deluxe product, the industry came into the holiday selling season facing a problem it hasn't had to deal with in years: CD manufacturing is at maximum capacity.
"With everyone at capacity because of the $5 CD," the distribution executive says, "we can't get the titles we make money on manufactured."