Business Matters: Disappointing Best Buy Quarter Part of Technology Retail Slide
Business Matters: Disappointing Best Buy Quarter Part of Technology Retail Slide

A Best Buy initiative to have all single-disc albums at an everyday price of $9.99 for the holiday selling season has been turned back by the major labels-at least for now.

While some major-label distribution executives expect the conversation to resume in 2012, others say they don't intend to revisit Best Buy's request to buy all single-disc CDs, including superstar titles, at a $7.25 wholesale price. The majors often use that price point for developing artists.

Part of the issue is that Best Buy has been racked by Anderson Merchandisers since May, and Walmart-another Anderson client-sometimes gets established artists at that price point. Best Buy executives say they are entitled to the same level of wholesale pricing enjoyed by the mass merchant.

What Best Buy executives failed to note is that Walmart has a five-bucket pricing scheme, including a top-tier $8.50 wholesale price for titles typically sold at $11.88. Walmart's other price buckets are about $7.25 ($10 in store), $6.50 ($9), $4.25 ($7) and $2.88 ($5).

Prior to being racked by Anderson, the majors sold Best Buy at their rate-card pricing and cut deals for bigger discounts on specific titles.

In the case of Warner Music Group (WMG), superstars typically carried an $11.86 wholesale cost. Universal Music Group superstar titles wholesaled for $10.35, Sony Music Entertainment for $10.50 and EMI Group for $12.04.

As a racked account, some majors are now selling star titles to Best Buy at the $8.50 wholesale cost. But that's not meeting Best Buy's $7.25 demand.

Best Buy isn't the first to try and get the majors to underwrite a $9.99 in-store price point for single CDs. In 2009, Trans World launched a similar initiative, requesting a $7.40 wholesale cost in a gambit supported by three majors but not WMG.

The majors agreed to Trans World's pricing as a test. But by July 2010, some label lawyers thought the offer had been stretched beyond what could be defended as a pricing experiment. Fearing it could be considered discriminatory pricing unless rolled out to other merchants, they forced a cessation. While some major-label executives say the Trans World test provided enough incremental sales to justify the lower pricing, others say it fell short of that goal.

When Best Buy started getting racked by Anderson, its executives expected the labels to extend all the same courtesies provided to Walmart-and sources say that's making for a sticky situation for the labels as well as for Anderson. If Anderson goes to bat for Best Buy on the lower pricing model, how will Walmart feel about the rackjobber, which has been supplying it with music since the '60s, suddenly helping a competitor become more price-competitive? Legally, both accounts are considered racked accounts and thus get functional discounts, allowing the majors to sell them at lower prices than the wholesale costs charged to chains and independents.

Walmart's multiple-tier pricing allows for new releases to be sold at $7.25 and even $6.50, both of which are used for new releases, but it can also be applied to titles from established artists. So how can the majors sell Walmart established titles at a lower price than Best Buy without getting hit with discriminatory pricing by the government or a lawsuit? In refusing the Best Buy $7.25 request,the majors are essentially arguing that they don't get the same benefit from the electronics and entertainment chain that they get from Walmart; i.e., more unit sales for the lower price. Additionally, the higher price points in Walmart's five-tier scheme provide the majors with a higher overall margin than the flat pricing scheme desired by Best Buy.

The majors appear as frustrated as Best Buy. "Three months ago you could sell Best Buy a hit title at $8.50 and get the circular with a $9.99 price point, " one sales executive says. "Now you can't." And if Best Buy hasn't gotten its $7.25 price point from the majors, the indie labels are another story. "They are doing a good job of bullying everyone," the head of one independent distributor says.

The disparate pricing schemes is just one of the label headaches created by having Best Buy racked by Walmart's wholesaler. "Anderson and Walmart have many years of understanding each other, and we have experience dealing with them," one label executive says. "With this new marriage between Anderson and Best Buy, it's sometimes hard to see what's coming at you."