Meet the Company Preparing to Be the Last CD Distributor Standing
With streaming's momentum accelerating, Alliance Entertainment -- the largest U.S. wholesaler of physical music -- has no choice but to take a contrarian approach.
"We are long on physical -- we want to be the last guy standing," Alliance's chairman Bruce Ogilvie told Billboard at his bustling company convention last month.
While Alliance has diversified into DVDs and video games -- merging with New York-based video game distributor MECCA deal in May -- the company still sees plenty of opportunity in music. That's in part because even if record labels ultimately decide to get out of the CD business altogether, Alliance hopes it could take over that business as a trusted partner that can license their music for CD manufacturing and distribution. Already, Alliance has been licensing product for the company's manufacture-on-demand capabilities.
Thanks in part to the sales picked up in the MECCA merger, Alliance now has annualized revenue of about $775 million, even with its retail client Best Buy currently removing CDs from all of its stores. About 52 percent of Alliance's revenue comes from music, 33 percent from video and the other 15 percent split between video games and pop culture merchandise and accessories. It also participates in third party logistics for Kobalt's AWAL as well as for some online CD/DVD stores, and "can do internet fulfillment and deliver as fast as Amazon," says Alliance Entertainment CEO and co-owner Jeff Walker, noting the firm can ship orders around six hours after receiving them.
That capability is thanks to its 700,000-square-foot distribution center -- the size of an enclosed shopping mall -- in Shepherdsville, Ky. The state-of-the-art center is armed with the latest sortation, packing equipment and computer systems, operating 24 hours a day during the fourth quarter, peak sales season. "Even in the off season, we sit with over $100 million worth of inventory in our warehouse so we are ready for whatever our customers want. That is a win for every one of our retail customers," Walker said.
Alliance isn't ruling out buying a music digital distribution company to complement their physical operation, but in the meantime they are picking up growth in music through their indie distribution arm AMPED, headed up by VP Dean Tabaac, and one of a few partners for indie labels who need physical distributor, something that most major-label-owned distributors won't do. Recently, for example, South Korean music giant SM Entertainment inked a deal with Alliance to distribute K-pop act Red Velvet's EP Summer Magic: Summer Mini Album, including a limited edition version with 5 different covers, one of each member.
But even as it diversifies its products and accounts, the Alliance management team wishes that the records labels would be more proactive in supporting physical music product. Sure, they understand why the industry is focused on streaming, but they wonder why the labels can't walk and chew gum at the same time.
How the industry will wind down the CD format is still unknown, but the Alliance management team argues withholding physical product so that digital can have an advantage is hurting everybody economically.
Back in the 1980s when vinyl sales first started declining, the labels were happy to embrace the more profitable CD and the portable cassette without doing much to support vinyl. But hindsight showed them that multiple formats provide more revenue, so when the cassette was fading into oblivion, the industry went long on supporting cassette tapes to the very end. Now, wholesalers like Alliance and indie store merchants and other retailers attending the convention say they hope that the industry becomes more aggressive in supporting the CD as its sales wind down.
So far, the Alliance owners have been disappointed because some artists only want to be out in digital, and the labels have been going along with their wishes. "Even if an artist doesn't want to put out a CD, at least give us something on vinyl," Walker says. "If artists like Drake and Cardi B each gave us 20,000 units in vinyl, it would give us and the retailers something to sell and it would give their devout fans something tangible from their favorite artist."
Walker foresees a longer future for vinyl than the CD, even though currently the latter format is 4.5 times larger than the former, with 38 million CDs scanned in the U.S. so far this year, versus 8.3 million vinyl copies. At Alliance, vinyl compromises 25 percent of the company's music sales, boasting the art and information that became an afterthought with the CD, but which is still coveted by superfans and collectors.
Another possible path for labels to take as the CD winds down is to sell albums one way - without accepting returns - to music merchandisers, like they already do with vinyl. But Ogilvie says labels should do so at a lower wholesale per-unit price, since they wouldn't incur return expenses.
Alliance Entertainment was formed more than two decades ago in a Wall Street investor rollup of three wholesalers: Florida-based Jerry Bassin Distributors, CD One-Stop, and Ogilvie's Abbey Road, purchased in 1994. Seven years after that sale, Ogilvie partnered with Super D, a one-stop started by Walker. When Alliance came up for sale, Ogilvie and Walker bought it and merged their Super D operation into it.
Ogilvie and Walker still have debt on the balance sheet from their Alliance acquisition, the amount of which they don't disclose, but industry sources estimate that Alliance has a very healthy ratio of earnings-before-interest, taxes, depreciation and amortization, to interest payments, about 8:1, which helped it acquire MECCA this spring. MECCA, a 40-year-old video game distributor, has vendor status with all of the video game publishers, with B&H Photo, PC Richards, Groupon, Rent-A-Center among its accounts. Ogilvie says he hopes to cross pollinate the retailers that Alliance sells to for MECCA's goods while tapping MECCA's merchants to see if they want to buy Alliance's other product lines.
At the company's 20th annual convention in Sunrise, Florida, where its largest office is located, about 400 people attended, including about 100 company staffers vendors from all product sectors, retail accounts, and recording artists; Alliance Entertainment VP of sales Ken Glaser organized and emceed the five-day event. In addition to indie store owners and indie coalitions, the convention brought in online merchandisers like e-Bay, department store chains like Dillards, and home entertainment chains like Trans World Entertainment and Books-A-Million. Other Alliance accounts, some of which just buy from the wholesaler and some of which use its vendor-managed inventory capabilities, include Wal-Mart, Shopko, Meijers and Books-A-Million. It also does both some entertainment software fulfillment for -- and bulk sales to -- Amazon. Alliance was one of the main vinyl suppliers of Record Store day, and while Alliance may have to do without physical releases coming day and date with the digital release date on some titles, the company cannot complain about the support that it received from record labels and other suppliers in staging its convention, with something like 80 product vendors, including the three major labels, attending.
Since the business of retail and wholesale never stops, the schedule of Alliance Entertainment convention began with product presentations from vendors in the morning, but broke after lunch to allow the staff to be bussed back from the convention hotel to the Sunrise office to take care of business in the afternoon -- to make sure retail accounts got the right product on time for their brick-and-mortar and online stores.
The convention attendees reconvened in late afternoon/early evening for showcases and other events, including a night at a bowling alley staged by Alliance indie-distribution arm AMPED; and an evening in an airport hanger to see a product presentation staged by Paramount, which was decorated to resemble a Mission Impossible soundstage to promote the movie slated to come out on DVD in the fall.
Acts that played the convention included Big Machine's Lauren Jenkins, RED Music's Lovely The Band, Republic Records Noah Kahan; and Sony Music Latin's Jahzel Dotel, Ruf Records' Mike Zito, Cleopatra Records' Case and Megaforce Records' Decker and Les Stroud.
The convention's high point was a performance from Tony Bennett. Bennett played about a 40-minute set sprinkled with songs from his extensive catalog including "Love Is Here To Stay," "the Good Life," "San Francisco" and "Fly Me To The Moon," in an evening sponsored by Universal Music Group.
In order to position itself for future growth opportunities, Alliance recently last month brought on board former Sony Music Distribution executive Bob Garbarini as senior VP of business development. (Other key executives include Laura Provozano, senior VP of purchasing; Jeff Skipton, senior VP of VMI; Tony Moyers, VP of consumer products/non-media; John Kutch, CFO replacing George Campagna, who just retired right after the close of the convention; Ben Means, president of Distribution Solutions; Gustavo Bello, VP of international sales; Carlos Franca, VP of eCommerce sales and operations; Bobby Miranda, VP of business development; Tim Hinsley, VP of retail sales; Mary Flynn VP of content and acquisitions of NCircle Entertainment; and the MECCA Entertainment executives, founder Raymond Aboodi and Danny Marshall, while former Alliance CEO Alan Tuchman is on the company’s board of directors.
One such opportunity is licensed pop culture merchandise. "Interestingly enough, there is not a one-stop wholesaler dealing in those goods," says Walker. "We want to have a wide selection of those products, just like we do for music."
Ultimately, Alliance wants to provide retailers with all of their entertainment software needs in one shipment, all on the same invoice. "We want to be the one-box solution," Ogilvie says.