Why There's 'No Magic Bullet' Solution to Music Industry's Distribution Problem

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Warehouse woes, shrinking order sizes and the lure of Amazon are just some of the challenges facing the U.S. distribution sector.

Amid the distribution misery that has been plaguing brick and mortar retailers -- especially indie store owners -- since April, the industry's veteran supply chain executives suggest there is no quick and easy solution in sight.

The Direct Shot distribution operation imploded into a fiasco when it took on distribution of the Warner Music Group and its Alternative Distribution Alliance titles at around the same time that it also began direct shipping individual Target stores instead of one huge shipment to the chain's warehouse, industry executives tell Billboard

But one of the underlying reasons it can't seem to fix anything -- besides still trying to ingest all of the WMG/ADA titles -- is because the company's main music warehouse is built for bulk "box-lot" fulfillment. In the reality of the shrinking CD marketplace, Direct Shot needs a warehouse that is built to do "odd-lot" fulfillment -- something it can't currently handle to any successful degree, according to industry sources. Odd-lot fulfillment means picking, packing and shipping orders that have mainly only one or two copies of a title, instead of picking a box containing 30 copies of a title, industry executives familiar with distribution pipelines tell Billboard

As CD shipments have shrunk, so too have order sizes, industry executives say. Even without the addition of WMG's inventory, the Direct Shot warehouse was unable to deal with the changing marketplace and was already poised to become a slow-moving problem waiting to befall the industry, says one music wholesaler. The addition of the WMG and direct shipments to Target stores, besides swamping the facilities capacity, also accelerated the situation, that executive adds.

As it is, Direct Shot's warehouse has fallen behind the times when it comes to modern distribution, industry executives say. But Kyle Krug, director of marketing for Legacy Supply Chain Services -- which acquired Direct Shot earlier this year -- refutes that characterization, saying the Direct Shot facility employs many of the accepted modern-day distribution strategies, including batch picking, and it also has plenty of sortation equipment. But he does acknowledge that the facility needs to be realigned and have its systems upgraded to address the change in buying strategies by retailers.

"Without a huge investment in infrastructure, it's hard to see [Direct Shot] improving its handling of distribution," says one executive familiar with these distribution issues.

Fortunately, Direct Shot apparently recognizes this. According to sources, sometime in the last two weeks Direct Shot and Legacy Supply Chain reached out to the majors asking them for financial help to upgrade its systems and equipment. The ask is in the way of increased rates paid to Direct Shot/Legacy, with the extra payments earmarked to upgrade the company's facility and systems.

No word yet on how the majors will respond to that request; and what Direct Shot will do if the majors decide not to agree to new higher payment terms.

Beyond its problems in supplying stores and wholesalers with inventory, consumer artist websites and touring acts needing merchandise to sell on the road have suffered too. Says one indie label executive distributed by a major-owned indie distributor: "You are assuring your artist that their product is in stores, but it's stunning to me that we can't get product to the artist for them to sell at their shows."

While Krug declined to discuss financial terms the company has with its accounts, he says, "Legacy is investing in a longterm plan to ensure the success of the physical music industry. The issue we are dealing with is how do you evolve and realign the facility to handle all the disruption that the industry has experienced over the last year. There is no magic bullet."

Beyond that, Direct Shot's Franklin, Indiana, warehouse, which handles most of the music distribution, seems to have another problem. Despite claims it has hired additional workers to help mitigate distribution problems, music industry sources tell Billboard that in September Amazon opened an $80 million distribution facility 20 minutes away in Greenwood, Indiana, which is hiring more than 1,000 employees -- allegedly with better pay and benefits. Consequently, music industry sources say that Direct Shot has lost employees to the new warehouse and makes it harder to keep proper staffing levels at the company, which had already been stymied by a U.S. economy with very low unemployment levels.

Krug insists the company has expanded staffing, but he does acknowledge that Legacy and Direct Shot -- like other warehouses across the U.S. -- have to compete with Amazon for employees. "Amazon creates that issue everywhere it opens a warehouse," he says. "So we have responded by increasing wages, improving  benefits and expanding recruiting efforts." 

"How can Direct Shot say it has adequate staffing levels, if it's taking up to seven weeks to fulfill a single catalog order," wonders one wholesaler. "If Direct Shot's facility was properly staffed, it would be able to meet demand."

To address the problem, Universal Music Group has moved all of its new releases to another Direct Shot/Legacy Supply Chain warehouse. UMG, Warner Music Group and Sony Music are also telling independent retailers to buy from wholesalers like Alliance Entertainment, Ingram Entertainment, All Media Supply and Cobraside, whom they are supplying with more product. But buying from a third-party wholesaler is typically more expensive than ordering direct, so WMG, Sony and UMG are offering wholesalers discounts to pass-through to indie merchants that previously bought direct. 

These discounts were intended for the fourth quarter but may extend until Record Store Day in April 2020, depending on how the Direct Shot situation unfolds in the new year, sources add. One major label source says his company won't put a timeframe on when this discount program will end, saying it depends on the improvement in the quality of service merchants are getting from Direct Shot.

WMG is also addressing the situation by cleaning up the database for its WEA distribution arm and putting some 2,000 titles on sell-hold while the Direct Shot mess gets sorted out.

Even with all of those efforts, catalog titles remain hardest hit by the Direct Shot debacle, with all three majors facing weak inventory fills, say retailers and wholesalers. While the majors are doing better with new releases, one music merchant says, "If we run out of inventory on a new release, it seemingly takes an act of Congress to get it back into stock. We are constantly chasing inventory on B and C level releases."


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