March 18, 2006
INDIES IN A BIND
BY TODD MARTENS AND ED CHRISTMAN - Billboard
Smaller Labels Are Gaining Access To Big-Box Chains. Will They Turn Their Backs On Old Indie Retail Friends?
Patrick Monaghan was not trying to create a panic. But when he saw Best Buy was selling two dozen independently distributed CDs for $7.99, he could not help himself.
The Best Buy endcap is real estate reserved for the very rich, and in his view the very rich are the major labels. Yet here were titles by Antony & the Johnsons and Cat Power, each priced for less than a full-album download at Apple's iTunes store, let alone the wholesale cost of each of those CDs.
Monaghan, who runs Carrot Top Records in Chicago, went to the first place most music fans turn these days: the Internet. His blog—a rant against the labels that bought into Best Buy's program—generated responses from Matador, Merge and Secretly Canadian, among others, and began a dialogue about a label's obligations to its artists and its traditional retail base (Billboard, Feb. 18).
The discussion comes as independently distributed music enjoys a resurgence, with current-album market share increasing to 17.5% in 2005 from 15.8% the previous year.
At the same time, the retail base that has nurtured the independent labels is in trouble. For the year to date, sales at independent retailers are down 27.4% from the same period from last year. That is on top of the 28.1% sales decline retailers experienced in 2005, according to Nielsen SoundScan.
"It's the U.S. affairs and the economy we're in," Eric Levin of Criminal Records in Atlanta says. "Tire stores and nail salons are going out of business. I don't understand why a few indie stores going out of business is news."
Levin, who heads the Alliance of Independent Media Stores, has a right to be upset. The media has essentially pronounced independent retail dead, even though his store has recently expanded, and such outlets as Amoeba in Los Angeles and Good Records in Dallas are as strong as ever.
But while Levin and other independent merchants argue that their surviving indie stores are among the best the U.S. industry has to offer, he might be downplaying the actual number of such store closures. According to the Almighty Institute of Music Retail, which offers a store database online, almost 650 indie stores—and nearly 1,200 chain outlets—have gone out of business in the past two-and-a-half years.
As the number of indie stores has declined, Best Buy and other large merchants have shown greater receptivity to independently distributed titles, offering smaller or one-off marketing programs that are more affordable for cost-conscious labels.
That is good news for the labels, but puts them in the difficult position of sometimes turning their backs on their traditional retail partners, just at a time when the indie stores need them most.
Sub Pop GM Megan Jasper is a proponent of using indie-label marketing dollars to position CDs at independent retail. "The reason I don't mind paying for it is because these stores have supported us for over 20 years," she says. "They're the reason we've stayed in business. It's our responsibility right now to move forward in the digital world and simultaneously find a way to keep these stores relevant."
But as indie sales shift to larger merchants, it becomes harder for labels to place and promote their product in indie stores. That is because the shrinking account base limits the opportunities to secure premium space.
What is more, the diminishing availability of shelf space helps cooperative advertising retain a high pricing structure, even though overall U.S. album sales have dropped 21.2% from 2000's total of 785.1 million units to last year's 618 million units.
The Internet is also a factor. Labels looking for a way to forgo underwriting retail ad campaigns are increasingly turning to online solutions. Today, records can get a bounty of Web attention from the top online retailers for little money. However, it is likely that the days of free or cheap online store promotion will not last forever.
'MORE RELEASES, LESS SPACE'
In its textbook definition, cooperative advertising occurs when retail and manufacturers equally share the cost of advertising a product. But in the record business, it usually means that the labels and/or distributors foot the bill for any advertising, albeit through programs set up by stores. The retailer kicks in its share by placing the title on sale, taking a hit on the profit margin. The album is also given prime in-store real estate—such as hit walls, endcaps and kiosks—and retailers commit to ordering enough product to anticipate the expected boost in sales.
Label executives often forget the stores' contribution. One company head for an East Coast-based distributor angrily calls cooperative advertising "a misnomer," while the owner of a New York-based indie label disparages co-op as a "necessary evil."
Cooperative programs with national retailers are a massive investment for independent labels. Best Buy's smallest national program is $20,000 for a two-week hit wall; its top program costs $55,000, sources say. Trans World's programs include a $12,500 price-and-position package. Target recently raised its cost to $57,000, pointing out that the chain now has more stores, and has upped the program by one week to 10 weeks, but it also has a new-release wall priced at $34,200. Tower's new-release wall costs about $15,000 for 30 days. And the Gondola listening stations at Borders Books & Music cost about $6,500.
"There's this never-ending thing of more releases and less space," Kill Rock Stars president Slim Moon says. "It feels like we need to spend more now to get people to bring in more than one copy. That's not the way it used to be."
And it is not getting any cheaper. Eventually, independent labels will either be priced out of national co-op plans or be forced to find new avenues to drive retail traffic.
"If anything, cooperative advertising pricing has gone up," says Bruce Iglauer, owner of blues label Alligator. "A huge number of programs are simply priced over our head."
Redeye Distribution and its Yep Roc label no longer buy into cooperative advertising programs. "The rate cards just don't make sense," says Tor Hansen, head of marketing and sales for the Chapel Hill, N.C.-based company.
Yet independent labels with the money to spend are finding big-box retailers suddenly opening their doors for releases by lesser-known artists—at least when it comes to regional or theme-driven programs.
"Retail has been offering some great programs recently," says Missi Callazzo, VP of New York-based Megaforce Records. The big-box stores have been very responsive to the indies, and some accounts have even customized programs for the label, she reports.
Kill Rock Stars' Moon agrees. He cites themed programs, such as the one that provoked Monaghan's ire, as well as a girls-in-rock promotion at Best Buy, in which he placed punk act the Gossip.
"If you want to go whole hog and do a nationwide, store-wide sale, the price has gone up," Moon says. "But [the big chains] have more cool, price-conscious options for indies. It feels to me like there's more affordable options to do targeted retail than there were for us 10 years ago."
But if the affordable options have increased, so has the competition for limited space.
"We get very frustrated with Barnes & Noble because we think they hit our adult demos," one indie-label executive says. "We believe in them as a retailer. But we have been turned down quite a bit for their programs, which we can afford."
Dealing with the larger chains can also backfire on an indie. To invest in such programs a label must be confident its releases will ultimately sell through. If not, the label soon will be eating returns.
And if the big boxes decide independent music is no longer cool, the labels will again be dependent on a weakened indie store universe.
"The chain stores will focus on what's bringing in business, and they'll try to go the extra mile," Sub Pop's Jasper says. "If and when the day comes when independent records like Death Cab for Cutie are slowing down and another genre emerges, the independent stores will continue servicing this audience."
Indie labels still like to work with Tower Records, Virgin Megastore, Borders and Barnes & Noble—chains that carry catalog and have long supported indies—as well as the indie retail community, particularly the store coalitions.
"We love the indie coalitions," Kill Rock Stars' Moon says. He also cites indie retailers Amoeba, Other Music and Newbury Comics as "our cornerstones."
But finding space at the coalitions is just as competitive as the chains. Independent retail has to be selective: Levin says the AIMS coalition usually gets upwards of 70 submissions for about 30 listening-station slots. Likewise, Don VanCleave, who heads up the Coalition of Independent Music Stores, says, "We are getting more than we can use." He says CIMS programs such as the metal listening booth and its DVD stations sell out every month.
CIMS' listening kiosk program runs $3,300; its top program is $8,000. At AIMS, the listening post costs $1,600. The Monitor This program at Music Monitor Network, another coalition, runs $4,750.
CIMS and AIMS rely on a vote among their respective stores to determine which albums will win the opportunity to pay for space.
THE INTERNET THREAT
The Internet also plays a role in the marketing dynamic, sometimes supplementing and sometimes replacing cooperative programs.
Sub Pop's Jasper notes that on the rare occasion that the coalitions reject a Sub Pop artist, she can promote the artist online for almost nothing.
"That's the beauty of amazon.com," Jasper says. "When you go online, there are more options to actually have your CD release visible. There are so many more options that just don't require physical space."
Indeed, as Jasper notes, the fan base for Sub Pop act the Postal Service was built largely via the Internet.
In fact, many label executives cite iTunes as a bigger threat to independent retail than anything Best Buy will do. Like CIMS, they say, iTunes has won over an indie audience by snaring exclusive content for independent artists, including online-only EPs and add-ons to album purchases.
"There's another group of kids, even larger than the kids who bought the Postal Service at independent stores, who bought that album online," Jasper says. "They're going to Amazon and iTunes. There's a huge obligation we have to continue the health of independent stores. At the same time, we would be fools not to support the business of these companies. It's a constant question, and it's hard to predict where it will end up."
But the economics of the Internet may soon provide the answer. With retail space at such a premium, many fear it is only a matter of time before such Web stores as iTunes follow in the footsteps of traditional retailers and begin charging for marketing programs.
Leslie Ransom, head of sales for Chicago-based indie Touch & Go, says, "Brick-and-mortar retail is obviously supporting their bottom line through ad programs, so I don't see why the Internet wouldn't start doing that at some point."
This too will change the equation for labels and retailers. No label is looking forward to the time when co-op dollars must be balanced among the Internet, independent retail and the Best Buys of the world.
"The importance is remembering why you need to do right by each organization," Jasper says. "The independent stores are the heart and soul, and if you forget that, you lose the reason you even took a job at a label in the first point."
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