Wal-Mart wants $10 CDs

chas smith R.I.P. · From: Encino, CA, USA

from the latest Rolling Stone Magazine:
http://www.rollingstone.com/news/story/_/id/6558540/thekillers?pageid=rs.Home&pageregion=single1

Wal-Mart Wants $10 CDs

Biggest U.S. record retailer battles record labels over prices
Wal-mart wants every CD you buy to cost less than ten bucks. And the nation's largest retailer -- which moved a quarter of a trillion dollars' worth of goods last year -- usually gets its way. Suppliers who don't accede to Wal-Mart's "everyday low price" mantra often find their products bounced from the chain's stores, excluded from being sold to the 138 million people who shop at a Wal-Mart store every week.

In the past decade, Wal-Mart has quietly emerged as the nation's biggest record store. Wal-Mart now sells an estimated one out of every five major-label albums. It has so much power, industry insiders say, that what it chooses to stock can basically determine what becomes a hit. "If you don't have a Wal-Mart account, you probably won't have a major pop artist," says one label executive.

Along with other giant retailers such as Best Buy and Target, Wal-Mart willingly loses money selling CDs for less than $10 (they buy most hit CDs from distributors for around $12). These companies use bargain CDs to lure consumers to the store, hoping they might also grab a boombox or a DVD player while checking out the music deals.

Less-expensive CDs are something consumers have been demanding for years. But here's the hitch: Wal-Mart is tired of losing money on cheap CDs. It wants to keep selling them for less than $10 -- $9.72, to be exact -- but it wants the record industry to lower the prices at which it purchases them. Last winter, Wal-Mart asked the industry to supply it with choice albums -- from new releases from alternative rockers the Killers to perennial classics such as Beatles 1 -- at favorable prices. According to music-industry sources, Wal-Mart executives hinted that they could reduce Wal-Mart's CD stock and replace it with more lucrative DVDs and video games.

"This wasn't framed as a gentle negotiation," says one label rep. "It's a line in the sand -- you don't do this, then the threat is this." (Wal-Mart denies these claims.) As a result, all of the major labels agreed to supply some popular albums to Wal-Mart's $9.72 program. "We're in such a competitive world, and you can't reach consumers if you're not in Wal-Mart," admits another label executive.

Tensions are not as high now as they were last winter, but making sure Wal-Mart is happy remains one of the music industry's major priorities. That's because if Wal- Mart cut back on music, industry sales would suffer severely -- though Wal-Mart's shareholders would barely bat an eye. While Wal-Mart represents nearly twenty percent of major-label music sales, music represents only about two percent of Wal- Mart's total sales. "If they got out of selling music, it would mean nothing to them," says another label executive. "This keeps me awake at night."

Wal-Mart would not directly comment on tensions with the labels, but Gary Severson, Wal-Mart's senior vice president and general merchandise manager in charge of the chain's entertainment section, did allude to the dispute about music prices. "The labels price things based on what they believe they can get -- a pricing philosophy a lot of industries have," he says. "But we like to price things as cheaply as we possibly can, rather than charge as much as we can get. It's a big difference in philosophy, and we try to help other people see that." Virtually no industry executives would publicly comment about their company's relationship with Wal- Mart. But off the record, many record-industry executives shared their concerns. "I don't think there is a music supplier in America who really enjoys doing business with Wal-Mart," says one major-label rep.

No one in the music business ever expected Wal-Mart to become the most powerful force in record retailing. In the past, the business was shared among smaller local and regional chains such as Musicland, which once had an estimated ten percent of the market. But as Wal-Mart and other national discount operations such as Target and Best Buy have grown -- approximately half of all major-label music is sold through these three -- an estimated 1,200 record stores have closed in the past two years, according to market-research firm Almighty Institute of Music Retail. Last February, Tower Records, with ninety-three stores, declared bankruptcy and is now up for sale; Musicland has already changed owners, with many local outposts shuttered.

Wal-Mart is like no traditional record seller. Unlike a typical Tower store, which stocks 60,000 titles, an average Wal-Mart carries about 5,000 CDs. That leaves little room on the shelf for developing artists or independent labels. There's also scant space for catalog albums, which now represent about forty percent of all sales. At a Wal-Mart Supercenter in Thorton, Colorado, for example, there were no copies of the Rolling Stones' Exile on Main Street or Nirvana's Nevermind. While most of the latest hits were priced at $13.88, some records -- from the O Brother, Where Art Thou? soundtrack to the latest by Yellowcard -- were displayed for $9.72. Says Severson, "Paying fifteen dollars for a piece of music is a difficult value equation for customers."

For the music industry, having such a dominant retailer is like being stuck in a bad marriage. Whereas traditional music retailers took advertising money from the labels to push new releases in Sunday newspaper circulars, Wal-Mart barely advertises locally. It relies on national campaigns, where it promotes its own low-price policy. "Wal-Mart has no long-term care for an individual artist or marketing plan, unlike the specialty stores, which were a real business partner," says one former distribution executive. "At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space."

In the same way that Wal-Mart made it difficult for local mom-and-pop retailers to compete with its low prices, it has hurt smaller music stores. "When you're buying CDs for twelve dollars and selling them for ten like Wal-Mart, it makes the rest of us look like we're gouging the customer, when we're not," says Don Van Cleave, head of the Coalition for Independent Music Stores, a retail consortium. "It's supertough to compete with that price point." Even online, Wal-Mart sells songs for eighty-eight cents, compared with ninety-nine cents at the market leader, Apple iTunes Music Store.
Getting Wal-Mart excited about carrying a record is at the top of every label's to-do list, but it's harder than it sounds. There is an immense cultural chasm between slick industry executives and Severson's team of three music buyers at Wal-Mart headquarters in Bentonville, Arkansas. Only one of the three had ever worked in music retailing -- until that person moved to a new division in August and was replaced by someone who previously bought Wal-Mart's salty snacks. (Wal-Mart also relies on buyers at its two distribution companies, Handleman and Anderson Merchandisers, who purchase records as well as stock the Wal-Mart stores.)

"Content-wise, Wal-Mart is limited about what they sell," says one label chieftain. "Wal-Mart is Middle America's shopping headquarters, with different buying habits and consumer tastes than those who live in Manhattan and L.A." When founder Sam Walton christened the first Wal-Mart in 1962, music was never a priority -- it wasn't an everyday, easy-to-stock product like light bulbs, since the Top Ten changed so much. The chain also had specific objections to music. Walton wanted all stores to remain family-friendly, and in the rural South, rock & roll had the potential to turn away many customers. In 1986, the Rev. Jimmy Swaggart led one such campaign to ban music from Wal-Mart, saying rock fostered "adultery, alcoholism, drug abuse, necrophilia, bestiality and you name it." Albums and magazines about rock (including Rolling Stone) were temporarily pulled from the Wal-Mart shelves.

Wal-Mart's wariness about music ended once the music industry adopted a voluntary advisory sticker on albums deemed to contain adult language or sexual content. Today, before any new album is released, someone at each label is charged with asking, "Do we have any Wal-Mart issues?" If an advisory sticker is placed on an album, the label will put out a clean version about ninety percent of the time. Since the edited version of a hit record usually averages only about ten percent of a record's total sales, they do it mostly to keep Wal-Mart happy.

Wal-Mart has loosened up a bit, too. Eminem's albums, stickered or not, are not carried by the chain, but it does sell the 8 Mile soundtrack. And it carries an edited version of 50 Cent's debut. Since the labels are so adept at self-policing, though, censorship controversies are now rare. "There have been examples in the past, but it's not a current issue," says Severson.
Wal-Mart has also urged the labels to create exclusive new products that would lower music prices. In a short-lived test, Universal excerpted seven songs from existing albums by acts such as Sum 41 and Ashanti and sold them at Wal-Mart for $7. Few other labels wanted to participate. "They proposed it to a bunch of artists and managers, but everyone was worried that we are sending a message that instead of the sixteen-track album we sold, those nine extra songs were filler," says a label executive.

Some record executives think they can survive Wal-Mart's push. They argue that the hottest acts will always command a premium price. "50 Cent sold 7 million copies," says one rep, "and I guarantee that many of those sold for fifteen, sixteen dollars." And they believe that Wal-Mart will want to carry those hits because they draw customers. "If they can't find a record at Wal-Mart, people will go elsewhere," says one executive. "We should play hardball." But each label is watching the others to see if any make major concessions to Wal-Mart's demands for lower prices. A label that gives in could gain shelf space at the expense of another. "If you lose an account, one of your rivals could get more product in the store and get one up on everyone else," says a major-label rep. "You have to tread cautiously."
The tug of war between the labels and Wal-Mart isn't going away soon. The chain is aggressively opening new stores -- fifty-seven in October -- including some in urban areas. So unless it makes good on its threat to cut back on its music section, it will continue to grow as the top record store and become even more powerful. Laments one industry rep, "There is some impending doom associated with us not helping them."

Price War: Does a CD have to cost $15.99?
Major labels insist that the low prices mass retailers such as Wal-Mart and Best Buy demand are impossible for them to achieve. But Best Buy senior vice president Gary Arnold counters, "The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn't properly priced." Labels point to roster cuts and layoffs as evidence that they can't sell CDs cheaper.
This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.
$0.17 Musicians' unions
$0.80 Packaging/manufacturing
$0.82 Publishing royalties
$0.80 Retail profit
$0.90 Distribution
$1.60 Artists' royalties
$1.70 Label profit
$2.40 Marketing/promotion
$2.91 Label overhead
$3.89 Retail overhead
WARREN COHEN and STEVEN KNOPPER
(Posted Oct 12, 2004)

Donny Hinson · From: Glen Burnie, Md. U.S.A.

Well, I can understand what the "label overhead" is (studio, mixing, session musicians, and administrative costs), but what in tarnation is that "retail overhead" cost? The only things I can think of under that category would be restocking, and damaged/stolen merchandise, along with some very minimal administrative costs. Since that's the biggest "piece of the pie", I'd be interested in knowing the "ingredients"!

(But secretly, I'm all for them trying to get the prices lowered on major-label CD's, since I've always thought they were far too high when you consider the volume of sales.)

Ron Whitworth · From: Yuma,Ariz.USA Yeah they say it's a DRY heat !!

Kind of funny in a way..Walmart has the music industry backed against the wall & shaking a little!!..Who would have ever thought this could have ever happened in a thousand years?? You just never know?? Ron

Ken Lang · From: Simi Valley, Ca

Retail overhead. I would relate this to what is called "floor plan" at automotive dealers. The longer a vehicle sits on a lot and is not sold, the higher the floor plan costs.

Think of it this way. A store or auto dealer has a given amount of space, or land, to store its products. This space is taxed. A single vehicle takes up so much space and therefore can be charged a percentage of this tax depending on how long it sits there.

Added to whatever taxes are paid is cost of upkeep, pay of employees, benifits and probably lots of other things involved that contribute to the cost of that space.

If a vehicle sits in that spot for one year, its floor plan is a total percentage of the cost of that space. If 20 vehicles occupy that space (the others being sold) the cost per vehicle is 1/20th of the floor plan.

I'm sure the same holds true for retail stores, including restock, theft, breakage and whatever else.

So a store makes 80 cents on a CD but it costs them nearly 5 times that to keep it on the shelf, which of course we pay for.

Clearly, something has to give to sell $10 CDs. And, save country, I wouldn't give $5 for any CD out there.

John Steele (deceased) · From: Renfrew, Ontario, Canada

And now, a synopsis of the issue at hand:

quote:

"At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space."

K... so now I'm toothpaste.
-John

------------------
www.ottawajazz.com

chas smith R.I.P. · From: Encino, CA, USA

I've been able to accept that I'm a commodity, I have difficulty being disposable labor.

Tony Prior · From: Charlotte NC

Is it possible that the Wallmart execs have come to the conclusion that most of the CD's we buy are not worth $16 ? And cannot be returned for NO SATISFACTION ? Maybe the label execs will cut out the Union portion and lower the Artist royalty so they can maintain the $3.89 Retail Overhead..I just re-read my Business 101 manual and there was no chapter on Retail Overhead fee's. I guess I have an old obsolete version.

I'm thinking it's not possible that THEFT and DAMAGE are part of the Retail Overhead cost..that would mean that there are as many CD's stolen and damaged as sold !Is that possible ?

Lets see if Metallica is the first to deny distribution of there CD's at Wallmart.

I think it's fascinating that someone has taken these label execs on "Legally"..considering that the latest news this week is that the Industry wants names and address of all Internet subscribers who may download.

maybe we need a TV debate between a Wallmart exec and a Label Exec..Town Hall style..we get to ask the Q's..

t

Chris Forbes · From: Beltsville, MD, USA

Yeesh, it's hard to know who to root for in this fight, I can't stand Wal-Mart or the record industry. Hmmmm, I guess like two football teams playing that I dispise, I'll root for a lot of injuries!!!

Ray Minich · From: Bradford, Pa. Frozen Tundra

I think "retail overhead" should be recast or renamed as "retail margin". The "buy low-sell high" kind of margin.

Billy Henderson · From: Portland, AR, USA

I want $10 CD's too! I won't pay $18.00 for a CD that has only one decent cut on it. Some I wouldn't buy if they were two for a nickle. Maybe it's the economy.

chas smith R.I.P. · From: Encino, CA, USA

There's another "backround issue" here, that I've heard in discussions that has to do with age-groups. That being, the people who grew up with LP's, and are used to having something to "hold in their hands", are more likely to buy a CD. Whereas the kids who are used to having digital music, iPods and such , don't seem to need to own the CD.

David Doggett · Posted 13 Oct 2004 10:29 am

Well I'm no accountant, but the way I read the cost breakdown is that the retail margin built into the "Suggestied Retail Price" of $15.99 is $.80 retail profit plus $3.89 retail overhead, for a total retail margin of $4.69. The retail overhead would cover everything from building space to retail personnel costs. Theoretically, the only costs in the list that are not fixed are the Label profit and retail profit. But I don't know how hard those numbers are for all those fixed costs. The fact that both labels and retailers sell CDs for less than suggested here indicates that there is substantial room in these "fixed" costs (cause ain't nobody selling nothin' without a profit). But I think we can all agree that these prices are "fixed."

But maybe things aren't as bad as we think. When CDs first came out, vinyl LPs sold for around $8, and CDs for around $15. The extra cost of CDs was supposedly because of startup costs and the initial low quantities sold. We were assured that the CD price would drop to the vinyl LP price as CDs replaced vinyl. This of course never happened. However, the $15 CD price has stayed approximately the same now for several decades, such that $15.99 today is worth about as much (or maybe less) than the old vinyl LP price of $8.

The Wal-Mart behavior suggests that they believe the attraction of their low CD prices brings in customers and gets them sales and profits on other items. In effect this more than offsets their retail overhead on CDs. That sort of thing is not factored into the above breakdown on the suggested retail cost. But Wal-Mart is obviously factoring that in. Plus, they are using their monopoly clout to try to force the labels to eat their own profit and some of their own overhead costs (which are essentially everything on the list but the retail items and the label profit). That is monopolist chutzpa on the level of the old railroad robber barons. Rockefeller had such a big chunk of the oil that he forced railroads to give him rebates on the money he paid them for shipping. Then he got so powerful he forced the RRs to pay him rebates on the oil they shipped for OTHER COMPANIES. Over the top behavior like that is what got us our present anti-trust laws. Maybe we need some more.

Ben Slaughter · From: Madera, California

This is THE typical WalMart scheme, they've done this with just about everything. They go to a supplier and say we'll buy 2 bazillion units for $X/unit, and the supplier can't pass up the sale because it's 4x the sales they've ever done. They come back the next time and say we'll buy 4 bazillion unit, but only pay you 75% of $X/unit, or we'll find another supplier.

Kind of fun when it happens to the record industry, who's been bilking us for so long, not nearly as much fun when it is happening to farmers with no margin to give up.

Don Joslin · From: St. Paul, MN

I have a couple of thoughts in defense of the retail overhead figures. A couple of years ago I was doing some work for an Ad Agency and saw some startling figures regarding how much commercial space is worth. The study showed that the space that your coffee cup takes up on your desk is worth around $11 PER MONTH. Remember, it's not just the space in the stores. Wal-Mart has their own trucks, a huge distribution network, regional taxation issues, employee benefits for all of those folks that you don't see on the retail floor, office supplies, and on and on. My wife used to work in retail and some retail businesses even figure in the air space above a product because they have to heat, cool, and filter the air. That's why you see product stacked so high in most stores. That $4 for retail overhead sounds pretty reasonable to me.

If you consiter clothing the retail markup is sometimes as high as 300% and most of it is made in foriegn countries by starving kids.

I applaude Wal-Mart for their efforts. Like others have said, maybe those big execs in Trashville will sit up and take notice of what their customers really want!

Don

PS - I love that phrase "Do we have any Wal-Mart issues?" - In my house a "Wal-Mart issue" means that BOTH teenage daughters are going with us to Wal-Mart - BRING THE CASH CARD!

------------------

My favorite baseball team is the Minnesota Twins...
-------- ...my second favorite is whoever is playing the Yankees!

erik · Posted 13 Oct 2004 3:30 pm

David Cobb · From: Chanute, Kansas, USA

On a related note, I've noticed that Walmart prices some new artist CD's at slightly under $10.
For example, Josh Turner and Gretchen Wilson CD's were priced this way, until it became apparent that these two artists had a following on the strength of singles released from the albums.
As soon as that happened, the prices on these CD's shot to around $14.88.
For an outsider looking in, it would appear that their thinking was "run these up the flagpole and see if anybody salutes.
If they do, then sock it to 'em with a 50% markup from where they were yesterday."

chas smith R.I.P. · From: Encino, CA, USA

Theresa Galbraith · From: Goodlettsville,Tn. USA

I buy almost all my current cds at Walmart.
The prices are right!

Billy Currington $9.72
Alan Jackson $9.84
Mark Chestnut $13.88
George Strait 50 #1's $18.88 double cd

By the way, all these cds have great steel jams showcased!!!!

[This message was edited by Theresa Galbraith on 14 October 2004 at 05:48 AM.]

Erv Niehaus · From: Litchfield, MN, USA

I bought a couple of Meryl Haggard CDs at Wal Mart a while ago. They were new gospel CDs and marketed only by Wal Mart. Tom Brumley's father wrote most of the songs on the CDs. I'm sure nobody else wanted to be bothered trying to sell them except Wally World. I applaud them for their efforts!
Erv

Janice Brooks · From: Pleasant Gap Pa

What about their online download service?

------------------
Janice "Busgal" Brooks
ICQ 44729047

Mark van Allen · From: Watkinsville, Ga. USA

Wow. There's a whole lot there to chew on. Of course in the same way that wanting cheaper tennis shoes leads to job outsourcing and support for foreign child labor, support for "cheaper CDs" may lead to nothing being available that contradicts WalMart's world view, political leanings, or
censorship position. But if I can save $6 on the new Brittany Spears...

------------------
Stop by the Steel Store at: www.markvanallen.com

John Kavanagh · From: Kentville, Nova Scotia, Canada * R.I.P.

When Wal-mart moved into my area, closinga lot of local businesses, I said I would never go inside. Four years later, I keep hearing more and better reasons not to.

Mark Ardito · From: Chicago, IL, USA

The recording industry has been in the need of a serious butt kicking for a long time. Maybe it is going to take a huge retailer like WalMart to actually shake up this crooked industry.

Mark

------------------
Sho~Bud Pro I, Fender D-8 (C6&E13) http://www.darkmagneto.com

John Steele (deceased) · From: Renfrew, Ontario, Canada

The last few years have seen Wal-Mart gain a foothold in my home town. I expect it'll have sucked the place dry and spit it out in five years or less.
They have exerted undue influence on the town council with respect to traffic patterns and store hours. They don't have to worry about suffering the same pressure they put on surrounding small businesses, because the existing businesses don't treat their employees like crap, as Wal-Mart does. They'll have it all their way if it means destroying the town. Why would they care anyway, they don't live here.
So please don't paint this whole thing up as some heroic move on Wal-mart's part to save the buying public from the evil record companies. That's baloney. Wal-Mart doesn't care any more about it's customers than it does about the record industry. They just want it all. I think they call it unmitigated greed.
Of course, this can only be accomplished with the complicity of a really stupid consumer base. Yeah, you know, the people that show up at my office door looking for a donation to the Girl Guides, or to send their kids to hockey camp, or to give money toward the fund-raiser for someone whose house burned down.... they're also the first people to crawl across broken glass to empty their wallets at Wal-Mart, thinking they've saved 5 cents. The very Wal-Mart that would laugh in their face if asked for a donation to a local cause in the town they're dismantling.
But, in the end of couse, all the Wal-Mart shoppers will be millionaires because of all the money they've saved shopping there, right ? Ha Ha
No, in the end they'll only have available to them what Wal-Mart decides they'll have, and at the price they decide on too (as Mark Van Allen has wisely pointed out).
Does anyone really believe there exists a record company which is as inherently evil as Wal-Mart ?!?
-John

------------------
www.ottawajazz.com

Drew Howard · From: 48854

F*ck Walmart.

Forum Index > Music	Goto page 1, 2 Next	Next oldest topic :: Next newest topic