January 16, 2006 - Los Angeles Business Journal
Downloads and chains forcing last of independents to adapt
By RACHEL BROWN
LOS ANGELES BUSINESS JOURNAL STAFF
Independent record stores Rhino Records in Claremont and Rhino Records in Westwood share a past, but not a future.
Pummeled by competition and shifting consumer habits, the Westwood location is closing, its 35 years selling music no match for a tough marketplace diminished by downloads and dominated by chains.
The Claremont Rhino store has survived because it remains insulated from some of the pressures that doomed its Westwood counterpart, and it has slowly adjusted to the reality that music retailing today is a specialty practice.
"The store is still doing good, but over the course of the last 10 years it has morphed," said Dennis Callaci, the Claremont Rhino's general manager. Many of the customers are "music fanatics looking for obscure records."
In the last three years, 156 record stores closed in California, 90 of which were indies, according to Clark Benson, founder of the Almighty Institute of Music Retail, a Studio City market research group which compiles store data. And the bloodshed isn't over. He predicts a year of heavy attrition in 2006.
Comparisons to dinosaurs and typewriters may not be in order; the species is far from extinct. There are still 761 music stores left in the state, 310 of which are independents. Those left after the fallout will be forced to rely on stronger business models, largely depending on a small slice of enthusiasts to keep cash registers humming.
"There is always going to be a need for a well-run independent store that caters to the niches," said Benson. "Five years from now, the typical independent record store will a have a very deep selection that you are just not going to find at the chains."
That's certainly what has happened at the Rhino in Claremont. About five years ago, the store made a decision to slim its selection of popular hit records and increase its volume of hard-to-find items coveted by collectors.
Callaci estimated the store doubled its in-store inventory. At the same time, it stocked its aisles with merchandise that has higher markups, including CDs put out by smaller music labels and used discs, as well as T-shirts and novelty items.
An independent store can buy a new hit CD wholesale at about $11.50, while CDs from smaller labels cost a few dollars less. Typically, used CDs cost between $1 and $5, and stores resell them for nearly double that price.
Currently, Rhino Claremont sells two new CDs for every used CD. Callaci would like to see that ratio more heavily skewed toward used, leaving the big chains to peddle Top 40 merchandise.
The Claremont Rhino faces its share of competition from chains like Best Buy Co. Inc. and Circuit City Stores Inc. The store tried to estimate how many such chain locations were within a nine-mile radius and counted nearly 30, Callaci said.
But Rhino has been helped by some chain closures. After Wherehouse Entertainment Inc. declared bankruptcy in 2003, two Wherehouse stores near the Rhino shut down.
The Claremont store, tucked away in a college town on the outskirts of L.A. County where a Birkenstock store and folk music center dot the tree-lined commercial drag, is a long drive from one of the largest sources of competition in L.A., Amoeba Music Inc. The Berkeley-based independent music store behemoth burst onto the local scene in 2001, drawing music shoppers with its huge supply.
Bob Say, owner of Freakbeat Records in Sherman Oaks, said the demise of local indie stores is too often pinned on Amoeba. "Everybody complains about Amoeba being this 800-pound gorilla, but there is room for others to survive," he said.
Say, who managed the small chain Moby Disc until it sold to Djangos.com Inc. in 2000, said the problem for many indie stores was that they didn't transition properly after the heyday of album sales in the late 1990s. The stores failed to foresee album sales tapering and clung onto a business model that, in the long term, worked only for low-price chains with large sales volumes.
The independent stores that stuck around didn't try to compete with the chains on price or scale, Say noted, but by finding a devoted audience of music fans and catering to them. That way, he said small stores, with pared down overhead, can have a role, even if they don't mint money.
Also making things difficult for indie owners, Benson said, is that they are often music lovers first, not business people, and they aren't adept at judging the business climate. Still, he estimated that by suiting niche tastes, a store like Rhino Claremont could realize $1.5 million to $2.2 million in annual sales.
At Rhino Claremont, although the customer flow is as heavy as ever, the base has changed. Callaci said that fewer college kids come through the doors. Many of them have been wooed by opportunity to hear and download music on the Internet. Benson pointed out that 2003 was an especially brutal year for college stores. Before that, he said, a campus might support three to five record stores, whereas now one to two is the rule.
Today's customers are drawn from a larger geographic region, searching for a deal on a rare music find.
Exposed to a wide variety of genres, current customers are typically knowledgeable and aren't devotees of any one kind of music. Callaci said they ask questions about all styles of music and have collections that incorporate many genres and generations.
"When I started working here, we would have the Goths, the punkers, but now people shop for everything," said Callaci.
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