(Billboard) (12/19/03)

By Ed Christman

Edited By Michael Bennett

NEW YORK, NY, USA - The fallout from the 10.7% drop in album sales that made 2002 such a tough time for the music industry continued to reverberate throughout 2003, a year that will long be remembered for its Chapter 11 filings and store closings.

For those keeping count of such grim news, four chains and four wholesalers either filed for Chapter 11 protection or were liquidated, and upwards of 1,000 stores are believed to have closed in 2003.

Two major chains -- Tower and Musicland -- were involved in out-of-court restructurings that included management and/or ownership changes, while nervous product suppliers are keeping their fingers crossed that both will prove successful.

In an attempt to overcome the problems frustrating music sales, most chains diversified their merchandise, resulting in reductions in album inventory.

While that move appears to be paying dividends for stores, it continues to hurt labels.

With thousands of label jobs lost during the year to restructurings at Sony Music Entertainment and Universal Music Group, thousands more are at risk in the new year, as the architects of the Sony Music Group/BMG Entertainment merger and the Edgar Bronfman Jr.-led new owners of Warner Music Group aim to achieve an estimated $500 million in savings between them.

Within those efforts, sales and distribution functions, having already undergone radical changes in the past 18 months, are expected to evolve further in 2004.

NOT A GOOD START

The past year began with bad news piling up fast.

In January, the 405-unit Wherehouse Entertainment and the 125-unit Value Central Entertainment each filed for Chapter 11 protection, while the 125-unit Music Network, CD World and The Wiz teetered on the brink.

As bad as that news was, the bigger worry for product vendors at the time was the fate of Musicland, then owned by Best Buy.

That month it said it would close 110 stores and ushered in a management change, with Musicland president Kevin Freeland exiting the company. He was replaced by executive VP Connie Fuhrman.

On the big-box front, Kmart closed 326 stores, which accounted for about $45 million in music sales, and Gary Arnold, who started the Redline label for Best Buy, was brought back into the main business and put in charge of the chain's entertainment software department.

MUCH ADO ABOUT MUSICLAND

But of even more importance to the supplier community at the time was what Best Buy would do with Musicland, which it bought in early 2001.

Fears that Best Buy would put Musicland in Chapter 11 were unfounded, as the consumer electronics entity forged a deal with Sun Capital, which would assume ownership of the chain in exchange for taking on its liabilities.

Sun Capital has worked quickly to turn the chain around.

Marc Leder, the Sun Capitol managing director overseeing Musicland, has put together a new management team of well-known and highly regarded executives.

Musicland shuttered about 300 stores.

In addition to the 110 Best Buys that closed, the new team negotiated with landlords to get out of 189 more leases.

Musicland even became a factor in the disposition of Wherehouse as it contested Trans World and chairman/CEO Bob Higgins for ownership of that chain.

Wherehouse, which began the year with 405 stores, was reduced to 111 by the time Trans World completed its acquisition of the chain.

The other big question mark during the year was Tower Records, although the major vendors are optimistic that Tower eventually will be sold to new owners with the deep pockets necessary to return the chain to a dominant force in music retailing.

As of late November, three rounds of bidding for Tower are said to have been completed.

Tower management is presumed to be in negotiations with the winner of that process, which is hoped will result in the chain's sale.

But if a deal derails, a Chapter 11 filing could still be the chain's fate.

NO-GO FOR MERGERS

Another chain formed through acquisitions, the 125-unit Music Network, was liquidated during the summer after nearly 18 months of trying to accomplish an out-of court restructuring. In the end, only about five stores survived.

Liquidation also befell The Wiz, the consumer electronics chain that was once the most important R&B merchant in the U.S.

Its owner, CableVision, sold the 17-unit chain in March to a liquidator, the Ozer Group, which filed for Chapter 7 protection.

Copyright 2003-2010 Billboard/Internet Music Media. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.

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