SIC 5735

This industry includes establishments primarily engaged in the retail sale of phonograph records, compact discs, prerecorded audiotapes and videotapes and disks. Establishments selling computer software are covered in SIC 5734: Computer and Computer Software Stores, and businesses engaged in the rental of videotapes are included in SIC 7841: Video Tape Rental.

NAICS Code(s)

451220 (Prerecorded Tape, Compact Disc and Record Stores)

Industry Snapshot

The prognosis for the retail music industry in the early years of the twenty-first century is not promising. Sales of compact discs (CDs) fell almost 9 percent during 2002 and were expected to continue to fall. Brick-and-mortar retailers were losing ground fast to online outlets and downloaded music. While CDs sales had dropped, sales of recordable compact discs (CD-Rs) experienced triple-digit growth. The declining revenues pushed parent company Best Buy to close 160 Musicland stores and forced Wherehouse Music to shut down 120 stores and file for bankruptcy.

As the industry struggled, fingers were being pointed in different directions. The Recording Industry of America Association (RIAA) was placing the blame squarely on the shoulders of those who promoted the piracy, bootlegging, and illegal free downloading of music. Although Napster, the once popular Web site that provided free file swapping, was defeated in the courts and dissolved through bankruptcy, others, including KaZaA and Listen4ever, stepped in to take over. Others blamed the industry's demise on lack of creative and inspiring new music available on the market and the overpricing of CDs as the main culprits.

Organization and Structure

By far, the largest portion of industry market share went to the large national chains, such as Tower Records and Musicland in the late 1990s. Megastores, such as Tower Records, with more than 10,000 square feet of floor space in each store, catered to an eclectic public, stocking thousands of titles in each store. Variety, price, and long hours ensured the megastores' success. They offered more titles than any other single retail source, carrying esoteric items as well as current hits, and they maintained long operating hours to ensure accessibility.

Many of the larger, big city stores such as the Tower Records on Sunset Strip in Los Angeles were common post-show entertainment for young people. Because these large chain stores buy in bulk quantities, they often receive discounts and thus frequently offer the lowest prices in town. Chain stores tend to have a strict hierarchical organization: sales clerks, buyers, and assistant managers work under a store manager, who in turn answers to company officers. Individual megastores frequently have a large degree of autonomy but rely on the buyers' and managers' knowledge of the local market to keep product returns to a minimum.

Small-store chains, like some Musicland outlets, work in much the same way, but without the variety or the long hours. While megastores tend to be free standing, smaller chain stores are usually located in shopping malls, offering customers convenience. They cater to a more general clientele than the megastores, usually centering collections on current hits and reliable standards. With fewer local employees, the smaller chains have clerks and managers but generally do not employ buyers, relying instead on the parent company for inventory selection.

Both the larger and smaller chains use both independent and record company distributors. Many of the largest record manufacturers have branch offices that distribute records locally. Independent distributors cover the smaller labels and independent record companies, as well as the larger labels in the geographical areas not covered by branch distributors. Chain retail outlets buy from these distributors in bulk, warehousing the units until they ship them to their individual stores. The advantage of this system is, as mentioned above, the price break that bulk buying allows. The disadvantage is in the lack of flexibility for the smaller chains, where individual stores frequently have no control over their own merchandise.

In many areas of the country, small and independent record stores still flourish despite the predominance of chain stores. These stores tend to carry a limited and specialized collection, catering to a specific, local clientele. Large college campuses, for instance, can frequently support stores specializing in rock, jazz, and/or classical music in addition to the local chain outlet. Independent record stores tend to buy products from one-stop distributors.

One-stops are sub-distributors who buy from the larger branch offices and independent distributors and sell to the retail outfits too small to be regular distributor accounts. Because of the smaller quantities and the markup of the one-stops, prices tend to be slightly higher than in some of the larger chains. Because the floor space is smaller than the megastores, the selection tends to be less diversified, although frequently in the specialized stores (e.g., classical only) the selection within one area may be as good as the megastore and better than the small-store chain. The organization of the stores is localized and less stratified; the owners usually manage and work in their stores and employ only a limited supplemental staff. The advantage for the shopper at these smaller stores is the personalized service the knowledgeable staff can provide.

Department and variety stores also sell a small selection of records and tapes, sold as a concession or on consignment from a distributor known as the rack jobber. Rack jobbers buy from large independent and branch distributors to fill display racks at supermarkets, department stores, variety stores, drugstores, discount houses, and bookstores. They deal in the biggest hits of the year, the most popular standards, and the cheap cut-outs and discount collections."Cut-outs" are the items dropped from production and sold at greatly reduced prices; discount collections are compilations of the most popular works of the standard classical composers and jazz artists, as well as collections of older popular hits, and are designed for the general public rather than the musically educated listener. The rack jobbers target people who might never go into a record store. They either lease retailer space, taking all of the sales in a concession arrangement, or they split the income from the sales with the retailer in a consignment arrangement.

Different types of mail order and direct-to-consumer sellers also compete with these retail outlets. Two of the biggest record labels, RCA and Columbia, sponsor record and tape clubs, in which members buy items at reduced prices through the mail directly from the company, avoiding the distributor middleman. Many small record companies sell through the mail as well as through retail outlets, as do specialty mail-order houses who sell only in a certain, usually hard to find, category. For example, The Lady Slipper Catalogue carries only hard-to-find recordings by women; they sell to small retail outlets as well as individuals.

Background and Development

Thomas Edison invented phonograph recording in 1877 using wax cylinders; a few years later, Emile Berliner developed the disk format of recording. These two formats competed for a few years, but by the beginning of the twentieth century, the disk format had won. The earliest commercial recordings were sold in music stores that also sold instruments and sheet music. Classical, jazz, and popular song recordings all sold well during this period. The advent of radio provided the public with free music, and consequently, the recording industry shrank. During the Great Depression of the 1930s, record sales dropped 90 percent from their peak in 1927. Coming to the failing industry's aid, however, were the technological developments of the radio industry, especially microphones, amplifiers, and a new electrical method of recording. In the late 1930s, Jack Kapp of Decca cut the retail price of records from 75 cents to 35 cents, juke-boxes became the rage, and radio began to rely as much on recorded music as live music. In this period, record sales picked up considerably. Soon small neighborhood stores devoted solely to selling records became prominent retail outlets.

The world of marketing changed dramatically in the 1950s, affecting every retail industry. Chain stores expanded and supermarkets replaced corner grocery stores; practices of bulk buying at a discount and mass advertising to sell volume business took hold. New forms of record merchandising grew to compete with, and eventually take over, the small independent record store. Initiated by Sam Goody in New York, some merchants began to sell records at discount prices with the greater volume of sales making up the profit difference. Distributors began to give major retailers discounts for buying in bulk, further fueling the war between the large and the small business. Department and variety stores began to sell a limited selection of records; rack jobbers who each handled many different stores would buy albums at bulk discounted prices and sell them at prices lower than the small retail stores were able to offer. In 1955, Columbia started the first record club, which sold items to members through the mail at discounted prices. This innovation introduced more competition to the record store industry; consequently, many small dealers were out of business by the end of the decade.

During the 1960s, the rack jobbers and their department store accounts all but completely took over the industry. In 1961, rack sales accounted for only $47 million in sales while other retailers took in $305 million; by 1965 the two were almost equal, with rack sales pulling in $365 million and non-rack sales drawing $372 million. By 1970, rack sales accounted for 70 percent of the total sales. The rise of large chains in the 1970s, though, and especially the full-line megastore that offered unparalleled selection, brought more business back into the hands of the record stores.

During the 1980s, the new compact disc (CD) format, with its greatly enhanced fidelity, completely revolutionized the industry. While cassette tapes had existed side-by-side with records for over a decade without overtaking the record format, by the early 1990s, companies halted record album production in favor of CDs. The popularity of compact discs showed no signs of abating. The Recording Industry Association noted that almost half of all American households in 1993 had CD players. Other association statistics indicated that shipments of CDs in 1993 increased 21 percent over the year before (to approximately five million total units) while cassette tape shipments dropped more than 7 percent in 1993 (to approximately 3.4 million units).

Because of the greater durability of CDs and the much higher prices (about 50 percent higher than records during the years both were sold), Wherehouse Entertainment and other major retail chains began to move into the used record business, joining small independent music outlets that commonly bought and sold used CDs and tapes. This area had been the last bastion of the independent retail store. "Furious because they don't make any money off used CDs," commented critic David Browne in Entertainment Weekly, "four major distribution companies—CEMA, Uni, Sony, and WEA—stopped underwriting newspaper advertising for those stores that carry them. That move alone was expected to cost the stores hundreds of thousands of dollars in lost revenue."

It was also noted that royalties were not paid to performers and songwriters on used CD sales. Retail outlets, however, reacted angrily instead of backing down, especially when CEMA refused to allow retailers dealing in used CDs to carry a new record by major recording artist Garth Brooks. Wherehouse Entertainment, according to Billboard, filed a suit, claiming that the distributors "conspired to unreasonably restrain trade and commerce in used CDs by withholding cooperative advertising dollars from retailers who buy and sell used discs." Independent outlets joined the fray as well, pointing out that many observers have cited artificially high CD prices charged by the manufacturers as a primary reason for the popularity of used CDs.

The Independent Music Retailers Association, in conjunction with two small independent chains, filed a suit in August 1993, charging among other things that the four distribution companies "violated a federal antitrust statute known as the Robinson-Patman Act, which states that businesses offering promotional allowances must offer the proportionally equivalent terms to all customers," according to Billboard. As the number of class action lawsuits grew, the Federal Trade Commission began to investigate. Faced with a storm of legal and business turmoil, the distributors finally dropped the controversial new policies, putting an end to the matter.

During the 1980s and early 1990s, computer technology and cable television created new retail avenues for recordings. Home shopping channels began selling CDs and tapes, as did electronic department stores such as Compuserve. These new retail outlets began to have a small but definite impact on the traditional retail outlets.

While the industry continued to profit, the recession of the early 1990s still had an impact and slowed industry growth. In 1990, record producers raised the prices on both CDs and cassettes, and sales started to slide. The 10 percent growth rate of 1989, as reflected in new store openings, slowed to only 3 percent in 1990; chain acquisition and consolidation almost came to a standstill. The following year saw a shortage of hit tunes, which further depressed the market, and retailers continued to tighten their belts. New store openings decreased further, and stock orders to wholesalers were down 11 percent.

In 1992, despite sluggish sales and the slowest growth in the industry's history, down to 1.04 percent, the larger firms still showed profit, and some investors were still committed to the market. Musicland opened 109 new stores, saw income increase from $62.3 million to $69.3 million, and raised $136 million by selling 17.09 million shares of stock publicly. Blockbuster Entertainment, a video-rental chain, bought several music retail outlets and announced further expansion. Lynch bought the California-based Wherehouse chain. Thus, even when sales were slow, the music retail business remained a profitable venture.

The growth of the compact disc industry helped the music industry to reach unit sales worth more than $10 billion for the first time in 1993. However, dollar and unit volume sales for album-length music cassettes declined for the same period. According to Television Digest, the sales increases in 1993 was considered a sign that the industry had managed to meet consumer demand for different music types.

By the mid-1990s large bookstores started retailing recorded music. Borders and Barnes and Noble added huge music sections to their bookstores while also introducing in-store music booths, where consumers could listen to the records before they bought them.

The mid-1990s was characterized by continued corporate reorganizations through acquisitions, although at a lesser rate. The year 1994 also saw the rise in manufacturers' prices of sound recordings on both CD and cassette formats. According to Billboard, this trend was counteracted by retailers who competed aggressively with each other in discount pricing. However, this led to the pruning of retail profits since the increase in sales as a result of lower pricing was not enough to offset the fact that there were just too many outlets selling music.

The financial troubles of the music retail industry shook up the entire sound recording business in 1996. According to Billboard, record labels were affected by the financial problems of retailers as well as the slowdown in the sale of catalog albums. To beef up sales, a new marketing concept was adopted in sound recording retail operations. In-store tours by the musical artists themselves was perceived to benefit both the consumers—who were honored by the presence of their favorite recording stars and the retailers—who were able to sell more records to crowds that attended such affairs.

Introduction of online retailing, the reorganization at the music distribution sector and the record-club debate were prominent concepts of the mid-to late-1990s. According to Market News, the annual communications industry report forecast that recorded music would be one of the fastest growing sectors of the communications industry with a five-year growth rate of 8.2 percent and gross expenditures of $14.903 billion by 1998.

In the late 1990s, many different types of establishments sold records, compact discs, and prerecorded tapes. Independent record stores, large, national and international chains, and department and variety stores were included in this sector. Several different types of distributors served the retail outlets, depending on the size and type of stores. Rack jobbers served the department stores, one-stops served the small specialty shops, and major recording company branch distributors and independent distributors served the large chains. Since this industry is essentially devoted to the sale of luxury items, its economic health has depended greatly on the economic health of the nation at large. The stable economy of the late 1990s along with consumer confidence boosted sales in this industry once again, after a dismal performance in the early to mid-1990s.

According to the Recording Industry Association of America (RIAA), in 1997, "more music consumers (86 percent) shopped at retail outlets than in the past eight years. However, the gap continues to narrow between purchases made at traditional record stores versus other retail stores such as consumer electronics stores and specialty stores (515 versus 34 percent). The percentage of consumers who purchased from tape and record clubs (9 percent) dropped to the lowest level since 1990." Another shopping venue in this industry that became increasingly popular was Internet sales through sites such as In 1998, approximately 1.1 percent of music buyers used this venue to do their shopping. This percent tripled from 1997 and was forecast to grow substantially into the next millennium.

After being hit hard by lagging sales, consolidation, and bankruptcy in the mid-1990s, music retailers finally recorded positive sales in 1998, the strongest year of the decade. According to RIAA, recorded music sales nearly reached $14 billion in 1998, with shipments of CDs up 12.5 percent to 847 million in 1998, and dollar value up 15.1 percent to $11.4 billion. In 1998, music videos were also a hot commodity with an increase of 45.9 percent in shipments, and DVD music video shipments were worth $12.2 million. Cassettes represented just over $1 billion in sales, although shipments dropped 8.2 percent to 158.5 million in 1998, while dollar value decreased by 6.8 percent to $1.4 billion. This gain was attributed to a strong flow of top releases, renewed interest in the music sector, the stable economy and a high consumer confidence level, and advances in technology.

As well as seeing a change in sales and profits, the music retail industry saw major restructuring in the late 1990s. Trans World Entertainment purchased Camelot Music, and Wherehouse Entertainment acquired Block-buster Music. In an effort to reduce debt, many large companies such as Tower Records, National Record Mart, and the Musicland Group were involved in IPOs, bond offerings, and private placements.

Online retailing also played a major role in this industry in the late 1990s. and CDNow encroached into the traditional music store scene, forcing retailers to offer online shopping. According to a survey held by the National Association of Recording Merchandisers, 70 percent of "brick-and-mortar" retail stores had an Internet site. Internet sales also accounted for 1 percent of chain stores' music sales and 3 percent of independent retailers' sales.

Aggressive marketing plans focusing on the consumer also were part of retailers' strategies in the late 1990s. For instance, Musicland launched a campaign to push its Musicland, Sam Goody, On Cue, and Media Play stores into the public eye. These stores advertised heavily in teen magazines, offered promotions on college campuses, and in some locations, presented free in-store concerts. According to Marcia Appel, senior vice-president of advertising for Musicland, "the advertising is not just centered around one new release or 10 products on sale. It really is being branded to become attached to the customer's heart."

Current Conditions

The recorded music industry entered a crisis stage in the early 2000s. Sales continued to fall annually, down from $14.7 billion in 2000 to $13.7 billion in 2001. Sales fell again in 2002 by another 9 percent, with an expected 6 percent decline in 2003. With the advent of file swapping, CD singles have been especially hard hit, with sales down nearly 80 percent.

The RIAA has been vigilant in its campaign to blame the dizzying decline in the sale of CDs on piracy and bootlegging music via digital downloads. With the rapid proliferation of recordable CD drives and MP3 technology, the ability to download music to a MP3 player or burn it to a CD has become commonplace. The industry has already spent over $1 billion combating piracy through court and legislative actions but has struggled to stem the flow of free file swapping.

Other factors have also contributed to declining revenues at music stores. The industry is releasing fewer new titles. In 1999, about 38,900 new titles hit the market. According to the research firm Nielsen SoundScan, by 2001 that figure had dropped by more than 20 percent to 31,734. Although releases increased to 33,443 in 2002, that number is still 14 percent lower than in 1999. Also the music that is being offered has not caught the public's attention. "The music industry's [modus operandi] is to throw things against the wall and see what sticks," Nathan Brackett, a senior editor at Rolling Stone, told Business Week Online. "If they're throwing 20 percent less stuff out there, there's less chance something will stick." Prices have increased (7 percent between 1999 and 2001) so that a DVD movie carries a price tag similar to the movie's CD soundtrack, a fact that does not go unnoticed by consumers. With selection decreasing and prices increasing, the result has been declining revenues.

Six retailers—Best Buy, Tower Records, Virgin Entertainment, Wherehouse Music, Hastings Entertainment, and Trans World Entertainment—account for 40 percent of all recorded music sales, with discounters such as Wal-Mart and Target also controlling a significant segment of the market. As a mature market, the industry will be required to catch up to the digital age or wait for their impending demise. In an attempt to revamp their relations with consumers, music stores are gearing up to provide more options than the traditional prepackaged CDs by making plans to offer both in-store and on-line digital downloads. However, until the industry gets control over free file swapping, the challenge will be to get music lovers to pay for what they can get for free on the Internet.

Industry Leaders

In 1999, Musicland Stores Corporation, MTS Inc., and Wherehouse Entertainment dominated the retail music industry. The three were ranked one, two, and three, and together accounted for more than $3 billion in sales.

The leading music chain in 2003 was Musicland Stores. Based in Minneapolis, Minnesota, the company operated 1,300 Musicland, Sam Goody, On Cue, and Media Play record stores. The company had overall sales revenue of $1.88 billion. When Jack Eugster took over Musicland stores in 1980, the chain was losing money for its parent corporation, Primerica. Eugster installed a state-of-the-art computer inventory system, applied his merchandising expertise gained from years with Target Stores and The Gap, and turned the company's sales around. In 1988, he assisted Donaldson, Luftkin, & Jenrette in a leveraged buy out of the company and became part owner himself. He added 200 new stores and doubled sales to $1 billion, making The Musicland Group the country's largest music retailer in 1993. Musicland was sold in January 2001 for $685 million to Best Buy. In 2002 lagging sales motivated Best Buy to close 160 Musicland stores and place the company for sale.

MTS Inc. operated 120 stores along with franchise operations in the United States and across the world in 2003. The company owned Tower Records, Tower Books, Tower Video, and WOW! Superstores. MTS focused on online growth as well as international operations in an attempt to combat increased competition from Internet retailers and discount chains. Suffering along with the rest of the industry, MTS posted a net loss of $57.2 million on revenues of $983 million in 2002.

Another notable company in the industry was Trans World Entertainment Corporation with sales of $1.3 billion, but a net loss of $28.5 million in 2002. It purchased Camelot Music Holdings in 1999 and operated more than 900 stores under names such as Camelot Music, Record Town, The Wall, Coconuts, Strawberries, and Spec's Music. Trans World also operated F.Y.E. stores, which offered music, videos, games, and electronics, and also offered products online.

Wherehouse Entertainment Inc. became a major music retailer in 1998 when it purchased Blockbuster Music. However, in February 2003 declining sales pushed the company into bankruptcy for the second time in 10 years, leading the company to close approximately half of its 370 stores. In 2002 Wherehouse lost $53.2 million on $604 million in revenues.


According to the National Association of Recording Merchandisers, there were nearly 35,000 workers employed in this industry in 1998. Most retail stores relied heavily on low-wage clerks for the basis of the workforce, and record stores were no exception. There were nearly three times as many hourly workers compared to salaried employees. Because of the specialized nature of music, most outlets tried to employ people with some musical knowledge, but this was far from universal. The small chain stores selling standards and current popular hits have the least need and ability to hire knowledgeable staff; the best of these stores hire young people with some awareness of current popular culture.

The megastore chains depend on musically aware young people as well and reward hard work and musical knowledge and experience with swift promotions to buyer and management levels. The best of these outlets employ knowledgeable and dependable staff who often have some sort of musical education. Frequently, the companies will hire people with musical knowledge rather than business knowledge and provide their employees with business classes at their national meetings. The small, independent stores hire a predominantly knowledgeable staff, particularly the specialty shops. For example, many stores that sell only classical music are run by and employ musicians and others with college-level music degrees. It is not uncommon for young, struggling rock musicians to work in record stores as they try to get their performing careers started.

America and the World

Music retailers looked to global expansion as trade barriers made it easier to do business abroad in the late 1990s. Tower Records, for example, had successful operations in Japan and the United Kingdom. While North America represented 33.8 percent of global music sales in 1997, Europe accounted for 33.3 percent, Japan had 16.5 percent, and Latin America brought in 6.8 percent of global sales. Latin America was considered the largest emerging market with a 40 percent growth rate. With other parts of the world accounting for large portions of music sales, American-based companies looked for opportunities to expand overseas into the next millennium.

Further Reading

Anderman, Joan. "CD Stores May Fall Victim to Rapid Music Industry Changes." Knight Ridder/Tribune Business News, 23 February 2003.

Black, Jane. "Big Music's Broken Record." Business Week Online, 13 February 2003.

"CD Sales Down 7 Percent." The Online Reporter, 11 November 2002.

"Closings at 23 CD Warehouse Store." Chain Store Age Executive Fax, 8 November 2002, 3.

Daley, Dan. "It's a Wrap." Tape-Disc Business, December 2001, 8-9.

"Digital Revolution Fuels Blank Audio." MMR, 14 January 2002, 33.

"DVDInsider: Musicland in Search of a New Home." DVD News, 31 March 2003.

"DVDInsider: Vital Statistics." DVD News, 23 September 2002.

Eliscu, Jenny. "The New Oldies." Rolling Stone, 28 November 2002, 26.

Frazer, Bryant. "Napster Was Here." Tape-Disc Business, September 2002, 2.

Fulton, Curtis Lee. "Bootleg CDs Slowed Sales." The Online Reporter, 24 June 2002.

Frequently Asked Questions. Recording Industry Association of America, November 1999. Available at .

Garrett, Diane. "Sam Goody Makes Way for DVD." Video Business, 30 July 2001, 45.

Horwitz, Carolyn. "RIAA: U.S. Shipments Fell 8.2 Percent to $12.6 Billion in '02." Billboard Bulletin, 3 March 2003, 1.

Oppelaar, Justin. "Music Biz Blames Piracy for Slump." Daily Variety, 27 August 2002, 1-2.

"Piracy Not Responsible for Decline in Music Sales." The Online Reporter, 2 September 2002.

"Record Sales Drop after Napster Strangled." The Online Reporter, 27 August 2001.

Recording Industry Releases 1998 Consumer Profile. Recording Industry Association of America, March 1999. Available at .

Streisand, Betsy, and Dan Gilgoff. "Singing the Blues." U.S. News & World Report, 10 February 2003, 48.

Sweeting, Paul. "Burning Questions." Video Business, 18 March 2002, 12.

"Why Online Sales of Music CDs are Plummeting." The Online Reporter, 11 November 2002.

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