Online Music Killing the Business
Content
CASE STUDY
Online music was killing their record stores. They had to save the business, but was it worth losing what had made it special?
BY RYAN M C C A R T H Y I PHOTOGRAPH BY IMKE LASS
fter 15 years, all that was left of Kent Wagner's music stores was 45 tons (if Dumpster trash. It was July 2008, and Wagner stood in front of the building in downtown Charleston, South Carolina, that had once housed his most successful location. It was the last of what Wagner liked to call his stubbornly independent slorcs^—^there had once been seven of them—and now it had been reduced to a pile of debris. "I thought to myself. That s a lot of blood, sweat, tears—and money—that we tlirew out," says Wagner. Like countless record stores across the comitry. Millennium Music had been besieged by the sweeping changes in the music industry'. Wagner had done everything possible to avoid this day, but he could no longer light the changing tide brought on by the rise of digital music: For seven straight years. Millennium had suffered double-digit revenue declines. "We always thought of ourselves as a community center, a meeting place,"saysWagner."We knew the industry was in decline, but we thought we were different." It turned out Millennium wasn't different. And Wagner and his business partner, Clayton Woodson, soon faced a stark choice: Fold up the business completely and walk away, or attempt to transform it into something entirely ditterent. Their hopes for the future hung on one thin reed:
56 INC. JUNE 2009
FRESH EYES
Founder Kent Wagner (rightl looked to marketing director Clayton Woodson, a former yoga instructor, for new ideas.
inn*
The Experts Weigh In
a small butgrowingonline trading business that allowed customers to exchange used C^Ds, DVDs, and books for electronics—iPods and the like. Millennium was able to make money by reselling the used merchandise on Amazon, eBay, and otlier sites. That side business hadn't been enough to save Wagner's beloved record stores, but could it he the basis of a different kind of music business? Wagnerlaunched Millennium in 1994,determined to create a thinking person's music store. The stores would stock hiird-to-ñnd records and boast sizable classical and jazz sections. In an industry known for cooler-than-thou customer service. Millennium would make music connoisseurship friendly and accessible. "Kent used to say that a music store is like a church," says Robert Bondurant, who worked at Millennium for 15 years, most recently as product manager. "People come because music is such a powerful medium, llc'd say we're here to guide customers to their personal epiphany." In the early years, that philosophy worked well, and revenue grew some 20 percent annually. The company (ipened stores across North and South (Carolina and employed more than 100 people. At its peak. Millennium had sales of about SIO million. The flagship in (Charleston became a hub for the local cultural scene. The store hosted bands, a live-jazz happy hour, and book readings. It opened a restaurant and a bar. It expanded to book sales and DVD rentals.
WHATSTHE LONG-TERM PLAN?
It sounds like what Woodson and Wagner did is working. I am concerned, though, about how AbundaTrade will scale. Though there are thousands of small and medium-size businesses selling through sites like Amazon, there is a finite supply of used CDs. Are there enough used CDs and DVDs to support this business long term? I also wonder why AbundaTrade abandoned all the cultural skills of its retail employees instead of trying to find a way to incorporate them into their new company.
Marty Anderson | SENIOR LECTURER | Babson Coilege, Wellesley. Massachusetts KNOW YOUR AUDIENCE
My big concern is that AbundaTrade is positioning itself against the growth of digital music. Eventually, CDs will be useless as a storage medium for mass music sales. I also wonder if Wagner and Woodson really know who AbundaTrade's audience is. Unlike eBay, online marketplaces that support niche segments are growing. So, they might have focused AbundaTrade on a more narrow audience, like jazz-record collectors. Still, their willingness to do anything to survive is a good sign. They were able to do away with everything they believe in and still stay afloat.
Jason Cravi/ford | FOUNDER AND C O | SwitchGames, New York City E KEEP IT SIMPLE
I like that Wagner and Woodson have come up with a unique model of e-commerce. But the model may be too complex. They have a lot to worry about: acquiring customers and their used products, obtaining electronics for trade and then reselling used products on a secondary market. If any of these markets falters, Wagner and Woodson are in trouble. There are millions of Internet businesses that rely on a much more basic business model. To be successful, Wagner and Woodson are going to need to keep things as simple as possible.
Jeremy Hanks 1 F0U^4DER AND CHAIRMAN | Doba. Orem. Uiab
But the dramatic industry shifts that put Tower Records and many others out of business were catching up to Millennium. As the years rolled by, the losses mounted. Wiigner's empire was hemorrhaging, and he was soon ready to try anything. In 2006, he turned for help to his marketing director, (~layton Woodson, whose eclectic background included making furniture, teaching first grade at a charter school in New York, and teaching acrobatic yoga. "Clayton tends to sec looking at the abyss as a growing experience," says Wagner. "I'm the opposite." illennium's used-CD section gave Woodson an idea. Customers frequently caine in to sell their old CDs for store credit. What if Millennium could lure in additional customers by offering iPods for used CDs? In the summer of 2005, he persuaded Wagner to give the idea a try. Woodson soon had another insight: Buying a used CD t)nline was actually cheaper than buying an MP3 album through iTunes. If Millennium moved its iPod trading program to the Wt'b, it coitld collect discs from across the globe, profitably resell them online, and still undercut iTunes's prices. In 2006, Millennium launched FeedYourPlayer.com, which quickly drew the attention of websites such as Digg and Tech on the Net. Traffic soared from a tew hundred visitors per week to
58 INC. IUNE2009
more than 15,000. New customers were soon mailing in more than 6,000 items a week. Liy 2007, online brought in !B400,000 of Millennium's $1.7 million revenue. Feed Your Player's success was in stark contrast to the performance of Millennium's ktne remaining store. In its last full year of operation, the store lost nearly $1 million, and the growing demands of the online business were putting a strain on staff resources. When Woodson, for instance, moved a cashier from the register to handle the influx of CDs being sent in, it quickly became clear she would need lots and lots of backup. In September of 2007, Wagner called a company meeting with his 50 or so remaining employees. He delivered the news that many had already figured out. The retail business was dying. I'hc future was online. Woodson would become his partner focused on developing the online business. The store would remain tipen, but resources would be put toward building Feed Your Player. Still, hearing it from the boss hurt. Millennium's music buyer quit when he realized the emphasis would be on used ( "Ds rather than new releases. Wagner understood his anguish. The stalf mem-
CASE STUDY
luTs, he says, "were accustomed to being tastemakers." Wagner himself was conflicted, clinging to the hope that downsizing or reltxating might save ihc store. "When you spend so much of your energy lighting against the bIindinylyobvious,"siiysWagner,"you can lose your focus on the big picture." The Decision Early in 2008. Wagner and Woodson finally agreed to pull the plug. The store closed that summer when its lease ran oui. The pair would relaunch the Onlinebusiness osa standalone operalion. With a blue marker, the duo wrote out possible names on a windowpane in Wagner's office and hit on AbundaTrade. Says Woodson: "We wanted people to get it the lirst time they heard it." A few weeks before closing, Wagner hosted a goodbye party for Millennium's customers.The Charleston community turned out in droves. There were students from the (,ollegc of C^^harleslon and cadets from the nearby Citadel military academy. Symphony lovers filled the store's massive classical section, sipping champagne. Saiesclerks and their friends shared beer and hamburgers. It was a bittersweet moment. The transition has been swift. A business with origins as a cozy cultural retreat is now high tech, methodical—and profitable. AbundaTrade. like FeedYourPlayer, takes used CDs, DVDs, and books in exchange tor electronics, including iPods. fiat-screen T\'s, and camcorders. Or customers can opt for cash—an average of S2 per CD. The company also gets used discs fi-om wholesalers and defunct record stores. It relies on sophisticated sofhvare that scans the Web to determine a fair price for tlie used products. Then the company offers the merchandise for resale on the Web. again rely-
ing on software to undercut other sellers on Amazon, eBay, and elsewhere. "The online world is so much easier in a lot of ways," says Woodson. "If you're not the cheapest, you're not selling." The transition hasn t always been easy. Wagner and Woodson were able to move 12 of Millennium's final 30 employees into new roles at AhundaTrade. But it's an entirely different world. AbundaTrade operates a lot like a logistics or order-fulfillment tirm. In its 6.000-square-foot warehouse, half of the company's 20 employees re\'iew incoming items, checking for scratches or defects. Shipping occurs around the clock, CÀistomer service is enlircly t)nline. Former record-store employees like Robert Bondurant are happy to have jobs but sometimes long for the good old days, Bondurant isagain product manager, but be is now also in charge of inventory management. "It was tough from an emotional standpoint," he says. "We're no longer selling our appreciation of music—it's all about moving product out the door now." Early results are encouraging. AbundaTrade receives about 15,000 used products a week. About a third of its used-producl sales are to overseas customers. (Japanese customers buy lots of heavy metal.) Revenue is on pace to hit $3 million in 2009. about 50 percent more than Millennium Music's flagship store ever pulled in. If it's a little bit ironic that a company that once boasted the latest uev,' releases now sells secondhand music in an outdated format. Wagner and Woodson don't seem to mind. The partners have their sights on extending Abunda Trade's business into other used products. "(Clayton and I have learned that one of our strengths is adaptability," says Wagner. Adds Woodson. "1 think the future is a really wide-open question." O
daae Study
A diocíituc laikiT is liuliotoJ b\uJimforu^iicMMKihisaiiUnii. HOW LONG CAN Ht'STAY CHOHraetf.?
Update
THE PROBLEM
SWEET SPOT A big spike in wholesale prices had this chocolatier scrambling. Now. he's in better shape than ever, despite the recession.
In late 20Q6, wholesale chocolate prices began a 35 percent rise. Chocolatier Dan Johnson, who built a lucrative business selling chocolate bars emblazoned with corporate logos, had to cut costs quickly to keep his Buffalobased Choco-Logo profitable. He switched suppliers, began using cheaper packaging materials, and cut the package weight of some products, Johnson also redoubled efforts to build up his high-margin corporate-logo business.
WHAT THE EXPERTS SAID
kiosks, Katrina Markoff, CEO and founder of Vosges Haut-Chocolat of Chicago, warned against sacrificing quality for growth, Julius Walls Jr, CEO of Yonkers, New York-based Greyston Bakery urged Johnson to focus future grovi/th on corporate sales.
WHAT'S HAPPENED SINCE
label printing costs as much as 50 percent. Most important, Johnson says, people still crave chocolate in hard times, "I think we're in a very, very lucky marketplace," he says, "The chocolate industry isn't entirely recession-proof, but it seems to have a much stronger footing than most industries."
WHAT'S NEXT
Gary Karp, executive vice president of Chicago-based Technomic, suggested opening mall
Choco-Logo has managed to remain profitable, A little good fortune helped: Johnson's former employer, desperate to dispose of 20.000 pounds of extra milk-chocolate inventory, offered Choco-Logo a 30 percent discount. The company also raised prices about 10 percent and purchased its own four-color printing press, which cut its
Healthy grovwth has convinced Johnson that it's time to open a second, and maybe a third, retail shop. Likely locations are Pittsburgh and Cleveland. Johnson says the company will also continue building the high-margin corporate-logo
business, —Jason Del Rey
JUNE 2009
INC.
59
Online music was killing their record stores. They had to save the business, but was it worth losing what had made it special?
BY RYAN M C C A R T H Y I PHOTOGRAPH BY IMKE LASS
fter 15 years, all that was left of Kent Wagner's music stores was 45 tons (if Dumpster trash. It was July 2008, and Wagner stood in front of the building in downtown Charleston, South Carolina, that had once housed his most successful location. It was the last of what Wagner liked to call his stubbornly independent slorcs^—^there had once been seven of them—and now it had been reduced to a pile of debris. "I thought to myself. That s a lot of blood, sweat, tears—and money—that we tlirew out," says Wagner. Like countless record stores across the comitry. Millennium Music had been besieged by the sweeping changes in the music industry'. Wagner had done everything possible to avoid this day, but he could no longer light the changing tide brought on by the rise of digital music: For seven straight years. Millennium had suffered double-digit revenue declines. "We always thought of ourselves as a community center, a meeting place,"saysWagner."We knew the industry was in decline, but we thought we were different." It turned out Millennium wasn't different. And Wagner and his business partner, Clayton Woodson, soon faced a stark choice: Fold up the business completely and walk away, or attempt to transform it into something entirely ditterent. Their hopes for the future hung on one thin reed:
56 INC. JUNE 2009
FRESH EYES
Founder Kent Wagner (rightl looked to marketing director Clayton Woodson, a former yoga instructor, for new ideas.
inn*
The Experts Weigh In
a small butgrowingonline trading business that allowed customers to exchange used C^Ds, DVDs, and books for electronics—iPods and the like. Millennium was able to make money by reselling the used merchandise on Amazon, eBay, and otlier sites. That side business hadn't been enough to save Wagner's beloved record stores, but could it he the basis of a different kind of music business? Wagnerlaunched Millennium in 1994,determined to create a thinking person's music store. The stores would stock hiird-to-ñnd records and boast sizable classical and jazz sections. In an industry known for cooler-than-thou customer service. Millennium would make music connoisseurship friendly and accessible. "Kent used to say that a music store is like a church," says Robert Bondurant, who worked at Millennium for 15 years, most recently as product manager. "People come because music is such a powerful medium, llc'd say we're here to guide customers to their personal epiphany." In the early years, that philosophy worked well, and revenue grew some 20 percent annually. The company (ipened stores across North and South (Carolina and employed more than 100 people. At its peak. Millennium had sales of about SIO million. The flagship in (Charleston became a hub for the local cultural scene. The store hosted bands, a live-jazz happy hour, and book readings. It opened a restaurant and a bar. It expanded to book sales and DVD rentals.
WHATSTHE LONG-TERM PLAN?
It sounds like what Woodson and Wagner did is working. I am concerned, though, about how AbundaTrade will scale. Though there are thousands of small and medium-size businesses selling through sites like Amazon, there is a finite supply of used CDs. Are there enough used CDs and DVDs to support this business long term? I also wonder why AbundaTrade abandoned all the cultural skills of its retail employees instead of trying to find a way to incorporate them into their new company.
Marty Anderson | SENIOR LECTURER | Babson Coilege, Wellesley. Massachusetts KNOW YOUR AUDIENCE
My big concern is that AbundaTrade is positioning itself against the growth of digital music. Eventually, CDs will be useless as a storage medium for mass music sales. I also wonder if Wagner and Woodson really know who AbundaTrade's audience is. Unlike eBay, online marketplaces that support niche segments are growing. So, they might have focused AbundaTrade on a more narrow audience, like jazz-record collectors. Still, their willingness to do anything to survive is a good sign. They were able to do away with everything they believe in and still stay afloat.
Jason Cravi/ford | FOUNDER AND C O | SwitchGames, New York City E KEEP IT SIMPLE
I like that Wagner and Woodson have come up with a unique model of e-commerce. But the model may be too complex. They have a lot to worry about: acquiring customers and their used products, obtaining electronics for trade and then reselling used products on a secondary market. If any of these markets falters, Wagner and Woodson are in trouble. There are millions of Internet businesses that rely on a much more basic business model. To be successful, Wagner and Woodson are going to need to keep things as simple as possible.
Jeremy Hanks 1 F0U^4DER AND CHAIRMAN | Doba. Orem. Uiab
But the dramatic industry shifts that put Tower Records and many others out of business were catching up to Millennium. As the years rolled by, the losses mounted. Wiigner's empire was hemorrhaging, and he was soon ready to try anything. In 2006, he turned for help to his marketing director, (~layton Woodson, whose eclectic background included making furniture, teaching first grade at a charter school in New York, and teaching acrobatic yoga. "Clayton tends to sec looking at the abyss as a growing experience," says Wagner. "I'm the opposite." illennium's used-CD section gave Woodson an idea. Customers frequently caine in to sell their old CDs for store credit. What if Millennium could lure in additional customers by offering iPods for used CDs? In the summer of 2005, he persuaded Wagner to give the idea a try. Woodson soon had another insight: Buying a used CD t)nline was actually cheaper than buying an MP3 album through iTunes. If Millennium moved its iPod trading program to the Wt'b, it coitld collect discs from across the globe, profitably resell them online, and still undercut iTunes's prices. In 2006, Millennium launched FeedYourPlayer.com, which quickly drew the attention of websites such as Digg and Tech on the Net. Traffic soared from a tew hundred visitors per week to
58 INC. IUNE2009
more than 15,000. New customers were soon mailing in more than 6,000 items a week. Liy 2007, online brought in !B400,000 of Millennium's $1.7 million revenue. Feed Your Player's success was in stark contrast to the performance of Millennium's ktne remaining store. In its last full year of operation, the store lost nearly $1 million, and the growing demands of the online business were putting a strain on staff resources. When Woodson, for instance, moved a cashier from the register to handle the influx of CDs being sent in, it quickly became clear she would need lots and lots of backup. In September of 2007, Wagner called a company meeting with his 50 or so remaining employees. He delivered the news that many had already figured out. The retail business was dying. I'hc future was online. Woodson would become his partner focused on developing the online business. The store would remain tipen, but resources would be put toward building Feed Your Player. Still, hearing it from the boss hurt. Millennium's music buyer quit when he realized the emphasis would be on used ( "Ds rather than new releases. Wagner understood his anguish. The stalf mem-
CASE STUDY
luTs, he says, "were accustomed to being tastemakers." Wagner himself was conflicted, clinging to the hope that downsizing or reltxating might save ihc store. "When you spend so much of your energy lighting against the bIindinylyobvious,"siiysWagner,"you can lose your focus on the big picture." The Decision Early in 2008. Wagner and Woodson finally agreed to pull the plug. The store closed that summer when its lease ran oui. The pair would relaunch the Onlinebusiness osa standalone operalion. With a blue marker, the duo wrote out possible names on a windowpane in Wagner's office and hit on AbundaTrade. Says Woodson: "We wanted people to get it the lirst time they heard it." A few weeks before closing, Wagner hosted a goodbye party for Millennium's customers.The Charleston community turned out in droves. There were students from the (,ollegc of C^^harleslon and cadets from the nearby Citadel military academy. Symphony lovers filled the store's massive classical section, sipping champagne. Saiesclerks and their friends shared beer and hamburgers. It was a bittersweet moment. The transition has been swift. A business with origins as a cozy cultural retreat is now high tech, methodical—and profitable. AbundaTrade. like FeedYourPlayer, takes used CDs, DVDs, and books in exchange tor electronics, including iPods. fiat-screen T\'s, and camcorders. Or customers can opt for cash—an average of S2 per CD. The company also gets used discs fi-om wholesalers and defunct record stores. It relies on sophisticated sofhvare that scans the Web to determine a fair price for tlie used products. Then the company offers the merchandise for resale on the Web. again rely-
ing on software to undercut other sellers on Amazon, eBay, and elsewhere. "The online world is so much easier in a lot of ways," says Woodson. "If you're not the cheapest, you're not selling." The transition hasn t always been easy. Wagner and Woodson were able to move 12 of Millennium's final 30 employees into new roles at AhundaTrade. But it's an entirely different world. AbundaTrade operates a lot like a logistics or order-fulfillment tirm. In its 6.000-square-foot warehouse, half of the company's 20 employees re\'iew incoming items, checking for scratches or defects. Shipping occurs around the clock, CÀistomer service is enlircly t)nline. Former record-store employees like Robert Bondurant are happy to have jobs but sometimes long for the good old days, Bondurant isagain product manager, but be is now also in charge of inventory management. "It was tough from an emotional standpoint," he says. "We're no longer selling our appreciation of music—it's all about moving product out the door now." Early results are encouraging. AbundaTrade receives about 15,000 used products a week. About a third of its used-producl sales are to overseas customers. (Japanese customers buy lots of heavy metal.) Revenue is on pace to hit $3 million in 2009. about 50 percent more than Millennium Music's flagship store ever pulled in. If it's a little bit ironic that a company that once boasted the latest uev,' releases now sells secondhand music in an outdated format. Wagner and Woodson don't seem to mind. The partners have their sights on extending Abunda Trade's business into other used products. "(Clayton and I have learned that one of our strengths is adaptability," says Wagner. Adds Woodson. "1 think the future is a really wide-open question." O
daae Study
A diocíituc laikiT is liuliotoJ b\uJimforu^iicMMKihisaiiUnii. HOW LONG CAN Ht'STAY CHOHraetf.?
Update
THE PROBLEM
SWEET SPOT A big spike in wholesale prices had this chocolatier scrambling. Now. he's in better shape than ever, despite the recession.
In late 20Q6, wholesale chocolate prices began a 35 percent rise. Chocolatier Dan Johnson, who built a lucrative business selling chocolate bars emblazoned with corporate logos, had to cut costs quickly to keep his Buffalobased Choco-Logo profitable. He switched suppliers, began using cheaper packaging materials, and cut the package weight of some products, Johnson also redoubled efforts to build up his high-margin corporate-logo business.
WHAT THE EXPERTS SAID
kiosks, Katrina Markoff, CEO and founder of Vosges Haut-Chocolat of Chicago, warned against sacrificing quality for growth, Julius Walls Jr, CEO of Yonkers, New York-based Greyston Bakery urged Johnson to focus future grovi/th on corporate sales.
WHAT'S HAPPENED SINCE
label printing costs as much as 50 percent. Most important, Johnson says, people still crave chocolate in hard times, "I think we're in a very, very lucky marketplace," he says, "The chocolate industry isn't entirely recession-proof, but it seems to have a much stronger footing than most industries."
WHAT'S NEXT
Gary Karp, executive vice president of Chicago-based Technomic, suggested opening mall
Choco-Logo has managed to remain profitable, A little good fortune helped: Johnson's former employer, desperate to dispose of 20.000 pounds of extra milk-chocolate inventory, offered Choco-Logo a 30 percent discount. The company also raised prices about 10 percent and purchased its own four-color printing press, which cut its
Healthy grovwth has convinced Johnson that it's time to open a second, and maybe a third, retail shop. Likely locations are Pittsburgh and Cleveland. Johnson says the company will also continue building the high-margin corporate-logo
business, —Jason Del Rey
JUNE 2009
INC.
59
