Wal-Mart Squeezing Record Labels to Cut CD Prices

Raindance writes "RollingStone.com has a revealing article detailing how retail giant Wal-Mart is making loud noises about throwing its weight around in order to get significantly better bulk prices on CDs. Says one industry executive, 'This wasn't framed as a gentle negotiation, it's a line in the sand -- you don't do this, then the threat is [your product is dropped].' This is the first time a big player has attempted this sort of hardball move on the labels, and the labels may be forced to deal, as Wal-Mart sells 1 out of every 5 retail CDs. Monopoly one, meet monopoly two."

No news here.

[artguy66]

Walmart does it to ALL of their manufacturers. Perhaps this one may deserve it.

walmart means moving product

[dubiousmike]

though many of you hate walmart for a bunch of good reasons, if you do not sell your CD in walmart, you can not top the billboard charts. Artists have changed core elements of their music/art because walmart said they wouldn't sell it if they didn't. This might actually lower prices for some independant music resellers, though unlikely. Them walmart will just ask for an even lower price. The fact remains that walmart has such a huge purchasing power, that little stores can not compete.

Standard Operating Procedure

[chud67]

I have heard from more than one person that this is typically how WalMart deals with its vendors/suppliers. If you have a company making widgets, for example, WalMart might come to you and place a small order for widgets to sell in their stores. Then as your product sells they gradually increase their orders until eventually they have pretty much your entire production line devoted to WalMart orders. At that point they come in and low ball you by saying, 'we're only going to pay x dollars per order from here on out, take it or leave it'. The vendor, whose entire business now hinges on WalMart orders, is forced to comply.

While I don't agree with this practice, I am glad to see it getting turned on the record companies now, since they've been ripping me and other consumers off for years. Let the jackals tear each other to pieces...

Re:My eyes are filling with tears for the labels..

[tekunokurato]

The cost of carrying 60,000 cds instead of just five is tremendous assuming you don't want to be constantly stocked out. Granted, I buy all my music on the 'net and none of it from major labels, now, so I'm not necessarily supporting the old model, but if people want to find those other 55,000 CDs in a store, they're going to have to pay more. No gouging about it.

Re:My eyes are filling with tears for the labels..

[LetterJ]

"Personally, I can’t believe that 1 out of 5 CDs are sold in Walmarts."

The thing is, nearly 1 out of 5 *anythings* are sold by Walmart. They are big on a scale most people can't imagine.

We view "entertainment" industries as big, but really, companies like Walmart dwarf them. They just aren't in the news every day like the movie and record industry. They chug along making billions of dollars without drawing attention to themselves.

Wal-Mart has 3500+ domestic stores, and nearly 1500 international units. They pull in over $60 BILLION dollars per quarter and $2 billion of that is PROFIT.

Walmart has so much purchasing power with wholesalers that this current story is just everyday business. However, this time they happened to target a branch of the media, who tend to yell and scream louder than most industries when *anything* happens to them.

Why CDs are $15.99

[ChaosMt]

From the end of the article...

$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

Re:My eyes are filling with tears for the labels..

[Anonymous Coward]

lol. I remember marking stuff up 100%. $12 cost, $24.99. It's still a good deal when you think about it. Think about what the retailer has to pay for: rent, electric, water, employee salaries (managers, assistant managers, cashiers Christmas help), insurance, shipping, returns, snow removal and other maintenance, and new product. How is a record store supposed to pay all of that with a %33 markup? What a moron.

Re:Walmart a monopoly?

[tekunokurato]

There's a difference between anticompetitive tactics and actually being a monopoly. Both are covered under antitrust laws, but WalMart is only the former.

Re:My eyes are filling with tears for the labels..

[Jucius Maximus]

"And if you don't like Wal-Mart, don't shop there. Your personal experience isn't exactly scientific proof that Wal-Mart sucks, there are plenty of people (myself included) that shop there because the employees on the whole are friendly and because their prices are incredible."

But when you buy music at Wal Mart, are you getting the real version or the censored but identically packaged version [cexx.org] made especially for that store? (This is why you never see those 'explicit lyrics warning' stickers at Wal Mart -- they just don't give you a choice and force their censorship on you without your knowledge or consent.)

Re:My eyes are filling with tears for the labels..

[pqdave]

Depends on turnover, and that's a big part of the problem. WalMart isn't going to buy anything risky, they know that the vast majority of the albums they sell will sell quickly, so the money will be available to buy another album to sell quickly...Profit on an individual item doesn't have to be high if you can turn it over enough times. Meanwhile, the perceived price of an album is whatever WalMart's price is. "Why do I have to pay $6 more for than I pay for Eminem? The independants can't afford to compete with WalMart on the hits, but can't survive only on non-hits.

Re:My eyes are filling with tears for the labels..

[southpolesammy]

There's a reason why Walmart is popular in sparsely populated areas -- time. In rural areas, a consumer may have to drive to several different stores separated by great distances to get everything they need for the household. This takes an enormous amount of effort and time. Walmart brings all of these disparate "stores" under one roof, making it much more convenient for rural shoppers to go to Walmart. The tradeoff is that the stores may not be the cleanest or have the greatest variety of products, especially at the high end.

By contrast, in the larger cities, the necessary goods are in closer proximity to one another so that going from one store to another is much less cumbersome. This also creates greater competition for shoppers' dollars, and the stores (on the whole) have a greater variety in order to distinguish one from another. In addition, bigger cities are actively trying to fight back against suburban sprawl and make better use of nearby land. The sheer size of Walmart runs counter to those goals. Therefore, Walmart is disdained in the big cities because it takes up an enormous amount of valuable space and does not stock the high end products that are locally available.

Re:My eyes are filling with tears for the labels..

[nomadicGeek]

Most independent stores I have gone to shop for music in are charing $16+ for a CD. If you're buying it for $12 and making $4+ a CD I seriously believe that you are gouging us. I don't feel bad for you.

A 30% markup for a specialty store is not unreasonable. You act like some asshole is just taking the $4 and putting it in his pocket. You should try to run a business. The owner of the store probably invested a good bit of money up front to get started. You have to fill the store with racks, buy inventory, and plan on running at a loss for the first few months as you grow your business. The owner is probably paying back the debt incurred at startup for a long time or they risked a lot of savings just to get started.

Once you get past that hurdle you have to pay rent, taxes, insurance, hire employees, pay unemployment tax, workers comp, social security. You also have to pay to advertise your business, pay your accountant to file your taxes, possibly hire a book keeper to help you keep up with the sales tax that you must pay. It is endless. $4 per CD doesn't go very far. You have to sell a lot of CD's to break even. Making a big profit off of such a business isn't a trivial thing.

I'm not saying that you should feel bad for business owners. Just realize that it isn't all that easy. If you go into a store that you really enjoy that has a wide selection, knowledgeable employees, and a great atmosphere with good customer support, you should appreciate it for the gem that it is. Someone has really had to put a lot of thought and strategy into pulling it off right. They probably also took a lot of risks just to get it started. It isn't all that easy.

It's not that easy

[Rescate]

The article mentions that Wal-Mart could stop selling CDs altogether, and their sales would be relatively unaffected.

"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.'"

So what happens when the publishers don't sell to Wal-Mart?

"...Wal-Mart executives hinted that they could reduce Wal-Mart's CD stock and replace it with more lucrative DVDs and video games."

So, not as easy for the labels as it seems. If Wal-Mart "will not be taken seriously as a place to get music," they can move on with other things, having made an example of the labels to others who might try the same tactic.

Re:My eyes are filling with tears for the labels..

[Anonymous Coward]

And don't forget that CD's have a 100% return policy at all retailers. Whatever they don't sell can be returned to the label (large or small) for credit. That's why you don't see a lot of indy releases at Wal-Mart. They order a minimum of about 40,000 pieces. If they return 39,000 of those, it would put an independent label out of business.

Comment removed

[account_deleted]

Comment removed based on user account deletion

For further reading...

[turg]

Here [fastcompany.com] is a very interesting article on the way Wal-Mart works with suppliers. They have done similar things in other industries to what they're doing here, and really transformed the way business is done in some fields.

Re:My eyes are filling with tears for the labels..

[cHiphead]

I don't like Walmart, but the problem is, like most people...

I'm too broke to NOT shop at Walmart.

cheers.

$4 per CD is not gouging

[pastafazou]

Most independent stores I have gone to shop for music in are charing $16+ for a CD. If you're buying it for $12 and making $4+ a CD I seriously believe that you are gouging us. I don't feel bad for you.
Perhaps you should look at this again. In the mall around the corner from where I live, it costs $5000 per month for rent on their smallest sized storefront. Assuming they need a minimum of 4 employees working 40 hours per week to cover the store, and they pay them $8/hour, you come to over $5000 in salary expenses per month. That's $10,000 per month just for these two expenses. That means you need to sell over 83 CD's per day with a $4 markup in order to cover just these two costs. A music store requires hundreds of thousands of dollars worth of inventory. Personally, I don't think a $4 markup on a CD is gouging the customer. The record comanies, however, with a cost of under $1 per CD, selling for $12, is certainly gouging, especially when you consider that the payouts to the artists is included in that less than $1 cost.

Cut them off

[FreeTheFurniture!]

So what's keeping him up at night? I'm sure this is naive, but why does the record industry allow WalMart to sell music if they are so bad? (I assume there's a distribution contract, but this must expire at some point)

Hmmm, I have one partner who is destroying all my other partners, providing no real benefits to me, and is now forcing me to wreck my margins in favor of theirs. Sure they sell a lot of my product, but record sales are actually down since they got in the game, and big deal, if they aren't selling my goods others will, and people will still buy.

It's not like if they stop supplying to WalMart they're going to lose those 1 in 5 customers. The benefits are pretty clear, they'll be doing their other partners a favor allowing them to compete (partners which provided marketing push for them) and they'll have more of their products on the selves.

Re:My eyes are filling with tears for the labels..

[Loco3KGT]

I beg your pardon but someone will always be paying below average wages.

See the thing about averages is that there's a bottom, a middle, and a top. Or a left, middle, and right. Or maybe a better way to put it is that to graphically represent an average there has to be two points on opposite sides of the represented average.

If Walmart paid higher wages, then someone else would be paying "below average" wages, etc etc.

And I know some people aren't taught this, but, there's always someone at the bottom.

Low pay is not illegal, it's not even unethical. If Wal-Mart raised their pay rates, they'd have to fire people. So ask yourself, do you want fewer people making more money, or more people making "less than average" money?

Re:On the topic of wal-mart employment

[drinkypoo]

They aren't interested in them because they pay shit with no benefits because they let illegal aliens in to do those jobs. It is a self-fulfilling prophesy.

Exactly correct. Some of those jobs will never be filled by citizens, for example agricultural jobs (read: fruit picking) around the Santa Cruz area on California's central coast. Unless you're willing to live four to a room, you can't afford to live there picking fruit. However, all of the wal-mart jobs currently being filled by illegal aliens could be performed by citizens, especially if kerry gets elected and fulfills his promise to raise the national minimum wage to $7 over the course of (approximately) his first term.

Re:Walmart is not evil

[DerekLyons]

People are always complaining about unemployement.. well just think about how many jobs walmart stores create.

According to some estimates for every job Wal-Mart creates at the retail level, they destroy 1.2 at the wholesale level and 1.4 at the retail level. That's a net loss of 1.6 jobs per job created. (Here in my community for example, two new Wal-Marts opened, utterly destroying three K-marts.) Think about it.

Benefits are usually better with larger companies.

Sure, for the guys at the upper level of the food chain. Those minimum wage forced part time workers at the cash register? They aren't noticeably better off whether they work for Wal-Mart or for Jimmy's Mom & Pop.

Unless you're a communist, capitalism is good for our society.

Of course, something (Wal-Mart) that has chased thousands of jobs off shore in the last month alone is *good* for our society. Not to mention the number of jobs they've destroyed outright.

Re:My eyes are filling with tears for the labels..

[amRadioHed]

making money hand over fist -> must not be doing anything unethical

Am I getting you right, is that what you're saying? So DeBeers, MS, Exxon, R.J Reynolds, we know those guys aren't doing anything wrong because they have lots of money? That's the most bizarre argument i've heard in a very long time.

Anyway, as for a good argument why WalMart isn't the greatest thing since sliced bread, despite their impressive wealth you can try this article: http://www.alternet.org/story/12962

You can refer to the book No Logo also for more information.

Really, there's a wealth of damning evidence out there. I don't think you've been looking.

Re:Why CDs are $15.99

[po8]

A simpler view of the same data...

$1.70 for packaging and distribution

$1.77 to the musician / artist (split among author, performers, and union)

$4.69 to the retailer

$7.83 to the publisher / label

Draw your own conclusions.

This ISN'T the first time.

[shark72]

"This is the first time a big player has attempted this sort of hardball move on the labels."

Not true in the least. Slashdotters have Wal-Mart to thank for the record labels being punished for price fixing (as in the popular Slashdotter refrain, "the record companies are evil! They've been busted for price fixing!"). Here's what happened, in a nutshell:

1. Wal-Mart started selling CDs at sub-par margins or as a loss leader to get people into the stores to buy other high-margin items.
2. Record chains like Tower Records freaked out, as their primary business was selling CDs and they couldn't compete with a Wal-Mart which had a huge store of fishing rods and cheap clothing to make up the bulk of their business.
3. The record companies helped fund the advertising for Tower as well as two other chains (TWE and MusicLand, I believe) in exchange for Tower et. al. agreening not to display prices in those ads that went below a certain point. FWIW, this is called a "MAP program," for "minimum advertised price," and is prevalent in tons of other industries.
4. Wal-Mart got all pissy and threw their weight around with the government.
5. The government told the record companies to stop, and to send checks to consumers.
6. Lots of other industries, including the computer peripheral industries, still happily continue MAP programs... until that point that Wal-Mart tattles on them, too.
7. Tower Records subsequently declared bankrupcty. Enjoy buying your music at Wal-Mart, folks.

That's about as hardball as you can get.

Re:Why CDs are $15.99

[Kwil]

Except that those manufacturing costs are actually covered in part by the artists' royalties. Most bands are given money *and studio time* as an advance against their future royalties. This winds up bumping the label profit at the expens of the royalties.

Re:Well, what do you know?

[pangloss]

Actually, from the reports about the report that I read, the study singles out Wal-Mart precisely because its policies are worse than chains such as Costco. But I don't know if that's in the report itself. If you've actually read the report, can you confirm?

Another problem with the Berkeley study is that it assumes that all Wal-Mart employees do not get health insurance through parents, spouses, or other employers. The actual results are likely to be much smaller.

Well, I still didn't read the actual report ;) but I did look at the authors' response [berkeley.edu] which states the following:
"our methodology accounts for the fact that some individuals who have spouses working at a company with more generous health insurance are opting into such plans.... Given the greater rate of job based health coverage at large California retailers overall ... Wal-Mart workers and family members utilize 40% more in such public health expenditures than workers in large retailers overall in the state."

I had guessed this about the methodology even before reading the response. I can't imagine a professional researcher/PhD without a personal axe to grind who wouldn't account for this in his research.