Holiday Sales Hangover

It's official: the 2007 holiday shopping season were disappointing. But looking at some figures from a Financial Times article, let's consider the nature of disappointment. MasterCard Advisors said that retail spending climbed only 3.6 percent from Thanksgiving to Christmas, and "when the International Council of Shopping Centres warned that same-store sales or sales at stores open a year during the November-December period were below projections of a 2.5 per cent gain."

Clearly investors and businesspeople are only happy when there is a significant rise in sales year over year. But satisfaction is a relative term, and depends completely on expectations. Having rosy expectations when credit is mangled, when people are stuck with ballooning housing prices, and when fuel is up enormously over last year is simply deranged thinking. How could anyone expect the average person to be willing to go even more into debt to line the pockets of a relative few? You can't expect people to inhale and never to exhale, and so you cannot expect them to always shell out more this year than last, particularly when you want that number to exceed inflation. When asking themselves, "What could we have done better?" I think a wise answer might be, "Stop telling ourselves stories to feel better, and face reality so we can consider viable options, not fairy tales."

Thanksgiving Sales Rituals

Once again retailers pushed sales into Thanksgiving itself, and although they did get a jump on competitors, it was at sales hitting 50% off, and it was probably just shifting dollars from one day to another - robbing Peter to pay Paul. I understand that, given their frame of reference, that's all they can do. They need to get enough sales to satisfy Wall Street and keep the stock price up.

But entire industries are facing real problems. Tightening credit and lack of money is huge pressure. There have to be major changes in how they do business. They have to understand that sales can't necessarily rise every year, you can't count on more people spending more every year. Investors can't count on ever expanding sales. Perhaps it's time to understand that companies can't stand with one strategy for one set of demands. Perhaps it's time to know that constant expansion is like constant inhaling. There must be cycles of expansion and contraction. When conditions contract, perhaps what a smart company, management, board, and investors do is look to use the time to strengthen the organization, find weaknesses, reform bloated processes, and otherwise realize that there could be advantage into changing a business approach to get ready for the next expansion. But that would require a view extending beyond immediate personal gain, and that doesn't seem to be in the cards in business these days.

Storms Gather on Housing Front ... Right?

The New York Times reported new homes sales at their slowest pace in more than seven years, with median prices down 7.5 percent from the previous year. Though, interestingly, when you look at the actual Commerce Department Report, the numbers are hardly written in stone:

Sales of new one-family houses in August 2007 were at a seasonally adjusted annual rate of 795,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 8.3 percent (±12.4%)* below the revised July rate of 867,000 and is 21.2 percent (±9.0%) below the August 2006 estimate of 1,009,000.

Those margins of error at a 90 percent confidence level are pretty big; in comparison with the revised July rate, the potential error is even larger than the estimated difference.

So, the Times is comparing a reasonably uncertain estimate to more accurate past numbers. And then other questions come up, as well. Is the drop in home sales also due to builders expecting a slow-down and scaling back their work levels? Why not look at the median number of months for sales apparently jumping from roughly 4 in 2005 and 2006 to the current 6? This is an example of the problem with reporting on economic data - it takes knowledge and effort to dig in and understand exactly what it is saying.

For those who'd like some perspective on the numbers, Investors Business Daily has a couple of informative graphs that show trends (at the bottom of the page).

Do Tracks Make Up for Albums?

According to an AP story, music album sales - 229 million - in the first half of the year were down 15 percent over the same period last year, according to Nielsen SoundScan. Over the same months the industry sold 417.3 million digital music tracks, which was up 49 percent.

Yet the numbers are deceiving on the surface. Assuming that albums go for $12 each, that would be roughly $2.75 billion in sales. Since the number of albums is down about 15 percent, that would mean a loss from the previous year of 40 million albums, or about $480 million.

But even at 99 cents each, the digital tracks would total about $417.3 million in sales, and they had roughly doubled. So offsetting the $480 million album loss is just over $200 million in digital sales. Clearly what we're seeing is not a 1-to-1 replacement, and so the industry is making less money overall. So what's the real story? I really don't think it's pirating so much as consumers often find albums padded out and are only interested in a few cuts.

Digital tracks become an efficient way of getting just what you wanted. If music labels want to retail the same profit levels, they'll have to address issues of quality and customer demand. Otherwise, no one will have an incentive to go back to albums. Unless the labels start to understand what it is people want, rather than using a "me too" approach, following all the other labels around in a circle, they'll have to tighten their belts quite a bit.

For Music Labels, Distribution Is the New Worry

There's an interesting article in the Wall Street Journal of April 27, 2007 about the problems that music labels face from the big box stores. According to the reporting:

big-box chains are now responsible in the U.S. for at least 65% of music sales (including online and physical recordings), according to estimates by distribution executives, up from 20% a decade ago.

Having that much potential distribution and sales tied up with a limited set of customers is a scary concept for any company for a few reasons that I learned in my time in business and in writing about business. One is that with so much ability to exert pressure, you can bet that prices to the retailers will eventually be coming down. Another, you now have narrower demographic segments dictating what will be commercially acceptable music.

Third, big producers need small producers to create new niches and open fresh areas for production, and that gets much tougher when the large stores are going to be less likely to pick up the work of small labels because it becomes too much trouble to maintain a vendor that supplies a small amount of what the retailer sells.

The kiss of death is, as the story mentions, is that the stores will find the category unprofitable compared to other areas:

That's partly because, with CD sales falling steeply, the discs aren't as hot as other products the stores sell. Also in the wake of the Don Imus controversy, the debate over the lyrical content of rap, rock and pop has flared up again. Oprah Winfrey recently has focused on rap lyrics on her talk show.

Best Buy has apparently reduced the space devoted to CDs, and Wal-Mart has given a quiet heads-up to the big music distribution industry that it will cut back space for music by as much as 20%.

What's a record label to do? Learn a lesson about non-traditional distribution. Some book publishers have been smart, putting their books for years into places where their natural customers might appear but that aren't the usual independent and chain stores. Most publishers don't get it, which is why so many are having problems. You have to meet the consumer where the consumer wants to be. So look at what Starbucks has done and start moving in that direction. Popular music labels could experiment with selling CDs through various fashion outlets, specialty interest stores, and other places where they could receive impulse buys - if music isn't a life style purchase, I don't know what would be. Put it in in the Gap, in Williams-Sonoma, at news stands, in gas stations, in craft stores. It doesn't matter where so long as the people who go to those places are the sort who buy the music. When things get tough, it's time to start thinking outside of the big box.