Wal-Mart, record labels, & CD prices

[pickluh]

When we were discussing Kellie's CD prices, I remembered my talks with clients who had ideas for new products and couldn't wait to get them in Wal-Mart. I'd tell them, "Wal-Mart didn't get where they are by paying top dollar to their suppliers."

I wondered if that applied to CDs and record labels. I found this article in RollingStone:

Wal-Mart Wants $10 CDs (from Oct 2004)

Here are some excerpts:

Along with other giant retailers such as Best Buy and Target, Wal-Mart willingly loses money selling CDs for less than $10 (they buy most hit CDs from distributors for around $12). These companies use bargain CDs to lure consumers to the store, hoping they might also grab a boombox or a DVD player while checking out the music deals.

Getting Wal-Mart excited about carrying a record is at the top of every label's to-do list, but it's harder than it sounds. There is an immense cultural chasm between slick industry executives and Severson's team of three music buyers at Wal-Mart headquarters in Bentonville, Arkansas. Only one of the three had ever worked in music retailing -- until that person moved to a new division in August and was replaced by someone who previously bought Wal-Mart's salty snacks.

The article is interesting reading. It even gives a breakdown of what goes into CD pricing. To get a perspective on things, I looked up how many Wal-Marts there are -- over 3,300. If each store sold just one Kellie CD per day since it was released, sales would be nearly 1,000,000 CDs already. That's amazing. On the other hand, you have to wonder who would profit.

On a related note, I checked my local Wal-Mart. There was one Kellie CD amongst all the country CDs. And there was just one Taylor Swift CD there too. However, near the checkout counter there was a point of purchased display with several Bucky, Taylor Swift, and Eliiott Yamin CDs, but none of Kellies.

[fanofkellie]

I found only two of Kellie's CDs at the Wal-Mart Supercenter in Dunwoody(Atlanta 'burb) a few days ago, and they were hidden behind some other artist. Why is her CD so woefully understocked and so pitifully displayed everywhere? What can be
done to correct this, seemingly, deplorable lack of promotion for Kellie in the stores?

[James]

Forget both Taylor and Bucky.. It bugs the crap out of me that Yamin gets as much visibility as he does. If there was ever anything wrong with world, that's it.

[pickluh]

Originally Posted by fanofkellie

I found only two of Kellie's CDs at the Wal-Mart Supercenter in Dunwoody(Atlanta 'burb) a few days ago, and they were hidden behind some other artist. Why is her CD so woefully understocked and so pitifully displayed everywhere? What can be
done to correct this, seemingly, deplorable lack of promotion for Kellie in the stores?

Here's more from that article:

Wal-Mart is like no traditional record seller. Unlike a typical Tower store, which stocks 60,000 titles, an average Wal-Mart carries about 5,000 CDs. That leaves little room on the shelf for developing artists or independent labels. ..."

... "Wal-Mart has no long-term care for an individual artist or marketing plan, unlike the specialty stores, which were a real business partner," says one former distribution executive. "At Wal-Mart, we're a commodity and have to fight for shelf space like Colgate fights for shelf space."

In the same way that Wal-Mart made it difficult for local mom-and-pop retailers to compete with its low prices, it has hurt smaller music stores. "When you're buying CDs for twelve dollars and selling them for ten like Wal-Mart, it makes the rest of us look like we're gouging the customer, when we're not," says Don Van Cleave, head of the Coalition for Independent Music Stores, a retail consortium. "It's supertough to compete with that price point."

Besides losing money, it makes you wonder just what a label has to do to get a good, well stocked spot in Wal-Mart. (It talks about how labels even have to produce specially edited and censored versions in order to make Wal-Mart happy.) If you could sell 1 million CDs and get 10 cents profit each or 500,000 and make a buck off of each one, what would you do?

The article goes on to say that the music industry may need to change it's business model and that's probably true. Here's how it says they break down the price of a CD:

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$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

[Scooter520]

Gives you a new perspective on cd's in the market place. Looks like a lot of people have there hands in the pie.

[pickluh]

Originally Posted by Scooter520

Gives you a new perspective on cd's in the market place. Looks like a lot of people have there hands in the pie.

Right. It reminds me of an episode of "Behind the Music" that VH1 ran. It was about TLC. They were a top group with great CD sales and selling out huge arenas with all the best special effects. And, because they had little spare time to spend money on personal things because they were touring constantly, they were surprised to learn that they were broke.

On the VH1 special, one of the members gave a break down of where all the money went. After all the label and agents fees, promotion, the services for their stages, costumes, etc, etc, they had nothing left.

It seems to me that others were managing all of that and made sure to spend all the money on everything possible. I suppose all the industry people knew one another and they made sure they all supplied everything they could -- whether the act needed it or not.

I recall an interview in Offbeat Magazine a few years ago with Dr. John about the music industry and bands in New Orleans. He said that people think the labels want to sign young bands because the music is more hip. He said it's more because the older guys have been around longer. They know the ropes and it's harder to take advantage of them.

With digital downloads, the music industry is in a state of change. The distribution networks must be trying to figure out how they'll survive when no one needs to distribute CDs. What about the manufacturers and packaging? Promotion has to change too. You don't have to wait for a song to be on the radio to learn about a band. You can sample it on iTunes and download just a few while you decide whether to buy the whole album. Radio had nothing to do with me buying Kellie's album.

Music is going to cost less and I'm sure everyone who is used to getting a piece of the bigger pie is going to be grabbing for their slice. In the mean time we have deal with squabbles between retailers and labels while they figure out who is going to let go of their pieces first.

I have to wonder how much the artist is being pressured to give something up in order to meet Wal-Mart's demands for low price. If the past is any indication, they'll get squeezed before the labels, promoters, distributors, etc. give it up. And that's especially true for new artists.

I wish I had a better understanding of whether Kellie is better off not being in Wal-Mart. Do you have to give up too much to get shelf space? If so, that might be the best thing for now.

[werss]

It's ridiculous. I bet she'd be selling twice, maybe three times what she's selling now if only they would stock her and display her better. Makes me so mad.

[Beam77]

Do you think that we should write or call Wal-Mart and ask them to stock Kellie's CD better? Maybe we can sign a petition and send it to Wal-Mart.

[ChrisKellieFan]

Until she gets a top 5 single, Walmart prices it at $9.72 and keeps it well stocked then I wouldn't expect a big steady weekly sales increase. It might help to ask Walmart and the label to put STG in the $9.72 program.

I'm sure the reason why Elliott's CD is stocked is because it's a newer release in a larger selling genre and he has top 10 airplay on the top 40 chart and good sales. Currently 40 million people a week hear his single on radio vs. 17 million for IW. Not surprising he gets good airplay since his album is better than most in the pop world (crap). Daughtry's music blows away most pop/rock. I thought it was interesting that Elliott asked fans via his myspace blog to report stores out of stock and they would take care of it, and we never heard anything like that from BNA.

[pickluh]

Originally Posted by ChrisKellieFan

Until she gets a top 5 single, Walmart prices it at $9.72 and keeps it well stocked then I wouldn't expect a big steady weekly sales increase. It might help to ask Walmart and the label to put STG in the $9.72 program.

Even if lower pricing made Kellie's sales increase, would she make less money? I'm trying to understand how that works...

Here's another good, but long, article about record industry economics by someone who has been in the music business for years.

The Ballad of the Mid-Level Artist
by Danny Goldberg

I've been irritated for many years by what seemed like overpricing of CDs, but my perspective changes when I read stuff like this. I've always been interested in the record business. It's hard not to be when you live in New Orleans and it seems like everyone is a musician.

I've watched friends pay for their own studio time and CD production and helped them sell through their websites. These artists are happy when they sell more than 10,000 copies. I've also seen what happens when they get major label record deals.

I became more interested in how all this works a few years ago when a good friend co-wrote "Watch the Wind Blow by". It became a number one hit for Tim McGraw. I believe my friend's royalties eventually added up to about $250,000.

I was amazed at how complicated the compensation structure is. I recall him saying that the structure even changes when a song is released as a single and when it hits number one.

Anyway, remember that there's over $4 more profit in a $13.88 CD compared to a $9.72 CD. That money goes somewhere. I don't know how much profit there is in a CD that sells for under $10. But if if it were split evenly between the label and the artist and there was $1 profit from the cheap one and $5 from the higher priced one, would you rather go platinum, selling a million CDs, at the lower price, or gold, selling a half million at the higher price?

At those rates, the artist would make $500,000 from the platinum and $1,250,000 from the gold. (I'd take gold).

We can't really know what's best without knowing the real costs involved, but it's safe to say it's not as simple as "drop the price and sell more". You don't know how much they must give up to get Wal-Mart to stock the CD or sell at the lower price. If anyone on the forum knows something about how all of this works, I'd be really interested in hearing it.

If Wal-Mart is willing to lose money at the $9.72 price, you can bet there's a lot of pressure on labels and artists. What's worse, if there's less profit, record labels would be less willing to take risks and fewer new artists like Kellie would have a chance to get a record deal. I wouldn't mind the higher price as much if it means I get the chance to hear performers like Kellie.

[pickluh]

Here are a couple of articles from HowStuffWorks.com about the record industry:

How Music Royalties Work

How Recording Contracts Work

This is good reading for anyone considering getting in the business. It's important to understand how it works. It's very easy for a new artist to get too eager about being a star and selling lots of albums and forget that they're also in it to make a living.

[werss]

Went to Walmart again today. Not a copy of Small Town Girl... and tons of Bucky, Carrie, and Taylor Swifts.