Anatomy of a Retail Downturn: Why a Bottom Is Wishful Thinking In ’09

Where, or where is the bottom? That is a question being asked by Wall Street, Main Street, and the recording industry, perhaps the only form of optimism that remains. But while rebounds and bottoms are nice, 2009 is already inheriting the negative momentum of 2008, and all signs point southward.

In the record business, the fourth quarter of last year featured year-over-year album sales declines approaching 20 percent in the United States, part of a broader annual drop of roughly 14 percent. Now, just weeks into 2009, early estimates show year-over-year declines of 12-13 percent, and CD-specific drops of 15-16 percent, according to a preliminary canvass of retail-oriented executives.

Is that the start of a brutal year? Digital Music News consulted a pair of high-level, music retail experts on that question, and unearthed some interesting variables. Still, the rosiest scenario places recording sales declines in the low-teens, at least during the first half. That is being stirred by both structural and economic problems, a double-whammy that is accelerating a massive disruption.

On the bearish side, one executive raised flags related to ongoing floorspace reductions. That includes Circuit City, now liquidating its network of nearly 600 stores, and all of the CD-specific real estate that goes with it. But others, including Barnes & Noble and Borders, are also cutting space, while questions surround future allocations at important big boxers Wal-Mart, Target, and Best Buy.

Same old story, right? Not exactly. Liquidations take time, and according to the retail executive interviewed, broader floorspace declines are expected to generate a delayed impact, specifically in Q2.  The delayed reaction means mid-teens declines for the next two months, and more severe, 20-something dips by April and May, according to the projection.

But other variables could positively affect the picture. According to a separate analyst, a crop of superstar releases could serve to mitigate the damage. That includes expected albums from Eminem, Dr. Dre, and U2, glaringly absent during the recent holiday quarter.  Usually, those types of releases are reserved for fourth quarter action, though windowing and withholding are tactics of past.  “They’ve realized that things just have to be pushed out, they can’t wait,” the source noted, pointing to inevitable leaks.

Indeed, superstars can still drive tonnage in this business, and big-name releases often tilt company balance sheets.  That is, if they arrive.  U2 is expected in March, but both Eminem and Dre remain question marks.

But bigger releases, if and when they arrive, have other intangible benefits as well, especially for retailers debating the merits of music. “Retailers just need something big to sell, in order to validate the product category and floorspace allocation,” the analyst said.  That is especially important for mega-retailers like Wal-Mart, now an uncomfortably powerful decision-maker for a troubled business.

Report by publisher Paul Resnikoff.  Sales information researched by exclusive data partner BigChampagne.