BEST BUYS MUSICLAND:
RETAIL, RECORDS REACT

The reaction from the music industry last week was one of stunned disbelief when rumors proved to be true that Best Buy was indeed going to acquire the 1,300-store Musicland chain in the largest music retail deal in history.

Best Buy paid $425 million in cash and assumed $260 million in debt, becoming the largest music retailer in the country.

The questions far outnumber the answers.

How will two seemingly disparate business models work together? Will the combined entity keep the mall operations and the "big box" operations separate? Will this force their competitors into more consolidation? Will the "merger" affect Best Buy's pricing agenda?

"If they keep it two separate entities, like they are saying," says one industry insider, "then nothing changes. But I can't see that being the case."

Neither retailers nor the labels appreciate consolidation in the other sector.

"The good news is that they're big and aggressive," says another top-level sales exec. "The bad news is that they're big and aggressive."

Industry estimates now have the combined companies' marketshare at 23% for Rap, 22% for Post Modern, 20% Pop, 19.7% Rock, 17.6% Urban and 16% New Age.

You get the idea.

"There's always margin pressure when any one retailer gets that big," says one insider, "because they have more leverage to push you for advertising, etc. And then there are the receivables, which will get so big that, God forbid, if something does happen, you've got a big risk out there."

Another exec expresses disbelief at things staying status quo.

"I don't think they bought Musicland just to watch it run. I've got to believe that there is an expansion of their brand going on here. On Cue could become the beginning of a Best Buy smaller market approach."

Some believe that the Sam Goody mall brand could even disappear. "I don't know why they would keep all of the separate brands despite what's been said so far."

Not everyone agrees that Trans World's Bob Higgins, who has always expressed his intention to be at least 20% of the business, is now forced to answer with another acquisition of his own.

"His correct response might be to not buy Wherehouse [another rumor that's persisted over the last year or so]. If, in fact, Best Buy is going to be much more pervasive and have a similar, or exactly the same, approach to pricing, do you want to be out there in more places where you're going to get hammered? I don't think so."

And how will all this affect the one-stops? Currently, Best Buy uses Valley Media predominantly for fill and catalog. But Musicland not only has a 1 million square-foot distribution facility in Indianapolis that can handle many of those one-stop duties, as well as the "just in time" service it gets from all but Sony-distributed labels. Will Best Buy get the benefit of those services and no longer need as much help from the one-stops?

The deal is expected to close early next year after the expected shareholder approval. Stay tuned.