1996: the year retailing as we knew it came to an abrupt end? A look at the major events that shaped another record year for the music products industry.

A LOOK AT THE MAJOR EVENTS THAT SHAPED ANOTHER RECORD YEAR FOR THE MUSIC PRODUCTS INDUSTRY

In the 1980s advancing digital technology dominated the thoughts of the music products industry. More recently, the focus shifted to the "retro" movement as the public seemed to discover all over again the marvels of the past. At other points in time, the industry's primary concern has been the economy, interest rates, trade barriers, or demographics. But in 1996 the burning issue was the future shape of music product retail. 1996 was a dynamic year that saw broad-based advances in industry sales, scores of important corporate milestones, and the most dramatic manufacturer expansion programs in nearly two decades. Yet these otherwise significant developments received only passing acknowledgement as retailers and manufacturers hotly debated whether the industry's network of approximately 6,000 independent retailers would be supplanted by a handful of national m.i. chains.

Since the 1950s scores of goods and services have been effectively distributed via highly visible national operations. In food there's McDonald's and Burger King. Want your taxes done? Call H&R Block. Appliance shoppers across the country routinely turn to Sears. And with the recent growth of huge specialty retailers like Toys R Us, Home Depot, Staples, Sports Authority, Pet Smart, and numerous others, consumers can now purchase just about anything imaginable from a national chain. Anything, that is, but music and sound products.

The feasibility of a national m.i. retail chain had long been a topic of late-night trade show speculation, occasional letters to the editor, and idle conversation. But given that the industry's largest retail operation had under 30 stores, no one ever gave the idea too much weight. That is, until three significant events transpired this year.

First, early in the year, Mark Begelman acquired Ace Music of Miami and publicly announced plans to create a national chain. If it weren't for his distinguished resume, Begelman might have been dismissed as just another outsider who ventured into the industry with misplaced ambitions. But as the founder of Office Club, which later merged into Office Depot, grew to sales of nearly $6.0 billion, and re-ordered the structure of the office supply business, he received instant credibility.

Second, venture capitalists from Chase Manhattan, Wells Fargo Bank, and Westin Presidio Capital purchased a 50% interest in Guitar Center, valuing the total company at $251 million. Ray Scherr, who had owned the entire company, pocketed $100 million in the transaction, making him the single most successful retailer in industry history. Guitar Center made public plans to open some 16 stores in the next two years, but the new investors in the company obviously expect far more dramatic growth in the future. Otherwise, how else could they have justified paying a whopping 49 times post-tax earnings for the company?

Third, Sam Ash Music, the nation's second largest chain ventured, out of the greater New York area for the first time, opening two stores in Miami. Company management also announced plans to open additional stores around the country, with Cleveland being the next stop.

Do these three milestones signal that the independent retailers who served the market for over a century are about to be overtaken by national chains? Time will certainly tell, but in the meantime a consensus has yet to evolve within the industry. Those who believe in the future of chains argue that the industry's fragmented retail base is ripe for consolidation and that a well run chain can deliver goods to the market with greater efficiency and effectiveness. Bolstering their claims, they cite the tremendous success of retailers like Circuit City and Home Depot. Skeptics counter that the music products market continues to depend on grass-roots activities like lessons, supporting school music programs, and fostering long-term customer relationships...activities that national chains with a "stack it high and sell it cheap" approach are not well suited for. What's more, they argue that the current spate of retail expansion has been driven by a decade of sales growth and a reckless sense that the industry's sales curve will march upwards forever. "Let's see how well these chains hold up when the market goes south," said one observer.

The inevitable never seems to happen, only the unexpected, and so forecasting the future evolution of music products retail is an iffy proposition. Nevertheless, given the huge stakes involved, the industry's preoccupation with the issue is understandable. Thousands of independent retailers who have devoted their lives and careers to serving a market are understandably concerned about how a national chain would impact their business. Suppliers are equally concerned. Despite their vocal complaints about "unsophisticated retailers," few relish the prospect of dealing with a major national chain hell-bent on using volume to extract price concessions. One manufacturer with experience in consumer electronics predicted, "National chains are concerned only with grinding the best price out of a manufacturer. If they take over in this industry, they take the fun out of the business. More importantly, they will stifle innovation. Small start-ups have traditionally been the source of great new product ideas, but these types of companies simply can't exist in an industry dominated by chains."

Concerns about the rise of national chains or "category killers" were moderated somewhat by another stellar sales year. After three quarters of retail sales gains on the order of 7%, sales growth seemed to slow somewhat in the fourth quarter. Nevertheless, 1996 will unquestionably go down in the books as yet another record year for the industry. The primary reasons for this robust performance are simple, straightforward, and, unfortunately, largely beyond the control of retailers and manufacturers.

First and foremost, demographic trends have graciously provided the us with a larger base of prime customers. The industry has always relied heavily on buyers between the ages of 12 and 24, and thanks to the child-bearing efforts of the Baby Boomers, we now have more 12-to-24-years-olds than at any time in history. Better yet, this key age group should continue to grow until the year 2010.

Secondly, we are living in a period of amazing economic tranquility. Despite laments about corporate downsizing and the uncertainty of living in an age of technological upheaval, the consumer confidence index suggests that John and Joan Q. Public are pretty comfortable with the status quo, so much so that they are spending in record amounts and are willing to take on previously unheard-of levels of debt. For expanding a business, a bigger customer base with more money to spend is a combination that's pretty hard to beat.

The industry's contribution to the current sales boom came largely in the form of better product value. With the exception of band instruments, where price increases averaged some 6%, 1996 was another year of little or no inflation in the music industry. Stable (or in some cases declining) prices are not the result of a charitable impulse on the part of retailers or manufacturers to make products more affordable. Rather, they are the natural outcome of too many products and store fronts chasing too few customers.

Despite the fact that there were no apparent shortages of any product last year (or did we miss a headline about riots in the street over a shortage of guitars?), manufacturers added productive capacity at a torrid pace. It's one thing to make optimistic predictions; it's another to spend the money to build a new store or expand a factory. Clearly, the massive investments made last year are the best reflection of the industry's confidence in the public's continuing interest in music and sound products.

In an effort to better supply a growing demand, and in hopes of securing a larger share of market, manufacturers added tremendous new capacity around the globe. Among the noteworthy plant expansions in 1996, Mackie Designs added a new 81,000-square-foot plant to accommodate production of an expanded product line (Feb. p. 52). Fender announced a $40 million, five-year expansion program that includes a 200,000-square-foot electronics plant in Corona, California, additional capacity in Ensenada, Mexico, and a joint venture in China to build guitars (July p. 40). Paul Reed Smith virtually doubled its guitar production, moving to a larger and more efficient factory (Feb. p. 56). Sabian Cymbals added a new 41,000-square-foot cymbal plant in Meductic, Canada, along with a larger U.S. distribution site in Massachusetts (Feb p. 150). Ashly Audio moved to an expanded 50,000-square-foot factory in Rochester, New York (March p. 34). Growing demand for tuners and specialized audio products prompted Sabine to open a new 45,000-square-foot plant in Florida. Ken Smith Basses opened a new guitar factory in Pennsylvania (March p. 42). Davitt & Hanser opened a new and expanded 56,000-square-foot warehouse in Cincinnati (July p. 42). Korg U.S.A. moved into a new headquarters and warehouse in Long Island (Oct. p. 28). Case maker SKB added a new R&D facility and 20,000 square feet of factory space (Dec. p. 35) Walter Piano moved into a sleek new 100,000 square-foot plant in Elkhart, Indiana (Feb. p 81).

A large portion of the factory expansions reflect the increasingly global nature of the industry. As manufacturers find it more difficult to effectively serve export markets from a single production point, they open additional factories around the world. Last year Kawai stepped up its U.S. piano production by acquiring a finishing company in Greer, South Carolina. As a result, the company can now produce polyester-finished pianos in the U.S. (Jan. p. 36). Responding to currency pressures, Roland expanded its Rodgers Organ plant in Hillsboro, Oregon, to produce a wide range of digital pianos and home electronic keyboards for the North American market (Feb. p. 52). The sixties and seventies saw a massive amount of guitar production shift from the U.S. to Asia. This year, in a surprising turnaround, Young Chang opened an acoustic guitar plant in Tacoma, Washington. The plant is designed to produce instruments to retail in the $500 to $1,500 range (Feb. p. 116). D.J. manufacturer Gemini stepped up its European export efforts with a new sales facility in the U.K. (Sept. p. 56). And International Music Corp. acquired a 400-employee factory in Ju rez, Mexico, to produce Ross sound reinforcement products (Feb. p. 194).

The industry's current good fortune even prompted NAMM to begin construction on a much expanded 35,000-square-foot headquarters in Carlsbad. In addition to office space, the $6.0 million structure will contain meeting facilities that will be available to the entire industry, as well as an industry museum (Oct. p. 43).

The ambitious expansion plans announced by Guitar Center, Ace Music, and Sam Ash Music stole most of the headlines; however, their moves didn't stop numerous other dealers from adding stores. Daddy's Junky Music planned four new stores in Upstate New York, Rhode Island, and Connecticut (Dec. p. 38). Dayton, Ohio, based Hauer Music expanded its main store and broadened its Ohio presence with a new location in Columbus (Dec. p. 38). Music To The Max opened an impressive 31,000-square-foot showroom in Westminster, California, going head-to-head with Guitar Center (July p. 70). Also in California, Fields Piano & Organ opened an elegant new showroom on Rodeo Drive in Los Angeles (July p. 70). Ace Music announced plans to open locations in Atlanta and Dallas, and Sam Ash and Guitar Center indicated that they would soon be opening stores in Cleveland.

Other retail milestones included: Prosser Piano & Organ was named "Business of the Year by the Tacoma Chamber of Commerce; Sherman Clay & Co., one of the country's oldest and largest keyboard retailers, abdicated from the southern California market and was placed on the market for sale. And Knut Koupee, the Minneapolis retailer that counted the artist formerly known as Prince as a customer, filed for Chapter 11 (March p. 61).

Manufacturers can grow internally or by acquisition. While there is considerable debate over which is the more effective method, both generally spring from a sense of confidence. A brisk level of merger and acquisition activity in 1996 provided further evidence that manufacturers remained extremely optimistic about the immediate future.

The Selmer Company strengthened its position in the stringed instrument market by acquiring the William Lewis Violin Company from Gemeinhardt Flute (Jan. p. 37). Fender consummated its purchase of Guild Guitar after months of negotiations (Jan. p. 48). Calzone Case acquired Anvil Case from the ZERO Corporation (July p. 45). PianoDisc, the pioneer in digital player pianos, purchased the beleaguered Mason & Hamlin Piano Co. and pledged to produce a limited number of "truly exceptional pianos" at a factory in Haverhill, Massachusetts (April p. 32). Boosey & Hawkes acquired Rico International, the world's largest reed manufacturer, from the company's founding families (Sept. p. 131).

In other financial news, Mark IV announced plans to sell its Mark IV Audio unit, parent company of Electro-Voice, Altec, Dynacord, and University Sound. To date, however, a deal has not been finalized (Jan. p. 36). Steinway Musical Instruments, the parent company of Steinway & Sons and The Selmer Company, became a New York Stock Exchange Company after successfully selling shares to the public (July p. 34). Samick of Korea found itself in a financial squeeze that necessitated a debt restructuring. The financial woes were largely due to some ill-timed acquisitions outside of the music industry, and piano and guitar production has been unaffected (Dec. p. 29).

Happy Birthday

The years immediately following World War II saw the feverish creation of new businesses as entrepreneurs who had been sidelined for five years during the war finally got down to work. Some of the notable enterprises that got started in 1946 and celebrated a 50th anniversary in 1996 were: G. Leblanc Corp. (Feb. p. 56); Fender Musical Instruments (Feb. p. 154); JBL (May p. 26); and Ferree's Tools (April p. 56). In other anniversary news, Schmitt Music of Minneapolis turned 100 (Sept. p. 106); Ovation Instruments celebrated its 30th year (Sept. p. 33), as did Midco International (Feb. p. 146); CAE, maker of the seemingly ubiquitous "Littlite," marked its first 25 years, as did Pignose, the creator of the first battery-powered practice amp (Oct. p. 45).

In other noteworthy milestones, software giant Microsoft adopted the Roland General MIDI system as the sound standard for all its programs (Dec. p. 36). Taylor Guitars was honored by the Magazine Publisher's Association for its exceptional advertising (July p. 48). Inc: Magazine gave Pro-Mark drumsticks an award for superior customer service at is annual "Small Business Award" banquet (June p. 25). Inc. also named Mackie Designs to its list of fastest growing companies (July p. 53). On the quality front, Shure, Samick, and Roland all qualified for the rigorous ISO 9000 quality standard.

When business is good, people have a distinct tendency to stay where they are. Thus, one by-product of the strong sales racked up in 1996 was a nominal amount of "musical chairs." As always, there were personnel shifts, but most fell into the category of internal promotions. Unlike years past, there were no high profile "white knights" hired to rescue a struggling enterprise. Noteworthy promotions in 1996 included: Chris Bristol was named a vice-president and director at Roland Corp. U.S.; Eddie Toporek, founder of MBT International, was elected president of the MDA; Yamaha tapped Noriyuki Egawa to be president of its U.S. operations; at Samson, Jack Knight was named director of operations, and John DiMaggio was hired to head training efforts; Dan Slick was promoted to assistant general manager, heading the Technics Musical Instrument Division; Audio-Technic named Phil Cajka as C.E.O. of its U.S. operations; at Korg U.S.A. Robert McCullar is the new national sales manager; Andy Ito was tapped as president of Pearl International; at Shure Brothers, Jim Kogen retired as president after 34 years and was replaced by Sandy Lamantia; pro audio veteran John Gatts joined Mark IV Audio to direct marketing; DOD tapped Larry Banks as its new president; after buying Rico International, Boosey & Hawkes hired Bill Carpenter as president/C.E.O. of the reed maker; at Ensoniq, Bruce Crockett stepped down as president and was replaced by Al Charpentier, one of the three founders of the company; Klipsch Pro Audio appointed Ian Thacker as president; and at Vic Firth Sticks, Rick Drumm became president and chief operating officer. On the family business front, John D'Addario III joined J. D'Addario & Co., becoming the ninth generation of his family involved in string making. Ted Kornblum joined St. Louis Music, the company founded by his grandfather, as assistant national sales manager.

Let The Good Times Roll

Analyzing the industry's prospects for 1997 leads to mixed conclusions. On the one hand, the demographic and economic forces that have propelled growth in the recent past seem very much intact. On the other hand, past precedent suggests that after a decade of unbroken sales growth, it's about time for a slowdown or some other type of correction. On balance, however, larger economic conditions suggest that any downturn would be relatively mild and that the industry's well run enterprises would remain largely unscathed. Quarterly retail sales statistics published in Music Trades, along with our annual "Music Industry Census," which lays out industry sales by product category, and our "Top 200," which ranks the largest retailers by sales, will provide a clearer picture in the months to come. At the moment, though, we remain cautiously optimistic. The U.S. economy has proved extraordinarily vibrant and resilient, and it remains the envy of the developed world. The music products industry has been equally deft at responding to the changing needs of the market. To all those who have read this far, the staff of Music Trades wishes you a very Happy New Year and continued success in 1997.