State of the Wholesaler

Proprietary brands, deals for retailers, and increasing margins are the battle cries

As Universal Percussion’s Tom Shelley puts it: “GM plants are closing, so nobody is too big to fail. Nothing would surprise me these days.”

It may seem that everyday one gets out of bed in the morning, it’s a wild, wild world out there where economic paradigm shifts are as rapid as they are unnerving. Still, retailers, particularly (exclusively?) the independent ones, not only continue to rely on their big and small wholesalers and distributors, but also are anxious to partner with them more than ever. Better deals, better margins, better terms – along with a better understanding of exactly what is happening to those on the front lines of MI retailing are no longer a luxury but a necessity, requiring creativity and new approaches from suppliers.

None are simply waiting for better times, and some are working to make these times better … a sowing before the inevitably next reaping.

“On the negative side of things, we are simply not moving through our products like we are used to,” states Dale Titus of Dana B. Goods bluntly. “On the positive side of things, the current economic conditions have inspired us to streamline our procedures, adopt new marketing technologies, and improve our machine in every way. When consumer confidence returns to the U.S., we feel that Dana B. Goods, and our dealers, will really reap the benefits of the work we are doing now. For example, we are in brand-building mode for Aria and MTD [guitars and basses]. We love planting those seeds!”

Business trends include change of business habits: St. Louis Music’s president Stan Morgan notes that an uptick in the frequency of phone calls corresponds with smaller orders. “It’s hard to tell for sure, but retailers seem to be ordering less, more often.” He adds that more of the “best sellers” are moving even better than ever. A call for the demand of the staples is a common theme.

WD Music’s Larry Davis insists that there are great opportunities in a recession. While he only has anecdotal evidence, it seems that for those in the business of repairing and upgrading instruments are experiencing a boost in business. “All those who repair guitars can’t keep up with their work – and report to me they are seeing customers bring in guitars they haven’t seen in years!” he laughs.

This is a time for suppliers to find better/more use of the Internet, particularly in the way they can serve their clients. New Web sites, better ways to communicate through e-mail, and even the exploration of social networking sites are all becoming tools used daily.

While each who participated in this in-depth report represents a company that is an unique entity in its own right, an overall battle cry for all on both sides of the counter emerged: If you’re not moving forward, you’re falling behind.

Assessing the Business Climate
“Business for our independent retailers has been a struggle this year compared to last year but fortunately, Musicorp’s business has held up well,” says Dan Roberts, Musicorp’s vice president of sales. “There are several factors that have kept Musicorp’s business running well: Excellent product selection of accessories and proprietary product lines, exceptional customer service in taking care of our dealers’ business, and the marketing tools that we provide to help our dealers draw customers to their stores, through special offers and other materials.”

Universal Percussion’s Shelley says they are actually boasting their inventory. “I’ve really loaded up – I want to be the guy that has the stuff,” he says. Recently acquired deals with lines such as Evans Drumheads, and Tama have helped considerably. “If you want Tama parts but aren’t a Tama dealer, I can sell to most retailers in most states. And now I’m a full Zildjian dealer.”

Smaller suppliers dealing with smaller products – i.e., instrument parts – seem to be almost benefiting from the current economic climate. WD Music’s Larry Davis has been in business long enough that this is the third recession he’s had to wiggle through. “We’ve always done well during them in part because we do everything guitar-related, and when you see sales of new guitars getting severely depressed, people look to get more out of their current guitar. We are seeing business up across the board.” WD has increased their inventory, ratcheted up their spread and depth, and is reaching out to more dealers every day.

Mark Ragin, CEO of St. Louis Music reports that they are showing a whopping increase on a variety of numerical fronts. Since his revered U.S. Band Company purchased long-respected St. Louis Music from LOUD and brought it back to its original home in St. Louis, merging the two in the shadow of the Gateway Arch, the new St. Louis Music (SLM) has picked up 1,203 new clients since November 14th through May 31st. And the sales period from January 1st through May 31st showed a 44 percent increase against the same five-month period of 2008. Then again, the company’s recent moves of establishing new partnerships (such as Martin accessories) and acquiring other organizations (like Zonda Reeds), it’s not a big surprise that they are already increasing business. “We’re very pleased that dealers continue to move their business our way,” Ragin says.

“Right now our business is holding its own compared to last year, which was a very good year for M&M Merchandisers,” says COO Chuck Franklin. “We started the year off a little slow for a January, but business picked up over the next few months.” He adds that while he’d like to see the business grow further, so many retailers are flat or showing only modest growth patterns, and those people “should feel pretty good given the present economic situation.”

Some are offering a more sobering assessment. Pete D’Addario of P & D Wholesale Music supplies reports that business in general is down. The percussion distributor says that they were down even before this most recent downturn. D’Addario [no relation to D'Addario String company] points out that the percussion industry as a whole as been a little too “successful” for its own good. A combination of more, lower-end products that are in fact of higher quality are cutting into the more profitable high-end. “Those $6,000 drum sets are just not moving.” Then there is the too-low end. Drums are available at certain mainstream big box stores, and he laments the poor quality of some of those instruments. “Poorly made drums are like a tennis racket – if it looks beautiful but doesn’t work well, you’re not going to use it.” Finally, there’s the cost of his entry-level products, which are creeping up. What he used to pay $199 for he’s now paying closer to $250. Combine that with schools cutting music programs, and the assessment is grim.

“It’s all taken a big bite out of the business.”

The sunny side is the percussion accessory segment, which he says is going strong. “I still sell a boatload of Vic Firth sticks. Sticks and drum heads because drummers break those.”

Dana B. Goods is also reporting a softer year. “I think we’re experiencing the same challenges as everyone,” says Titus, marketing communications manager.

Tom Vallis, vice president of LPD says that while our overall domestic business is about the same as last year, their proprietary lines have increased substantially both domestically and internationally.

“Our business has been affected by the economy mainly on the high end instrument side,” says Chesbro Music’s Vanetta Wilson. “Last year we had trouble getting low to middle priced instruments from the factory due to capacity and this year there is no problem.”

Trends, Deals, and Proprietary Lines
“It is no surprise that our accessory items like our pedal lines and our value-priced Aria guitars and MTD Kingston basses are selling well,” says Titus. “But many of our boutique, high-end products are not selling through very quickly.”

Shelley says his Remo hand percussion products are doing particularly well. Otherwise, it’s the low end that is carrying the day. Inexpensive drumsticks, particularly Universal’s own Cannon brand, are strong. “Cannon percussion products, entry level player [products], drum pads, bell kits accessories are doing well. Also things like cymbal felts and wing nuts – people are buying those more than ever. They want to keep their current set working well rather than buy new.”

“Right now it seems as though consumers are spending their time at home,” Franklin of M&M says. “We are seeing that accessories across the board are doing very well. I guess the guy or gal who wants a new guitar is satisfied right now with putting some fresh strings or new pickups on their old guitar instead of spending the money for a new instrument. We saw this trend going into the latter part of 2008, and we increased our offerings in this category going into 2009 and it has worked out well for us. In our spring catalog we added over 600 items and most of them fell into the accessory category.”

One “trend” seems to never dissipate – it’s just that during these times, it becomes even more important.

“Retailers are looking for margin, and looking for the better deals,” Ragin of SLM states. Recently they put together a 16-page flyer of close out items and emailed it out in PDF form just to see if there was any interest in that at all. They never got to print it because retailers immediately jumped on all the bargains. Now they are doing another one filled with nothing but close out items.

“And we’re having a record year for reeds,” he adds. “We’re already at the numbers we were at for the entire last year, and that was a record year, too.” Building on their wide selection, they recently added Tom Alexander Superial reeds, and the previously mentioned acquisition of Zonda Reeds, which are made in South America.

LPD has been ambitious with their proprietary lines, and Vallis says that’s where the increase has been for them. “Paracho Elite, our Latin themed instrument line, is now being carried by several of the major U.S. retailers and we have expanded in offering this product to dealers in both Europe and Japan,” he says. “Many dealers are finally realizing the importance in offering products for the increasingly growing Latin population.” He adds that they have taken on distribution of Canadian guitar maker Sparrow this year. “They offer guitars with custom paint finishes reminiscent of the days of tattoos, hot rods, and pinball machines, which has been popular. We are basically helping build this brand from the ground up in the U.S. market.” They are also experiencing a record year for our Italia Guitars, a line that features guitars with the same retro flair of the Italian made guitars from the 1960s.

“And finally, we have also just announced that we worked out a deal to distribute Line 6 PODs, effects, wireless products, and accessories. We expect this to contribute tremendously to our overall growth this year. We are continually looking for new product and new lines to keep up with the most current and hottest trends, as well as offering dealers mainstay items that will keep them profitable. A lot of effort goes into selecting and building our proprietary lines, because it is so important and contributes to much of our success at LPD. While we are a full line distributor, our proprietary lines have certainly been the most affective in developing relationships with retailers. For example, something as simple as our City Limits Strap Line has been a huge success for us. A lot of thought went into branding and strap selection, by offering dealers unique straps, with good quality materials, while making sure that we could offer all this at excellent price points.

“The most important factor in offering a proprietary line is its sell through and profitability for a dealer. For this reason, when we develop a proprietary line, we spend a great deal of time and research analyzing the marketability, and working with the factories on quality so that we are able to confidentially guarantee to our dealers that this product will be a success. If you can encourage dealers to try your product and they can experience its success for themselves, they will begin to look to you for other products as well.”

For WD Music, the current trend is to fix guitars, so retailers who have guitars parts behind the counter – or worse, in a box in the back room – don’t do as well as those who display openly on the floor. “A lot of dealers don’t like to mess with guitar parts for a number of reasons, but if they are willing to make the effort, it’s a profitable business. The parts that go into a guitar are wear items. The knobs, the pick guards – they probably get more abused than car parts. Especially the way rockers play! A few new parts bring the guitar back to life.”

Universal Percussion is like many wholesalers, and is reacting to the current times by running more specials. They are also getting manufacturers to cooperate with co-ops. “For example, we had a May Day sale on May 1st that allowed all domestic suppliers 10 percent off on one order – order on May 1, and you get an extra 10 percent,” explains Shelley. “There were no strings attached and we really did a mountain of business. We’ll do that again in July for Summer NAMM. The manufactures have really stepped up and helped out. Some that weren’t willing to do that the first time have come back and asked to participate again.

“Business is tough for everyone, and dealers need to make more margins. That’s the solution to all of this – make more margin.”

Wilson of Chesbro reports accessories are holding their own in this economy and niche products such as ukuleles are up. And their proprietary product lines have experienced increases which include the Anthem and Tanara brands. “These electric, bass, and acoustic lines are produced solely for the independent dealers with competitive margins and features. Teaching impulse gifts and items under $5.00 price points are remaining strong in the music gift market, while gifts over $15.00 have softened.” She adds that they have created special programs in each category of the business, and also have given specials to dealers on select products with special pricing and terms.

“We are always looking for new products to enhance our offerings to the MI and you never know what that will be,” adds Franklin. “Just like this last catalog we produced where we partnered with Hohner, VOX, Grover… and we increased the Hal Leonard offerings so we will continue in that same fashion as we move forward. One specific new product we will be offering is our Bass Guitar For Dummies Pack. We have once again partnered with Wiley Publications and this will be the third product in this line.

“As for pricing it seems the past year or so it is a moving target but I think we will see some stability on that issue as we move through the year.”

The Increasing Importance of the Internet
Across the board, wholesalers and distributors who offer retailers the ability to order online say use of this feature is increasingly popular, though all seem interested in augmenting the personal touch they provide with real human support, as opposed to replacing it. SLM has ballooned in personnel and now has eight inside sales people in the office plus two more that work from home. Newly installed president Stan Morgan hired another 10 to work as outside sales rep.

Yet while the personal touch is important, they have established a web site that allows retailers to order on line. “Every SLM dealer receives a personal account code and password, and they can get online 24/7 and see their inventory levels, adjust them, see their cost, and fill up their shopping cart,” Ragin says. The order goes out the next business day (sometimes sooner) and shoots back an email to the dealer with the UPS shipping code so they can track it. But he adds that this is mostly for those who send five to 25 orders a day. “For the dealer that wants one order, we still prefer they call and speak with one of our sales people, because then if say a certain mouthpiece is out, sometimes we can get them a better one at the same price, or make other suggestions.”

Davis of WD Music proudly tells that his was one of the earliest in the business to do a business-to-business Web site for their retailers. “We set one up in 1998, and it’s funny, at first there wasn’t much action … and now this past January we signed up one thousand dealers alone!” Davis is eager to do business with anyone big or small. Sometimes a dealer will say he or she is working out of his or her basement and ask if they can become part of the WD network; Davis tells them that’s how his business started.

“Online ordering has grown since we introduced it and we are constantly reviewing to see how we can update the site to enable more dealer usage,” Wilson says. “Right now a majority of our customers prefer to speak with an account executive. The web site is used during non-business times to check inventory availability. Also, authorized dealers use the web to place orders for consumer direct shipments.”

“The technology of the Internet and potential of email has given us the ability to communicate with LPD’s customer base in real time,” says Vallis. “We are able to relay new product information, order status, specials, pricing information, and communicate this immediately to our dealer base, which has increased overall efficiency and help us increase our sales.” Their Web site is maintained internally by a full time Webmaster/graphic artist.

Musicorp too has reached out to dealers online: “Growth in online participation in the last year has been huge!” says Roberts. “The convenience of stock-checking on a 24/7 basis, as well as entering orders on the dealers’ own timetables, has been extremely well received.”

P & D has just activated their Web site so authorized dealers can place orders that way, and increasingly, their dealers are taking advantage of it, reports D’Addario.

M&M Merchandisers recently did a major overhaul to their site, and the new look and feel has received good marks from its retailers, reports Franklin. “The dealers are really starting to use the site a lot. We see increased traffic almost daily. I think the biggest advantage for the dealer is the convenience. They can go to the site whenever they feel they have the free time to do so and they can do everything from check stock to track shipments all with the click of a button.”

While none sell direct, the awareness of how consumers use the Internet is fully realized. Roberts points out that the consumer has been using technology to research products before going to dealers’ stores to make purchases, therefore there’s a very real need “to make sure that Musicorp support our dealers with as much information as they can about the products they sell.”

And the power of social networking sites has not escaped them either. “Musicorp is also active in supporting its proprietary brands with email newsletters to consumers, individual Web sites (such as MBT Lighting, Barcus-Berry and Stageline), plus social networking sites for our brands on Twitter, MySpace, FaceBook, and YouTube.”

Titus reports that Dana B. Goods has invested a lot of time and resources into their Internet activity. “Besides participating in many of the social networking sites, we have also started working with Shopatron for Aria. This will allow consumers to buy Aria products directly from the www.ariausa.com site, with the nearest participating Aria dealer getting the sale. We feel good about this because it gives us a chance to help the dealers sell Aria guitars and basses without having to do anything more than fulfill the order.”

Credit Crunch
It appears, at least as far as MI wholesaling is concerned, the credit issues affecting other industries aren’t as pronounced in this industry.

Shelley reports that they haven’t had problems from Universal’s bank, even though he does business with one of the ones that almost went bankrupt and received bailout money. Credit restrictions are tighter in general for the bank’s clients, though his company has not experienced problems. As far as credit to his customers go, “I would say our credit department is a little more careful watching customers – we don’t know if everyone is going to make it through this economy. I hope they do.”

“Musicorp still makes every effort to provide the terms that its dealers request,” says Roberts. “If open terms are requested, Musicorp asks for credit references and if those references are positive, a line of credit is established, subject to monthly review.” But like other companies, they have seen more dealers using credit cards for payments in the last couple of years. “Some dealers that are experiencing weaker cash flows are more in need of open terms to help them get product in their stores and have time to sell through it, then pay the invoice. The current conditions in the marketplace require Musicorp to be more vigilant in order to maximize sales opportunities while minimizing the risk.”

Roberts adds that they’ve seen some dealers have their lines of credit reduced by banks or by their credit card companies during the period of the credit crunch “but fortunately, Musicorp’s dealers have been able to secure financing options for the most part. Due to current economic conditions, the recent trend shows more credit card and COD dealers are requesting open terms. Changes imposed by Credit Card companies are reducing and constraining available credit lines for some dealers.”

“We work on a very relaxed, hand-shake type [credit] system, and St. Louis Music will continue to do that until there’s an issue,” Ragin says. “We’ve had to get strict with a few retailers who fell a little behind, but by and large business hasn’t been affected.”