Used CD Sales Put Industry in a Spin : Pop music: Record company executives oppose the practice because they fear that it will reduce the sale of new product.

Two of the record industry’s strongest arguments in persuading pop fans to join the compact disc revolution in the ‘80s--superior sound and durability--may be coming back to haunt manufacturers.

Frustrated by their inability to get record labels to lower CD prices, several major retail chains around the United States, including the Torrance-based 306-outlet Wherehouse Entertainment, have begun selling used CDs.

The retailers argument: Used CDs, which unlike vinyl or cassettes don’t deteriorate with age, are as “good as new” and only about half the price.

For consumers, this means merchants will charge roughly $9 for the most popular used albums as opposed to the suggested $16.98 retail price that has recently been introduced for superstar acts such as Garth Brooks and Madonna. Used CD versions of older albums by less popular artists can be purchased for as low as $1.

Record industry executives staunchly oppose the move because they fear it will reduce the money consumers spend on new product.

“We do not consider (the sale of used CDs) in any way positive to the retail record business,” said Henry Droz, president of Warner Elektra Atlantic Distribution Group, the nation’s largest distribution firm.

Officials at several companies have already begun designing strategies to squelch the used CD concept. Though none would comment publicly about their plans, sources say manufacturers may not only tighten restrictions on returns of opened product, but are also planning to retaliate against chains that sell used CDs by refusing to continue underwriting newspaper advertisements that feature their products.

“The sale of used CDs may just be a cottage industry at this point, but it could turn into something much more dangerous,” said David Blaine, senior vice president of the New York-based PolyGram Group Distribution.

Until now, the used CD market has been confined to small independent stores like Rhino Records in Westwood and other “mom and pop” outlets located mostly in college towns.

But that may change as a result of test marketing now being conducted by at least five major chains--a move that, if successful, is likely to spread to other retailers, industry observers say.

The leader in the testing is Wherehouse, which is now selling used CDs in 24 outlets, including five in Southern California: Torrance, Lakewood, Manhattan Beach, Van Nuys and Irvine.

“We aren’t doing this out of spite or because we’re trying to get back at the companies,” said Bruce Jesse, vice president of advertising and sales promotion at Wherehouse Entertainment.

“Retailers in Southern California are in the heart of a deep recession and pricing is certainly an issue with many of our customers. All we’re trying to do is meet the demand of consumers to introduce a lower price point on CDs. It’s a new way for us to earn money and our customers tell us they appreciate it.”

Other chains testing the sale of used, discontinued or close-out CDs include: the Amarillo, Tex.-based Hastings Books, Music & Video, the Milford, Mass.-based LIVE Specialty Retail Group, the Albany, N.Y.-based Trans World Music and Sacramento-based Tower Records.

The attraction for the stores is a potential 100% mark-up on used product as opposed to around 11% for new hit releases or about a 30% average for all albums when older, catalogue items are included.

Merchants have long complained that record label pricing policies have provided them with too little a profit margin on CDs. Prices, the retailers argue, have continued to rise even though manufacturing costs for compact discs have plummeted in the past decade.

“There’s a real battlefront being drawn here,” said Erik Flannigan, an editor at ICE, the nation’s leading CD newsletter. “The record companies have backed consumers and store owners up against the wall with these ridiculous CD prices. I don’t know what the record companies expect.”

Compact discs, industry sources estimate, cost record companies about $6 a unit to make and distribute. The companies charge retailers about $10.70 for superstar CDs and suggest they sell them to consumers for $16.95.

However, retailers say they are forced to significantly discount their hottest new CD releases to $11.98 because most consumers are reluctant to spend more than $12 for a compact disc. Merchants say they try to make up the tiny profit margin earned on new superstar product by charging $9 to $14 for dated catalogue titles for which they pay companies between $6.25 to $9.

Used CDs, on the other hand, not only provide consumers with the opportunity to purchase a quality product for $9 or less, they also allow merchants to pocket about 100% profit per sale.

When buying used CDs, merchants generally offer patrons between 50 cents to $6 credit, depending on their resale value. The stores pay about 30% less if the customer wants cash rather than credit.

In a related move, some retailers are experimenting with buying heavily discounted “close-out” merchandise from distributors--which, they say, can create another attractive low-end alternative for consumers. These discontinued records sell for $3 to $8.

Still, independent store owners who have dominated the used CD market for years caution that selling used CDs can be a very risky and labor-intensive venture.

Rhino special products manager Kenn Norman estimates that only 20% of the items he purchases can be resold for profit--with used CD sales contributing to less than 20% of the store’s total business. The bulk of used product the store buys must be sold off at cost during year-end close-out sales.

That’s why some major chains are hesitant to jump on the used CD bandwagon.

“The problem is that used CD exchanges are frequently done for store credit or cash,” said Arnie Bernstein, president of the 1,000-outlet Minneapolis-based Music-land. “If you’re a small independent operator, those kind of transactions are relatively easy to monitor. But if you’re a big business and you have hundreds of locations, I think it would be a nightmare to control.”

Even Tower Records president Russ Solomon--a frequent outspoken critic of what he calls “record company greed”--questioned the viability of mass-marketing used CD sales. Only four out of Solomon’s 77-outlet Sacramento-based chain presently sell used, opened or bargain-priced close-out CDs.

“Everybody knows that compact disc prices are too high,” Solomon said. “Still, I just can’t imagine how any retailer could generate enough volume selling used CDs to offset our poor profit margins. What we need is for the labels to drop prices on new product to stimulate growth in the industry.”

There is no indication that the multinational conglomerates that own the record companies intend to lower prices. As it is, Americans--who make up about 34% of the global retail market--pay about $6 less for new CDs than consumers in Japan and other nations around the world. If anything, prices are likely to continue to rise.

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A New Spin Depending on the demand, record retailers will give from .50 cents to $6 in credit for used CDs (30% less if the customer wants cash) and resell them for $1 to $9. For example, Madonna’s “Erotica” or Garth Brooks’ “The Chase” were sold last fall to retailers for about $10.26 wholesale price. Used, they now cost about $9. Suggested retail for a new CD: about $16.98

Actual sale price most retailers charge consumers: about $11.98

Amount seller receives from retailer for a used CD*: about $5

FinL retaile price for a used CD: about $9

* “Erotica” or “Chase” used as examples

Source: Record retailers in the Southern California area