Things Musician's Should Know About Music Industry Retailers
By Chris Loeffler |
Following up on our conversation on pricing in the previous article, I’d like to turn attention to the business of owning a small to medium sized music store, and how MSRP and MAP play a role in business planning.
On the surface, most people can rattle off some of the core expenses of running a music instrument store- rent, staff, inventory, and utilities. Those are fairly easy to guess at and vary widely based on location, real-estate prices, and pervading retail wages.
For the purpose of exploration, let’s use a middle-of-the-road model for geography and store size as the example of what it takes to run an independant music store. Let’s skip the initial expenses of starting a business (approximately $25,000 in store sign, furnishings, basic equipment, business license, etc) and assume a store is established enough that those initial costs have been recouperated.
In this example, let’s expolre a small retail store in a low-traffic strip mall (approximately 2,000 square feet, including showroom and storage/warehouse) renting at a low rate of $17 per square foot per year, costing about $2,800 a month. Add to that the typical “triple net” lease terms, which add common area maintenance, property taxes, and building insurance, and there’s likely another $200 a month to pay out for the space.
Going cheap on utilities, we can assume approximately $400.
Assuming a store is open ten hours a day, seven days a week and can get by on a barebones staff of 2.5 employees per day, prevailing retail wages for a small store manager, assistant manager, and two part-time employees in a median town (including taxes, insurance, etc) is about $8,000 per month assuming a $20/hr manager, $14/hr assistant manager, and minimum wage for the part timers after employer taxes, insurance, and benefits are paid out. If you’ve worked retail, you’ll recognize this is about as bare-bones as you can run a business and is likely a nightmare in balancing opening/closing activities, phone and email coverage, weekly inventory receipt, store merchandising, maintenance, cleaning, and bank runs.
Quick math shows that, assuming there is no outstanding debt from investments in the business and the owner is serving as the manager, this store has $11,500 in expenses just to be open and staffed.
Let’s assume (incorrectly) that all store merchandise is available on Net 30 terms (payment due within 30 days of receipt) and that all the inventory can be sold in that same time period (average turn rate for product in a music store is closer to 90 days) to simplify this next bit, because interest payments and the inability to use your money/space for something else muddy the water quickly.
Let’s also be lazy and assume business taxes (state, federal, etc) are 30% of revenue in this model.
Ok. That was a lot of math (and even more over-simplification), but it brings us to knowing that in any given store hour in this shop is costing $40 (not including marketing, website, taxes, supplies, inventory, admninistration) less 30% of profit earned on sales.
Let’s now assume this store averages $200 in sales per hour (if you’ve been to a mid-sized town’s music instrument store, you’ll know this is highly unlikely, but we will give the benefit of the doubt that they sell at least one $1k instrument per day in addition to the typical accessory, book, and entry-level instrument sales).
Using the MSRP vs MAP assumptions in this article, let’s say the retailer is paying 50% of MSRP for the gear he is selling, and sells at MSRP. This would mean they made $100 off the sales for that hour, less $40 in operating profits. However, credit card processing is 2.9%, and then they need to account for business taxes, meaning that $200 netted $40 in profit after taxes (assuming no marketing, website hosting, or additional expenses have been incurred by the business and the owner/manager is handling all bookkeeping, cleaning, and administration on their own, which again is highly unlikely).
The reality, though, is customers now price shop and have been trained to pay MAP (or as close to it as possible) and will quickly pull up Amazon or Guitar Center pricing when they hit the register. Using an average, $200 in MSRP sales are MAP listed around $160.
Working the same math above ($100 in cost of gear) with a $160 MAP price, we have $60 in profit, less the $40 for basic operating expenses, less the credit processing and taxes, and end up with between $13-14 in profit.
Multiply that by operating hours in a year, and you are looking at a whopping $50,000 to cover marketing, pay the owner (assuming they aren’t the manager), cover the interest charge of inventory that isn’t sold before payment is owed to the manufacturer, or anything else.
Again, this is assuming no janitorial services, no bookkeeping services, minimal staffing, and that all initial costs have been paid, which isn’t realistic for most people in most places.
Why do I bring this up?
To bring transparency to the pricing process from the retailer side, and to allow you, the consumer, to make more informed purchase decisions and consider what your retailer is worth to you.
There was a strong “car lot” vibe to how music stores ran in the 80’s and 90’s because there was margin to spare without risking the business. As things have tightened, retailers are called to drop their prices out of the gate to reflect the lower margins required by large online retailers. At the same time, small retailers still have an ingrained customer-base that believes it is meant to push on the lowest marked price for a real deal.
As a result, the person who walks in to purchase a guitar with a MSRP of $1,300 that is discounted to $1000 (MAP) may feel there is a lot of give in the price, not realizing that squeezing for an extra $100 off represents a 10% saving for them but cuts the profit of the retailer by nearly 30%. In addition to all the other costs previously mentioned that we aren't including in this equation, many stores do a proper setp-up on stringed instruments (or include one with purchse).
At the end of the day, the retailer needs to ask themself- Is it worth it to take on $650 in inventory liability to make $150 in profit within a couple of months? We already know the risk associated means they're adding $150 in business tax and labor to the equazion, so to break even the would need to sell the guitar they purchased and has a MAP of $1,000 for $850 just to break even.
Yes, the retailer may be willing to take it in the shorts in the moment to bring in cash flow in slow times, and that is an act of desperation, not a solid business move.
I’m not here to tell you that guitar is worth $1,000 dollars; only you can decide that. What I ask you to consider is what your retailer is worth to you? What is the ability to try gear before you buy it worth to you? What is the information and service worth to you? How about the same-day availability of sticks when yours break? -HC-
Chris Loeffler is a multi-instrumentalist and the Content Strategist of Harmony Central. In addition to his ten years experience as an online guitar merchandiser, marketing strategist, and community director he has worked as an international exporter, website consultant and brand manager. When he’s not working he can be found playing music, geeking out on guitar pedals and amps, and brewing tasty beer.