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"Retailers are looking for ways to become better merchants; it’s not one-size-fits-all any more."
——Eric Weisman, Alliance Entertainment
WHOLESALE CHANGES
An Exclusive HITS NARM Special Report on Rack-Jobbers
In the wholesale/one-stop/rack-jobber world, there are three names you need to know: Anderson, Handleman and Alliance. Not coincidentally, the three are nominated for NARM Awards in the Wholesaler of the Year, Large Division category.

Anderson, the closely held and tightly run Wal-Mart rackjobber, basically has one account that they serve, and it’s a huge one—just over 1,800 Wal-Mart outlets. Michigan-based Handleman handles Kmart, Bluelight.com, Meijer, Zellers, Shopko and some Wal-Marts—if you count 962 or so as some—totaling over 5,000 stores and approximately 11% of all music sold in the U.S. With a more diversified client base, young upstart Alliance has emerged as the contender to watch.

Formed in 1991, the Coral Springs, FL-based Alliance Entertainment employs 1,000-plus people across all operating divisions. Net sales have grown from approximately $300 million in 1998 to $750 million in 2002. In 1999, private investment firm The Yucaipa Companies purchased Alliance. And later that year, Alliance then acquired Digital On-Demand (including its subsidiary RedDotNet), a leading distributor of digital entertainment content into retail. Alliance’s accounts include Barnes & Noble, Toys R Us and CVS, among others, totaling 5,000 accounts in more than 25,000 brick-and-mortar stores.

AEC’s e-commerce spans Internet fulfillment for the likes of Barnes & Noble, Best Buy, Circuit City, Blockbuster, Amazon.com, Univision and QVC. Mega-weights Microsoft, AOL, Yahoo, Pressplay and RealNetworks are among those that license the deep data base of AEC’s AMG (All Music/Movie Guide).

Alliance President/CEO Eric Weisman isn’t content with his company’s standing; the recent attempt to purchase Liquid Audio shows a commitment to digital distribution and innovation, while product diversification has helped its customers make money in a down music market. (Anderson eventually bought Liquid Audio’s assets in December 2002 for $3.2 million.)

"It’s not the case anymore that a rack is a rack and a wholesaler is a wholesaler," Weisman says. "Marketplace, time, technology, customer requirements and innovation have blurred the lines. Retailers are looking for ways to become better merchants; it’s not one-size-fits-all any more. It requires being able to understand their needs and have the resources to focus on those needs and help them become better merchants. That requires far-sighted thinking and anticipation about where the market is going."

In that sense, Weisman prefers the term "category manager" for the role Alliance plays in its customers’ business. Retailers rely more and more on Alliance and other rack-jobber/wholesalers to assist in meeting their merchandising challenges.

"It’s about being as responsive as you possibly can, as close to real-time as possible," says Weisman, whose company also offers consumer-direct fulfillment for online orders, picking, packing and shipping within 24 hours. "Everything that you do in your warehouse requires an investment to maintain the best service levels—to turn things around quickly. Everything in terms of your technology—from purchasing from the suppliers to managing the inventory in the stores, to supporting all sorts of electronic interfaces and communicatio—it’s all about being as close to real-time wherever possible. That’s been the real premium. And to be diversified in terms of where you can send product and ship to the distribution center, to the store level, and ultimately, to the consumer. Handleman, Anderson and Alliance all have these different attributes to one degree or another, and each of them may excel over one vs. the other."

The changing role affects all aspects of the wholesale, we mean category-management business. It’s not enough to know the music that sells and get it to stores in time to capitalize on hits. Weisman notes, "There’s an emphasis now on supply-chain management infrastructure and logistics—material-handling equipment, technology, the ability to do things electronically with customers, all kinds of value-added services, e-commerce, databases. Now wholesalers are moving faster, one-stops and rack jobbers can react instantly. And legitimate digital distribution could be greatly impacted by one-stops and rack jobbers."

Even Anderson Merchandisers, which has set itself up as a wholesaler to Wal-Mart, understands the need to get into the digital space, recently bringing in Mike Abbattista as VP Label Relations in Anderson’s digital media division. Weisman sees digital distribution as still something of the Wild West, but knows that, as things shake out in terms of infrastructure, there might not be a place better suited to deliver digital music than the people who deliver physical music.

"The digital world is not the divine realm of suppliers, retailers and wholesalers," he says. "There is no existing blueprint that shows how the digital realm will be managed. There are a number of different views. That said, there is a lot of motivation to unlock the puzzle and find the solution in terms of how a commerce model or series of commerce models can be viable. We’ve set out to do it and are determined to be a leader."

As the industry continues to feel the impact of declining sales, wholesalers and retailers are understandably diversifying their product lines. DVDs made a great deal of money for a great many people last year, as did video games. Part of category management is making sure the dollars keep coming in, whether for Ozzy Osbourne CDs or Osbournes bobble-heads.

"Product diversification is critical," says Weisman. "I felt that prior to the current decline in the music marketplace, one needed to embrace it, because when you looked at both brick-and-mortar and e-tailers, it became increasingly important that they were selling all of these products. Managing that inventory in different ways on their behalf, you want to sell more than music."

But you’re reading this because you want to know where the music industry is headed. For once, there’s something to be happy about. Somebody smarter than us, GE Commercial Finance, recently extended Alliance’s line of credit; so surely they see a bright spot and a light at the end of tunnel if they think that music is a good investment.

In addition to his assertion that product diversification is essential, Weisman is bullish on music. "The decline in sales is not indicative of a decline of involvement by the public with music," he says. "Most people believe it’s quite the contrary and a big piracy issue is camouflaging the true dollar value of the industry. The people who want to be involved in music recognize that music is very much in the fabric of our society and culture, and believe that it will stay that way. All facets of the music industry will be required to evolve to be participants in the industry going forward. Music touches so many people’s lives on a regular basis. It’s going through its challenges, but the organizations that come through the other side are those that are able to create value and drive innovation into the consumers’ music experience. This is nothing more than a further evolution—like going from vinyl to CD, or going to a hybrid physical realm—shared in a dynamic manner with a variety of home entertainment products.

"Music itself is for the ages. It will always be a part of people’s lives. The business is no longer fully in charge of dictating how people experience music; it must evolve to meet the requirements and demands of the public. That’s not something that’s easy for many companies to do."

You have to like Alliance’s chances.

HOW THEY STACK UP

AEC One Stop Group
Fiscal Year-End: December 2002 estimated net sales: $750 million
One-year estimated sales growth: 25%+
2001 employees: 1,200
One-year employee growth: 20%
Anderson Merchandisers, which rack-jobs 1,886 Wal-Marts with music, and all Wal-Marts with video, is a privately owned company and the largest magazine wholesaler in the United States. Their carefully guarded operations stretch from Amarillo, TX, to Arkansas. They purchased Liquid Audio’s assets in December, 2002, getting into the digital distribution game.



Handleman Company
Fiscal Year-End: April 2002 sales: $1,337.5 million
One-year sales growth: 12.1%
2002 employees: 2,600
One-year employee growth: -3.7%
Handleman Company is a "category manager" and distributor of music in the U.S., U.K., Canada, Mexico, Brazil and Argentina. The Company is comprised of two operating segments: Handleman Entertainment Resources (H.E.R.) and North Coast Entertainment (NCE). NCE has two companies in its portfolio: Anchor Bay Entertainment, an independent home video label, and Madacy Entertainment, an independent record label.

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