Virgin Megastore — Killed by Downloads, Then Evicted for the Rent

Summary

Virgin Megastore was Richard Branson's grand statement about how entertainment should be sold — vast, loud, theatrical temples of music, movies, and games — and in the spring of 2009 every one of its stores in the United States closed. The first American Virgin Megastore opened on the Sunset Strip in Los Angeles in 1992, and the chain went on to plant flagships in the most expensive retail real estate in the country: the Times Square location that became the highest-volume music store in America, and the Union Square store a few miles south. At its 2002 peak the US chain ran about 23 stores and took in roughly $230 million a year. These were not mere shops; they were destinations, with listening stations, DVDs, books, and a scale designed to dwarf the mall record store.

What undid them was, first, the same digital tide that drained every music retailer. Album sales fell nationwide for most of the decade as file-sharing and then Apple's iTunes taught customers to buy single tracks, or nothing at all. By 2009 the six remaining US Virgin Megastores were generating about $170 million, down sharply from the peak.

But the final blow was real estate, and it is the part that makes the story unusual. In 2007 the chain's US operation was bought not by a retailer but by its own landlords — the developers Related Companies and Vornado Realty Trust. They held the leases on the most valuable Virgin locations, where Virgin paid rents locked in years earlier at a fraction of the going rate. The owners did the math and concluded the stores were worth more dead than alive: a higher-paying tenant would earn them far more than a music chain could. Forever 21 took the Times Square flagship. The Virgin Megastore was not so much defeated as repossessed.

Timeline

The Cathedral of Music

Branson's Virgin Megastores were built on a simple, expensive conviction: that buying entertainment should be an event. Where the mall record store was a rack of CDs near the food court, a Virgin Megastore was tens of thousands of square feet of music, film, games, and books, with listening posts, in-store appearances, and a deliberate sense of theater. When the format worked, it worked spectacularly — the Times Square store became the single highest-volume music store in the United States, a tourist landmark as much as a retailer, drawing crowds that bought CDs by the armful in the back half of the 1990s.

The model's strength was also its exposure. A store that grand needs a great deal of expensive real estate, and Virgin put its flagships in Times Square and Union Square, on Sunset Boulevard — addresses that command some of the highest rents on earth. As long as customers streamed in to buy physical music at full price, the format more than covered its costs. The format had no margin for a world in which the physical music stopped selling and the rent kept rising.

When the Music Stopped Selling

That world arrived on schedule. Napster had already normalized free music by 2001; the iPod gave it a home in the pocket; and Apple's 2003 iTunes Store made paying $0.99 for a single track the new normal, collapsing the album that had been the music store's basic unit of profit. Recorded-music sales fell nationwide in seven of the eight years that followed — a slow, grinding decline driven, as industry observers put it at the time, by illegal file-sharing and by the simple shift to buying songs rather than albums. A chain whose whole proposition was a vast room full of CDs was selling the one thing the market had decided it no longer needed to leave home for.

By 2009 the toll was plain in the numbers. The US chain that had run about 23 stores and $230 million in revenue at its 2002 peak was down to roughly six stores and about $170 million. The Virgin Megastore had not collapsed outright — its surviving flagships still moved real volume — but it was a shrinking business in a category in structural decline, holding onto a handful of trophy locations whose value lay increasingly in the floor space they occupied rather than in the music they sold.

The Five Factors

Aftermath

The closures put roughly a thousand store workers and dozens of corporate staff out of jobs in the spring and summer of 2009, in the teeth of a recession. The flagship spaces were swiftly re-let — Forever 21 took the Times Square store — and the landlords realized the higher rents that had been the entire point. Branson's Virgin brand carried on in music, mobile, and travel ventures elsewhere, and Virgin Megastores survived abroad under franchise in markets such as the Middle East, but the American chain, and its great theatrical stores, were finished.

The lasting mark is as a study in retail real estate. The Virgin Megastore's American end is the clearest case in the genre of a chain killed less by its own losses than by the value of the dirt beneath it — a profitable store closed because the floor it stood on was worth more empty. It sits alongside the other music-retail casualties of the late 2000s, but with a distinct epitaph: where the others were undone by their income statements, Virgin in America was undone by its balance sheet, and by landlords who happened to own both.

Lessons

References

• All Virgin Megastores in U.S. to close The Hollywood Reporter
• Times Square Virgin Megastore To Close Billboard
• Like a Virgin Megastore, shut for the very last time Salon
• Virgin Megastores Wikipedia