Wherehouse Music — The West Coast Record Empire That Burned Twice

Summary

Wherehouse Music was the dominant record retailer of the American West Coast, and on January 21, 2003 it filed for Chapter 11 bankruptcy for the second time in eight years. Founded in 1970 in Gardena, California, by Leon Hartstone — and incorporated, with an entrepreneur's optimism, as Integrity Entertainment Corporation — the chain grew into a fixture of Southern California strip malls, its stores stacked with vinyl, then cassettes, then compact discs, and, eventually, used CDs, video games, and rental movies. By the late 1980s it ran nearly 300 stores; after a 1998 acquisition of the Blockbuster Music chain it briefly commanded one of the larger music footprints in the country. Then the format that had made it rich — the $15 CD — collapsed into a free file on a college dorm hard drive, and Wherehouse, already weighed down by debt, could not survive the second fall.

The company's epitaph, filed in court, blamed the obvious culprit. Management attributed its 2003 collapse to "the proliferation of free music on the Internet over the past several years, coupled with an exponential increase in the use of CD-burning technology," noting that music sales across the industry had fallen roughly 10 percent in the prior year. That was true, as far as it went. It was also the convenient half of the story: Wherehouse had already gone bankrupt once, in 1995, well before Napster existed, and had emerged having changed remarkably little about what its stores actually did.

What the second filing exposed was a chain twice felled by the same disease — debt — and then finished by a genuine technological shift it was too leveraged to outrun. The 1998 purchase of Blockbuster Music from Viacom, for more than $115 million, doubled the store count and the liabilities at the precise moment the CD's long decline was beginning. When the music finally stopped, Wherehouse carried more than $222 million in debt against $227 million in assets, and roughly 4,750 employees waited to learn how many of them had a job.

The afterlife was an absorption. In the bankruptcy auction, Trans World Entertainment — the Albany-based roll-up that had already swallowed Camelot, The Wall, and Coconuts — bought the surviving 148 Wherehouse stores for $41 million, closed 35 of them, and converted the rest to its FYE banner. The Wherehouse name, the one the radio ads had taught a generation to pun on, was gone from the strip mall within a couple of years.

Timeline

The Punning Empire on the Strip

Wherehouse was a creature of the Southern California strip mall, and it understood the geography better than almost anyone. While the mall chains chased department-store anchors, Hartstone's stores planted themselves where the cars were — freestanding boxes and corner units near the supermarket — and bet on volume, breadth, and a name nobody could forget. The radio jingle did the rest: a question and its own answer, "Where house? Wherehouse!", the sort of pun that lodges in a teenager's memory for forty years. By 1983 the company was public; by 1987 it ran close to 300 stores and was the West Coast's leading seller of recorded music.

It was also, for a moment, ahead of the industry on a genuinely clever idea. In the early 1990s Wherehouse leaned hard into used CDs — buying discs back from customers and reselling them at a margin the new-CD business could only envy. The major record labels, who saw no royalty on a resold disc, were furious; in 1993 four of them withheld cooperative advertising dollars from retailers trading in used CDs, and Wherehouse responded with an antitrust lawsuit. The episode is a tidy preview of the chain's whole later predicament: Wherehouse kept finding the cheaper way to put music in a customer's hands, and the cheaper way kept turning out to be worth less to the people who owned the music.

The Debt That Came Before the Download

The story Wherehouse told the bankruptcy court in 2003 — that the internet killed it — was incomplete, and the proof was that the internet had not been needed the first time. In 1992, Merrill Lynch Capital Partners and management had taken Wherehouse private in a buyout valued at roughly $250 million, the standard early-1990s arrangement in which a healthy retailer is bought with borrowed money and then asked to service the loan out of its own cash flow. By the mid-1990s, with long-term debt around $167 million and a softening music market, the arithmetic stopped working. On August 2, 1995 — years before Napster, before a single MP3 had been traded over a dorm-room connection — Wherehouse filed its first Chapter 11.

It emerged in January 1997 under new ownership, the New York fund Cerberus holding the majority, and proceeded to do the one thing a chastened retailer should not. Rather than rethink the store, it got bigger. In August 1998 Wherehouse paid Viacom more than $115 million for the roughly 378-store Blockbuster Music chain, a deal that nearly doubled its footprint and its liabilities in a single stroke. The timing was, in retrospect, exquisitely poor: CD sales were about to peak and turn, and Wherehouse had just leveraged itself to own more of the thing that was about to stop selling. When the second bankruptcy came, the Blockbuster Music acquisition was named as a principal source of the debt that sank the company.

The Five Factors

Aftermath

The 148 stores Trans World kept became FYE outlets; the 35 it closed, and the more than a hundred Wherehouse had already shuttered before and during the filing, emptied their shelves into liquidation sales and went dark. Several thousand employees — the company had roughly 4,750 at the 2003 filing — lost their jobs in the wind-down, a quiet attrition spread across hundreds of strip-mall storefronts rather than a single dramatic closing. For the customers, the loss was the browse: the long racks, the listening stations, the bin of used discs where a teenager could trade last month's purchase toward this month's.

Trans World's acquisition of Wherehouse was one move in a larger consolidation that briefly made the company the dominant force in mall and strip-mall music retail — and that consolidation, too, was overtaken by the same forces, as Trans World itself shrank for years afterward and eventually rebranded entirely. Wherehouse survives now mostly as nostalgia: a logo on a reissued T-shirt, a punning jingle half-remembered, and the recognition that it had been, twice, a textbook case of a leveraged retailer meeting a disrupted market and losing.

Lessons

References

• Bankrupt Wherehouse eyes layoffs Variety
• Wherehouse Music Stores Files For Bankruptcy, Blames Downloaders Techdirt
• History of Wherehouse Entertainment Incorporated FundingUniverse
• Wherehouse Entertainment Incorporated Encyclopedia.com (International Directory of Company Histories)
• Wherehouse Entertainment Wikipedia