Musicland — The Mall’s Record Store, Bought High and Liquidated Low

Summary

Musicland was the dominant music retailer in the American shopping mall — the parent of the Sam Goody and Suncoast chains and the Media Play superstores — and in January 2006 its holding company filed for Chapter 11 bankruptcy and was broken up. Tracing its roots to a Minneapolis record operation in the mid-1950s (and absorbing the older Sam Goody name, a New York fixture since 1951), it grew into the largest music seller in the United States, with more than 1,300 stores at its 2001 peak and revenue north of $1.8 billion. For two generations, the Sam Goody at the mall was where a teenager spent allowance money on a cassette single or a CD, and the chain's logo was as much a part of the American mall as the food court and the fountain.

Then the music moved off the shelf and onto the hard drive. Napster, then iTunes, then the simple habit of buying one song instead of a $16 album drained the category Musicland was built to sell, and the discount big-boxes — Walmart, Target, and Best Buy itself — undercut what was left. The mall record store, with its narrow margins and its rent, had no answer.

The financial story is its own small tragedy of timing. Best Buy bought Musicland in 2001 for roughly $685 million, at the very top, betting it could turn mall music stores into mall electronics stores. It could not; Musicland bled, and in 2003 Best Buy handed the whole thing to a private-equity firm, Sun Capital Partners, for no cash at all — Sun Capital simply assumed the debt and the leases. Three years later, Sun Capital's Musicland filed for bankruptcy. The surviving Sam Goody and Suncoast stores were sold to Trans World Entertainment and folded into the FYE banner; the Musicland name, and most of its stores, were gone.

Timeline

The Store at the Mall

For decades the economics of mall music were almost too good. A new album cost the label and distributor a few dollars to manufacture and reached the shelf priced at $15 or more; the markup financed the lease, the staff, and a generous spread of inventory. Musicland understood this better than anyone, and it scaled the model relentlessly — Sam Goody for the music shopper, Suncoast for the movie buff, and later the big Media Play superstores that tried to sell music, movies, games, and books under one roof. By the late 1990s the group was the largest music retailer in the country, with well over a thousand stores and revenue measured in the billions, and the brand was woven into the texture of American adolescence: the place you went on a Saturday to flip through the racks, read the liner notes on the back of a CD, and walk out with a thin plastic bag.

The trouble was that the entire enterprise rested on a single, lucrative artifact — the physical album, sold at a price the customer increasingly resented. It was a profitable business built on a product about to be unbundled, and unbundling is exactly what the internet does best.

Bought at the Peak

In 2001, Best Buy decided that the mall was where the young customers were, and that Musicland was the way to reach them. It paid roughly $685 million, plus the assumption of substantial debt, and announced a plan to put stereos and video games alongside the CDs and turn the Sam Goody footprint into a feeder for the Best Buy brand. The timing could hardly have been worse. Napster had already taught a generation that music was free for the taking; the first iPod shipped the same year Best Buy closed the deal; and the discount chains — Walmart and Target, and Best Buy itself in its own big-boxes — were selling hit CDs at prices the mall store could not match. The category Best Buy had just bought into was beginning a decline that would last most of the decade.

Musicland did not turn around; it lost money. By one account it cost Best Buy on the order of $85 million in 2002 alone, and it dragged on a parent company that was otherwise thriving. So Best Buy did the thing acquirers do when an acquisition curdles: it found the exit. In June 2003 it handed Musicland to Sun Capital Partners, a Boca Raton private-equity firm, in a transaction with no cash changing hands. Sun Capital took on the company's debt and its mountain of mall leases, and Best Buy took the writeoff. A chain it had valued at $685 million two years earlier was now worth less than nothing — worth, in fact, only what someone would pay to be rid of its liabilities.

The Five Factors

Aftermath

The Media Play superstores closed first, and with the 2006 bankruptcy thousands of retail jobs across Sam Goody, Suncoast, and the corporate offices disappeared into the broader collapse of the recorded-music aisle. The surviving stores that Trans World bought were rebranded FYE; a shrinking number limped on in malls for years as physical media kept contracting, but the Musicland and Sam Goody names — once unavoidable in any American mall — were retired. The dead Sam Goody storefront, like the dead Tower Records and the empty Suncoast, became a small landmark of the decade the music business spent in free fall.

The lasting mark is as a case study in timing. Best Buy's purchase is taught as a textbook example of acquiring a category at its peak, and the no-cash handoff to Sun Capital as a clean illustration of how distressed assets get passed down a chain until someone is left holding them at the bankruptcy filing. Musicland did not do anything uniquely foolish; it simply sold the wrong thing at the wrong moment, in too many stores, on too many leases.

Lessons

References

• Musicland, owner of Sam Goody, files for Chapter 11 bankruptcy West Central Tribune / AP
• Musicland Holding Corp. files for Chapter 11 bankruptcy Deseret News / AP
• Top music store chain agrees to buy Musicland for $104M Tampa Bay Times
• Musicland Wikipedia