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Tower spins bricks-to-clicks
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November 1, 2000: 11:52 a.m. ET
Tower Records keeps costs low as it builds promising business on the Net
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SAN FRANCISCO (www.redherring.com) - Sharing a stage at a PricewaterhouseCoopers and Morrison & Foerster Internet conference in Sacramento, California, last week with a charitable organization, Tower Records senior vice president Mark Bressler quipped, "Given what's happening in the music industry, we're headed towards being a nonprofit company."
Bressler, who's also managing director of TowerRecords.com, was joking, but his comment underscored how the Internet is radically shaking up some markets, especially music. While the music industry fights Napster and free music distribution in the courts, Tower Records has built a promising Internet business, furthering the argument that bricks-to-clicks ventures hold the upper hand against Internet pure-plays.
 TowerRecords.com is expected to be profitable this year, with sales doubling or tripling, according to Tower executives. The Web site is considered one of the 10 biggest Internet music sellers and the biggest among brick-and-mortar stores, according to industry estimates. Moreover, the company's customer acquisition costs are in the low "single digits," according to Bressler. Compare those numbers with Internet companies, some of which have spent more than $80 per customer on marketing.
Tower Records and TowerRecords.com are owned by West Sacramento, California-based MTS, a privately held company. Tower wouldn't disclose specific online sales numbers.
Lean Tower
It's a good thing Tower's online operations are doing well. The company's conventional business is struggling. Despite total sales of $1.03 billion last year, the company's net loss was $8.8 million. The advent of competition, both traditional and Internet, such as Borders (BGP: Research, Estimates), Amazon.com (AMZN: Research, Estimates) and CDnow (which was acquired by CNet (CNET: Research, Estimates)), is widely seen to be eating into Tower's sales.
At one time, TowerRecords.com was an IPO candidate, but those plans, like everybody else's in this space, have been placed in limbo. With its roots in a 35-year-old company, TowerRecords.com benefits from an established name, a big customer base and the widely recognized chain of 187 stores worldwide. As opposed to the insanely high marketing costs of dot.coms, Tower's four-year-old Web store spends little on advertising, relying instead on co-op marketing dollars from record companies that are promoting their artists.
Tower Records online operations worldwide vice president Jon Feidner said, "With advertising, we still do very, very little. Meanwhile, our sales continue to grow."
The Tower executives claim their Web operation is lean, having developed most of their technology in-house. Bolstering the Web site is a five-year-old mail order operation and a 10-year-old customer call center, both of which also serve brick-and-mortar store customers.
Tower employs more than 7,000 people worldwide, but has just 35 people dedicated to e-commerce, not including technology and customer service staff, which serve both online and storefront operations. Feidner says the company's Web personnel costs are high but still "quite reasonable" compared with its traditional stores.
Most of TowerRecords.com's revenue comes from CD sales. The company offers music downloads, but those sales are "extremely modest," according to Feidner. He says Tower is "totally committed" to digital distribution.
Lessons learned
Speaking at the PricewaterhouseCoopers/Morrison & Foerster conference, Bressler offered this advice for converting a brick-and-mortar business to an online success:
- Create a plan with a path to profitability. "It's absolutely critical to have a clear plan from day one," he said.
- Start with a great technology team and the best software available. "It's important to pay for it; we went the cheap route and made a ton of mistakes," Bressler said.
- Don't pioneer new technology products. (Tower tried it with Microsoft (MSFT: Research, Estimates), one of its expensive mistakes.)
- Be wary of online advertising deals, which tend to generate few click-throughs. On the other hand, Bressler says Tower tried to protect itself early on by making a short-term, rather than a long-term, dot.com deal. Unfortunately, its partner at the time was America Online (AOL: Research, Estimates), whose later success priced Tower out of the market. (AOL is involved in a merger with Time Warner (TWX: Research, Estimates), the parent company of CNNfn.)
- Ensure that senior management are on board from the beginning. By contrast, Tower's initial online foray had no business plan. "There was a lot of resistance," he says. "There was no integration with the stores. It was a total seat-of-the-pants operation."
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