MTS, Inc.

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MTS, Inc.

also known as: tower records

founded: 1960

Contact Information:

headquarters: 2500 del monte st., bldg. c
west sacramento, ca 95691 phone: (916)373-2500 fax: (916)373-2535 url: http://www.towerrecords.com

OVERVIEW

MTS, Inc. is one of the largest music retailers in the United States. Worldwide it operates more than 160 Tower stores selling CDs, records, videos, and books. In partnership with electronics retailer Good Guys, it also operates Wow! superstores, which sell audio and video equipment, along with Tower's music and video line.

COMPANY FINANCES

MTS Inc.'s sales grew from $830 million in 1994 to $950 million in 1995 and to $1 billion in 1996. Foreign stores account for more than one-third of the company's sales and were particularly important in boosting revenues in the mid-1990s, when domestic revenues were limited by price wars.

ANALYSTS' OPINIONS

In 1990, Gail Buchalter noted in Forbes magazine that if MTS, Inc. were a publicly held company, it would probably be listed as one of the Forbes 400. Buchalter went on to write that the company's target audience is young and fickle, so holding market share would always be a challenge. In 1998, Tower founder and president Russell Solomon told Billboard that he expected moderate growth over the following three years.

HISTORY

Russell Solomon began in the music business by taking over the record inventory from his father's Sacramento, California, drug store in 1952. The record wholesaling business he started was not a successful venture, but with a loan from his father, he opened a small retail record shop in Sacramento in 1960. The business grew steadily, and soon a second small store was opened.

In 1968, Solomon opened Tower Records in San Francisco. His idea was to cater to a diverse array of musical tastes by opening a store big enough to stock the many new musical acts that had come bursting on to the local and national scene. The new 5000 square foot outlet was small by Tower's current standards, yet twice as big as its previous locations. It was the right store, in the right place, at the right time. It became a youth hangout and an immediate success.

Variety was Tower's strong suit from the beginning. Solomon stocked both Top 40 hits and little-known titles his customers might have heard on their college radio station at midnight. He took someone else's problem—excess records sent back to the manufacturer because they did not sell fast enough—bought them up cheaply, and turned them into an asset. Tower became the place where consumers could find anything.

Tower's first Los Angeles-area location opened on Sunset Boulevard in 1970. Over the next 10 years, the chain grew to about two dozen stores, becoming much better known in the process. Solomon has always insisted that the expansion of the chain was more a happy accident than a planned strategy, resulting from him becoming aware of promising locations such as one in New York's Greenwich Village where he opened his first East Coast store in 1983.

Tower Records continued, and even accelerated, its expansion in 1989. By 1994, the company had 127 retail locations and began opening multimedia stores which sell books, video, records and computer goods.

STRATEGY

Tower's main strategies have been to offer as much variety as possible in big stores and to stay open late, generally until midnight, for the convenience of customers. The combined effect of these strategies was to keep Tower stores out of malls, where smaller, centrally managed chain record stores offer a more limited inventory, concentrating on the most popular mass market selections.

Another important strategy was to hire young employees who were knowledgeable about the music their contemporaries wanted, and then include them in buying decisions. This resulted in returning fewer CDs to the manufacturers, thus avoiding a penalty imposed if the return rate is too high. This youthful expertise is also purchased at a bargain salary.

Localized buying allowed Tower stores to keep their fingers on the pulse of the volatile singles market. Early in its history this was a specialty, with 45 rpm records flying out of the stores at $.79 each. Tower remains strong in local music by carrying recordings from garage bands and other artists whose work would not be found in most chain outlets. The result is an international chain in which each store looks surprisingly like a large independent.

INFLUENCES

The music retailing industry weathered a difficult period in the mid- to late 1990s. Record companies were charging retailers more for their goods, while competition between stores was forcing deep discounts to customers. The result was a serious profit squeeze. As superstores burgeoned, retail floor space was increasing faster than customer demand.

FAST FACTS: About MTS, Inc.

Ownership: MTS, Inc. is a privately held company.

Officers: Russell M. Solomon, Founder, Pres., & CEO; Dee Searson, VP Finance & CFO

Employees: 7,600

Principal Subsidiary Companies: MTS Inc. is the parent company for Tower Records, Tower Video, and Tower Books.

Chief Competitors: Tower Records competes with other music, video and book retailers, including: Barnes & Noble; Blockbuster; Borders; Camelot; Crown Books; Musicland; Virgin Group; and Wherehouse Entertainment.

While Tower kept careful tabs on its inventory, it took a contrasting view of the situation by actually raising prices rather than lowering them. The company's position was that shoppers wanted to find what they were looking for, even if they had to pay a bit more for it.

Although Tower keeps customer satisfaction high and merchandise return rates low, its huge inventory imposes its own costs. Big stores in good locations, however, are expensive to rent. By the late 1990s, Tower was not only competing with music stores but also with a variety of superstores and warehouse outlets that included CDs and videos among their offerings.

CURRENT TRENDS

According to a regional business newspaper, The Business Journal Serving Greater Sacramento, industry predictions were that electronic commerce over the Internet might make record retailing obsolete by the year 2000. Solomon maintained that people would always want to shop in stores and carry home their purchases rather than waiting for them to arrive by mail. The retail music business is driven by impulse buying, often by people who do not yet have the credit cards necessary for on-line purchases. Still, Tower hedged its bets. The company put out an electronic magazine, Addicted to Noise, and started selling CDs over the Internet.

Another up-and-coming technology poised to affect Tower's business is the Digital Video Disk (DVD), a new recorded media format which looks like a CD but can hold much more information. DVDs also have more options; for example, viewers can choose one of several languages when watching a movie. The format has been accepted by the "early adopter" market, such as home theater enthusiasts who value the enhanced audio and video quality, and the number of movies available on DVD is constantly increasing. While stereophiles are beginning to enjoy audio DVD as well, mass market acceptance will probably await the introduction of dual format CD/DVDs, which can be used either with the older CD players or offer enhanced quality in DVD mode. MTS Inc. is eyeing this appealing technology. However, the company must still weigh the potential for competing standards and the ability to sell DVDs at a reasonable price before becoming heavily invested.

PRODUCTS

Tower Records, selling mostly CDs by the 1990s, accounts for approximately 80 percent of MTS, Inc.'s sales. The company also operates Tower Video, Tower Books, and several multimedia stores. While the Tower Books outlets carry a full literary line, the combined Tower Records, Video, and Books stores emphasize books on popular culture, music, film, and television. Tower Records stores also have book sections focusing on music and entertainment. The general trend is for the company to offer some mix of its music, video, and book lines at each location. In addition to its retail outlets, Tower produces a music magazine called Pulse!

GLOBAL PRESENCE

Since its first Japanese stores opened in 1981, Tower has been aggressively moving into international markets, with most of its 1990's expansion overseas. Japan is a particularly strong market for Tower, with more than half of its 73 overseas stores. Other locations include Bogota, Buenos Aires, Dublin, London, Mexico City, and Tel Aviv. The chain had outlets in 15 countries in 1998.

In contrast to Japan, where all the stores are Tower-owned, some of the Asian countries forbid foreign companies to own retail outlets. In Malaysia, Thailand, the Philippines, Hong Kong, Singapore, and South Korea, Tower functions via franchise arrangements with local entrepreneurs.

With the exception of Spanish-language titles in South America, and a limited selection of Japanese-language titles in Japanese stores, almost all the titles in Tower's overseas locations are in English.

EMPLOYMENT

Tower tends to pay its young employees low salaries, but it offers an appealing work environment, allows considerable autonomy in decision-making, and promotes from within.

CHRONOLOGY: Key Dates for MTS, Inc.

1960:: Russell Solomon opens a small retail record shop in Sacramento, California
1968:: Solomon opens a Tower Records in San Francisco, California
1970:: Tower opens its first Los Angeles Store
1981:: The first Tower in Japan opens
1983:: The first East Coast store opens in New York's Greenwich Village
1994:: Tower begins opening multimedia stores, selling books, video, and computer products as well as music

Employees in the first California stores of the 1960s and 1970s enjoyed some very unusual fringe benefits— promotional parties with live bands; in-store concerts; hobnobbing with musicians, promoters, record company executives, and radio personalities; and time off to attend Vietnam War protests. Many of the current managers began at the first San Francisco store on Columbus and Bay, and its unique culture still dominates Tower's environment.