🍾Happy Anniversary, Tower Records!!🍾

Tower Records Filed for Chapter 22 on August 20, 2006 (Long Disruption)

12 years ago today Tower Records Inc. filed for bankruptcy for the second time in 2.5 years, ending the company’s run in the United States (and most other places of the world).

The company first filed for bankruptcy in February 2004. The music retailer had approximately 90 stores and more than $110mm in debt that it owed to the likes of AIG Investment Group, Goldman Sachs & Co., JPMorgan Chase and…wait for it…Bear Stearns Securities Corp. The first bankruptcy was a short prepackaged bankruptcy that eliminated $80mm of debt in a debt-for-equity swap, leaving the company’s famous and eccentric owners with 15% of the company. The company attempted a sale process but had no takers. CIT Group provided the company with a $100mm DIP credit facility. O’Melveny & Myers LLP and Richards Layton & Finger PA represented the company (and both signatories to the petition actually still remain at those firms).

Interestingly, with some limited exception, the narrative explaining the company’s demise is not-all-too-different from what we see from retailers today. SFGate wrote at the time:

Tower's difficulties reflect those of the music industry during the past few years. Industry sales declined from $10.49 billion in 1999 to $8.93 billion in 2002, according to a report from the National Association of Recording Merchandisers, which attributed the swoon to digital downloading and copying. Retailers are also under pressure from online sales by firms such as Amazon.com, and from deep discounting by such rivals as Wal-Mart, and fierce competition from other chains like Borders and Barnes & Noble.

CBSNews added:

The filing is expected to help clear the way for selling the 93-store chain that suffered from rapid changes in the music business, especially the exploding popularity of downloading music for free from the Internet. Discounters such as Best Buy, Circuit City and Wal-Mart Stores also undercut Tower's prices and hurt the chain's earnings.

Those trends and a major slump in the music industry followed fast on the heels of the company's 1998 decision to expand using $110 million of borrowed money. The expansion drove Tower to a peak of more than $1 billion in annual revenue with nearly 200 stores in 21 states and numerous franchises internationally. But it has been rapidly downsizing since 2001.

A filing last April with the U.S. Securities and Exchange Commission revealed the retailer had lost money for 13 straight quarters.

Wait. Amazon ($AMZN)? Check. Deep discounting from the likes of Walmart ($WMT)? Check. Too much debt to fund an over-expansion? Check. Revenue declines on the basis of technological innovation? Check. We guess the more things change, the more they stay the same.

And stay the same they did. Even then. It took just 2.5 years for the company to wind its way back into bankruptcy court. And for all of the same reasons. Two months later, Great American Group, a firm that specializes in liquidations, emerged as the highest and best bidder in an auction for the company, winning with a bid of $134.5mm; it beat Trans World Entertainment Corporation ($TWMC), an entertainment media retail store operator that — shockingly — still exists. You may be familiar with it: it’s largest specialty retail brand is fye, which as of May 2018, still operated 253 stores. It is hanging by a thread, but it still exists — largely on the back of its etailz segment, which apparently thrives by doing omni-channel business with Amazon, Ebay, Jet.com/Walmart and Wish.

Anyway, Trans World had hoped to continue operating at least some of the Tower locations; it lost the bidding by $500k. And, accordingly, Tower Records liquidated. While there is such a thing as Tower Records in Asia, the name is all but a distant memory today.

Getting Creative With Some Brick and Mortar

Three weeks ago we wrote a feature (with a pathetic title - not our strong suit) that introduced you to the concept of ghost restaurants. To refresh your recollection, these were restaurants with no real physical location - just some branding, space in a commercial kitchen (like the co-working space unicorn WeWork, but co-cooking kitchen space for chefs), and a distribution mechanism like Seamless. The benefits of this concept are obvious: quick experimentation with food concepts, cross-pollination of food stuffs between different concepts, and avoidance of expensive and fixed long-term duration rentals, among other things.

Why doesn't WeWork for physical consumer products exist then? Well, now it does. In two discreet neighborhoods in New York, anyway (SoHo & Wiliamsburg). A new Y-Combinator backed startup, Bulletin, is a new platform matching up smaller brands with consumers with physical retail space. Rather than specialty retailers taking on expensive leases to display a few select racks of wares, they can simply rent a single sub-section of a larger retail shop on a month-to-month basis. Low friction, zero long-term overhead, mucho flexibility. 

Outsourcing rent exposure to Bulletin is even better considering that the brands otherwise maintain autonomy; they choose the products to display, deploy their normal price-points and coach the Bulletin-provided salesperson on how best to market and/or demonstrate their products (some risk on that last part, we'd think, but whatever). Bulletin alleges that the whole setup process can be done in 5 days or less.  Query whether a hypothetical brand has any control over whether its wholesome plush children's dolls are situated next to some dude named Lion's rad display of custom bongs, but that's for the brands to safeguard, not us. Perhaps there's some hipster version of co-tenant clauses? Regardless, on the consumer side of things that would be a wildly comical combination: just the right kind of humor and smorgasbord-like experience to get customers returning to the space. It's like an upscale branded flea-market. Throw in some craft beer made out of spider piss and there may just may be lines around the block. 

In a time when leases are the largest albatross weighing down retailers (well, other than billions in debt and dividend recaps), we welcome innovative and creative physical structures that aspiring brands can take advantage of. Most successful retailers these days are leveraging digital platforms - whether that's Amazon, Alibaba, Ebay or Etsy. Or - if you're half the average age of this newsletter's readership - Poshmark. SOME kind of brick-and-mortar has to work, right? Will Bulletin be the model? We've got no clue. But we welcome the attempt.