CD Warehouse Saves Plenty of Room for Success
Daily Oklahoman February 22, 1998
Gypsy Hogan
Oklahoma City; OK; US; Southwest
AÿAÿAÿJust a little over a year ago, Jerry W. Grizzle landed CD Warehouse on the Nasdaq exchange with a $ 5 million public offering of a million shares of common stock at $ 5 each.
The offering allowed Grizzle to pay $ 3.5 million to Mark Kane, company founder. Grizzle became the company's chairman and chief executive and moved corporate headquarters to Oklahoma City.
Kane retained two CD Warehouse stores in the Dallas-Fort Worth area.
Kane started the business in 1992 in a 100-square-foot Dallas flea market booth where he made $ 3,000 his first weekend selling overstocked CDs and cassettes.
Later, he moved into buying and selling used CDs - about three-fourths of CD Warehouse business today. The company also stocks the new Billboard Top 100 titles.
Grizzle gives Kane credit for a great business idea - and for recognizing that the company needed someone else to carry it to the next level.
Enter Grizzle, a brigadier general who owned and operated Orbit Finer Foods before becoming vice president and treasurer of Sonic Corp.
It was at Sonic, from 1984 to 1991, that he learned the art of franchising. That, combined with earlier experience at Pizza Hut and Keebler, gave him the background CD Warehouse needed.
"Mark didn't understand collective advertising, collective purchasing, common-color scheme. He knew those things were what was needed, but didn't know how to do them," Grizzle said in a recent interview.
"What I saw was a great franchising concept that didn't have the standards -standard look, procedures, operating methods - that I was used to with Sonic."
The last year has been a busy one, with CD Warehouse growing from 113 stores to 151. The year started with 30 contracts for new franchise stores and plans to build 12 company stores.
Same-store sales in 1997 grew by 13 percent over the previous year. Year-end results have not been announced. At the end of third quarter, however, the company was showing a net of $ 222,755, or 13 cents a share, compared with $ 140,241, or 8 cents a share, a year earlier.
Stock has been trading in the the $ 3.75 range.
One of the first things Grizzle, 44, did was hire Rand Elliott & Associates to develop a CD Warehouse prototype store. Grizzle had watched Elliott do the same for Sonic, designing a concept that can be built from the ground up or as a retrofit for existing space.
The new prototype will be unveiled to franchisees at their annual meeting March 21-22 in Oklahoma City. The first such store will open in Norman that weekend.
Grizzle recently talked about the expanding business:
- So, where do you go from here?
The past year we have tried to become very focused. People ask where are you going to go, but I really don't need to go anywhere. I'm already in 29 states. We need to fill in.
Mark's idea was to have one store in each state. What we need to do is steer into markets where we can get penetration, where we can effectively advertise.
So, we've taken Dallas from 17 stores to 23; Houston from two to five; Oklahoma City from three to five when two new stores open.
We're also updating our computer system so that each store can to talk to each other and back to the home office. Customers looking for hard-to-find titles will be able to go to a nearby CD Warehouse or sit at their home computer and search the inventory of all the stores in our system. Hopefully, by the end of the year, they'll be able to buy over the Internet and have the CDs shipped to them.
- Big retailers like Peaches and Camelot and Strawberries have teetered on financial disaster. What does that say for the future of CD Warehouse?
Best Buy, about two-and-a-half years ago, decided to use CDs as their loss leader, thinking people would come in for a CD and then buy stereos and other electronics.
At the time they did that, their sales were about $ 352 million. Their sales increased to $ 729 million, but their profits dropped from $ 58 million in 1995 to $ 1.7 million in 1996.
In the process, they destroyed the traditional music business because everyone else had to follow their prices or not sell anything. All of that did two things for us - it created a huge used inventory and the validity of the secondary market.
- How do you compare your situation with theirs?
All those chains are going into Chapter 11 (reorganizational bankruptcy), but they're not changing their philosophy of doing business. They're still selling new CDs and having to compete with Best Buy.
We sell new releases and price them competitively with Best Buy - $ 13.99 to $ 15.99. But, then, once customers are in the store, they start shopping the used CDs at $ 5.99 to $ 8.99, the older releases that Best Buy is still selling for $ 13.99. ...
Our competitors are stuck in massive buildings or major malls with high rents.
Our philosophy is real simple: Stay in Class A strip shopping centers, 1,500 to 2,000 square feet of space. Carry 10,000 to 20,000 pieces of music. And because of our system, we know that we will capture 80 percent of any potential sale that walks in the door.
I think the current and continuing state of the industry will feed our concept.
- What system do you mean?
We have a proprietary data base that is updated quarterly based on store sales. We are able to recommend the number of CD titles that should be in stock, a sales price and a buy price.
That's the great thing that Mark and his dad did. They took the time to put together 70,000 titles of music in a data base. All the new releases have been and are added to it. From those files, we can know how things are selling. If the popularity of a piece is dropping, we can adjust our buy price down.
It's a system that would be difficult for anyone to duplicate. But it's what allows a franchisee to know what to buy and sell without being a music expert.
- What makes you think a Best Buy or Peaches won't move into the used CD market?
I think at some point, they will recognize that they need to be part of it. But then I think they will look at CD Warehouse to help them. Whether that will be for us to set up their system, or they buy us ... I see a number of possibilities.
I know, though, that we will be a major player in that industry.
Textual Illustration:
Caption: Oklahoma businessman Jerry W. Grizzle says he is enjoying the challenges of shaping a young public company and positioning it for growth. -Staff Photo by David McDaniel
Credit: Staff Writer |
