Tower faces supply cutoff

Sources say at least 3 big record companies have pulled the plug.

By Dale Kasler -- Bee Staff Writer
Published 12:01 am PDT Saturday, August 5, 2006

In a major new crisis for Tower Records, the West Sacramento-based music retailer has been cut off from product shipments by at least three major record companies, sources said Friday.

The move suggested that Tower's long-festering financial problems may be coming to a head. Retail consultants and others said Tower's 89 stores might not be able to last more than a few weeks without new product.

Industry sources, who asked to remain anonymous because they said they weren't authorized to speak for the companies, said Universal Music Group, Warner Music Group and EMI Group had halted shipments to Tower this week. The Los Angeles Times, which first reported on the matter Friday, said Sony BMG Music Entertainment also stopped deliveries.

Officials with the four companies declined to comment publicly or couldn't be reached for comment. Combined, the four companies are responsible for the vast majority of what's sold at Tower or any other music retailer.

The cutoff came a week after Tower hired a new chief executive, turnaround management consultant Joseph L. D'Amico, to sell the venerable retailer, which has been up for sale for several months.

Tower, which was in bankruptcy reorganization in 2004, has been for sale on and off since 2001 and is 85 percent owned by a group of bondholders who took charge after Tower emerged from bankruptcy two years ago.

D'Amico -- the company's third CEO since 2002 -- and other Tower officials didn't return calls seeking comment. Representatives of the bondholders who control Tower couldn't be reached or had no information about the situation. Officials with Houlihan Lokey Howard & Zukin, the Los Angeles investment bank hired to sell Tower, couldn't be reached.

One source familiar with the situation said Tower had been close to a buyout a few weeks ago. "In the end, the deal fell apart," the source said.

George Whalin, an independent retailing consultant from San Marcos, said Tower would need to resolve the situation in the next 60 days or so. Otherwise, "they won't get any of the new releases," he said. "The thing that feeds those stores is having the new releases."

As the product supply dries up, the company could face liquidation, he said. Tower employs several hundred workers at its West Sacramento headquarters.

The timing by the record companies was particularly ominous because industry officials, gathering this weekend at their annual convention in Florida, are making plans for the holiday shopping season.

"This is when the buying starts occurring for the holiday season," said Barry Sosnick, a retail consultant from New York.

One source who works closely with record companies said the industry had allowed Tower to buy music for quite some time on terms that were "extremely lenient … to try to keep them afloat." That means the retailer was given longer than usual to pay for merchandise.

But sometime in the last week or so, the source said, Tower decided it wouldn't pay its bills, prompting the shutoff by the record companies. "From a business standpoint, it had become completely unworkable," he said.

The news sent the music industry into an uproar and sparked speculation about Tower's prospects.

"I've had 25 people come up to me and ask, 'What's going on with Tower?' " Mike Dreese, a prominent music retailer, said from the National Association of Recording Merchandisers' convention in Florida. "There's certainly a mad scramble, a lot of anxiety. There are people literally running around here on cell phones asking, 'Have we shipped anything to them?' "

He said some smaller music distributors were considering halting shipments to Tower as well.

Shoppers at the Tower store on Broadway in Sacramento on Friday said they'd been aware for some time that the company was struggling.

"From about '97 on, we were always hearing rumors: 'Borders is buying Tower. The company's going to close a bunch of stores,' " said Jonathan Davis, 29, a student at the University of California, Davis. "But they've always managed to hang on somehow."

Tower's problems are well known in the industry. Once the nation's premier music retailer, the 46-year-old company began struggling in the late 1990s because of competition from mass-merchant discounters, online sellers like Amazon.com and finally the digital download phenomenon.

Retail music sales fell 17 percent between 2000 and 2005, according to the Recording Industry Association of America. Several long-established retailers went into bankruptcy, including Musicland and Wherehouse.

As Tower's losses piled up, the company put itself up for sale in 2001 but couldn't reach a deal, according to documents filed in a now-settled lawsuit between Tower and a consultant. In 2002 Tower was forced to sell its Japanese stores for $125 million to pay some of its debts.

Yet a year later it defaulted on its bond debt by skipping a $5.2 million interest payment. That touched off lengthy negotiations with creditors and another attempt to sell the company.

Tower went unsold but the debt negotiations generated a restructuring and early 2004 bankruptcy filing that transferred 85 percent of the ownership from Sacramento's Solomon family, who founded Tower, to the four major bondholders. In return, most of the bond debt was wiped off the books. The Solomons retained 15 percent ownership.

For its part, Tower recently opened a digital download store and a podcasting operation on its Web site. It also opened several new stores.

Up until a few months ago "the word on the street" was that Tower was doing reasonably well, Dreese said. "Their operations had turned the corner."

But in the last few months sales of DVDs -- which had been a growth item for music retailers in recent years -- began softening, Dreese said.

Tower had made sufficient progress that the recording merchandisers group named it "retailer of the year" in the large retail division in 2004 and 2005. The company is a finalist for the award again this year. The winner will be announced at the association's convention in Florida tonight.