Mts Inc. Business Information, Profile, and History

Company Perspectives:

With a keen eye on the future Tower Records' commitment to introducing its customers to the latest trends in new product lines is paramount to the organization's retail philosophy. Tower forges ahead with the development of exciting shopping environments, espousing diverse product ranges, cafés, artist performance stages, personal electronics departments, digital centers; stores that celebrate the unique interests and needs of the local community. At the same time Tower's strong presence online continues to add significant value to the company and to provide online customers with the world's largest selection of music and more.

History of Mts Inc.

MTS Inc., the little-known corporate name of the much more widely recognized Tower Records, is the second largest music retailer in the United States. In addition to CDs, cassette tapes, and music videos, MTS outlets sell movie videos, books, magazines, and newspapers, as well as its own line of designer clothing. In mid-2000 MTS had a chain of more than 183 stores that it owned and another 61 stores that were operated as franchises. Tower Records stores are located in some 20 countries on four continents. In contrast to many other large chains, Tower does not order for its branch locations centrally. The corporate philosophy is that each store knows best what its own local demand is and thus each store decides for itself what it will stock and how its stock will be merchandised.

Company Origins

Tower Records, the international chain of record, book, and video stores run by MTS Inc., traces its origins to a small drugstore in Sacramento, California. For much of the 1940s, young Russ Solomon sold records from the store, which belonged to his father. In the 1950s Solomon took a chance, left retailing, and tried his hand at distributing records. It was a miserable failure. He borrowed heavily to finance the business and in 1960, after eight years of struggle, he went bankrupt. The experience left a somewhat bitter taste in Solomon's mouth and it would be many years before he looked for outside financing help.

The experience did not dampen Solomon's ambition, however. A month after the failure of his distribution business, with a $5,000 loan from his father, Russ Solomon opened a record store of his own. It was located in Sacramento's famous old Tower Theater, which gave Tower Records its name. The Tower concept--'supermarket-style' record stores open until midnight with an incredibly deep selection of merchandise--developed through the 1960s. Fueling the store's success was the skyrocketing popularity of rock 'n roll and other recorded music. That trend hit its full stride in 1967 with the Summer of Love in San Francisco and the definite emergence of rock as a pervasive cultural, social, and political phenomenon. That same year, Russ Solomon met by chance a person who knew of a vacant supermarket on Columbus Street in San Francisco.

One year later, a Tower Records store opened in the former supermarket. It was significant for two reasons. First, the new store pioneered the Tower 'large-store concept'; it had 5,000 square feet of sales space, minuscule by later Tower standards, but twice as much as any other Tower store at the time. Second, it was the first Tower store outside Sacramento, and it represented the chain's first step in an expansion that would eventually reach four continents.

At first, Tower grew in California. The chain built a store in Los Angeles on the Sunset Strip in 1969. The location became Tower's flagship site for many years. Its location in the music capital of the United States put Tower on the map for the first time. The company expanded quickly beyond Los Angeles, though, to Berkeley and San Diego in 1972, to Chico and Stockton, California in 1974, and to Anaheim in 1975. It burst the bounds of its home state in 1976, opening stores in Seattle, Washington and Phoenix, Arizona.

Moving into Japan in 1980

Most companies would have set their sights on eastward expansion into other American cities. However, a combination of savvy, seduction, and serendipity took Tower into the market that would prove to be one of its most lucrative: Japan. In 1979, Solomon was approached by a group of Japanese businesspeople who proposed opening Tower franchise stores in Japan. Despite the rosy outlook, things began going poorly almost from the start. First, at the last minute it developed that Tower's Japanese partners, who had promised to finance the deal, had far less cash than they had let on. A badly thought-out distribution company foundered. A fact-finding trip by a Tower executive led to a company decision to set up and run a store in Japan itself, without any middlemen. That decision barely was made when the company discovered there was already a Tower store in the Japanese city of Sapporo. Its owners later told Tower people that they had used the name because they were so impressed by Tower's Sunset Strip outlet. In the end, Tower took over the Sapporo store and began doing business there in April 1980.

Just one year later, the company opened stores in the Japanese cities of Shibuya and Yokahama, and by the end of 1993 there were 16 Tower Records locations in Japan. Significantly, except for a few restaurants such as McDonald's, Tower Records was the first foreign retailer to crack the Japanese market. It contributed to the growth of the Japanese indie record scene by becoming the first chain in the country to stock records released by independent Japanese labels. In March 1986, Todd Rundgren performed at a Japanese Tower Records store, the first foreign artist to make an in-store appearance in a Japanese record store.

Expanding in the 1980s

Tower was already well-established in its first overseas market before it cracked New York City in 1983. The discovery of the store's site at Fourth and Broadway was due to another of Solomon's chance encounters. That store would encompass three stories with 30,000 square feet of sales floor. That Greenwich Village store was the anchor of Tower's east coast expansion and would long be the chain's flagship location in that part of the country. It would later lead the National Association of Recording Merchandisers to name Tower its 'Merchandiser of the Year.'

In addition to broadening its base of stores, MTS Inc. also increased Tower's product line steadily. In 1963, the company opened the first Tower Books location. 'It was a way for me to get books cheap,' Russ Solomon once told Billboard magazine. In 1989, at a time when the rest of the record industry viewed video with suspicion, Tower made a significant commitment to selling that product. The decision was primarily Solomon's, who realized early on that videos were collectible.

Contrary to rumors in the music industry that Boston would be the next eastern city invaded by MTS, Tower instead set its sights on Washington, D.C. It was attracted by the fact that competition among record retailers was less fierce in the capitol, and that there was a large market for classical music there that was not being served. Tower did eventually reach Boston, however, in 1987. By that time, the chain had crossed the Atlantic, opening its first stores in Great Britain. One year after Tower opened a small store in Kensington, England, it opened a huge, 25,000-square-foot outlet on London's Piccadilly Square. That move--like so many in Tower's history--was, in large part, unplanned. An acquaintance from the Hard Rock Cafe phoned Russ Solomon to tell him that the location was becoming available. It turned out to be ideal. By 1992 Tower had five stores in the United Kingdom, including sites in Glasgow and Kingston-on-Thames. Tower's growth in the United Kingdom was slow compared with that in Japan, and industry observers speculated that Tower had found the English market much more difficult that it had anticipated. Real estate prices were much higher than Russ Solomon expected. Tower also was said to have been hurt by a fine levied by British authorities for Tower's violation of laws barring Sunday hours of operation. Tower's losses were said to be significant, especially since it did 25 percent of its weekly business on Sundays.

Introducing New Products in the Early 1990s

Tower added stores in Dublin, Ireland and Tel Aviv, Israel in 1993. It began expanding its Far East presence in 1992, opening its first store in Taiwan. The following year it announced that it would open a second store in Taipei, along with stores in Hong Kong and Singapore. As in Japan, Tower confronted a company in Singapore that was already using the name, 'Tower Megastore.' It was a paper company with ties to Tower's competitor, Virgin. Other problems faced by Tower in Asia and Southeast Asia included strict government censorship of music that could be sold, laws that strictly limited parallel imports that would compete with releases by labels in the host country, and widespread record piracy that enabled rival record stores to undercut Tower by selling CDs and cassette tapes at grossly reduced prices. Tower expressed its commitment to sell only legitimately manufactured recordings in its stores. It soon discovered that its level of service and the variety of music it sold enabled it to compete without becoming involved in price wars.

By 1992, Tower had about $650 million in annual sales, which increased to more than $700 million in 1993. More than $500 million of those were from the United States; Asia accounted for approximately $120 million. The chain had 77 record and video stores, 15 bookstores, and three art galleries in the United States; it had five stores in the United Kingdom and Ireland and 16 stores in Asia. At the same time Tower was working hard to implement a new point-of-sale system linked to computers in individual stores that would make ordering and restocking more efficient.

Tower made its first venture into the clothing business in the summer of 1993. It introduced a line of streetwear, hip-hop, and grunge fashion that included jackets, shorts, and shirts, designed by The Lab, Inc. Announcing the new clothing line, Tower pointed out the 'synergy' that had always existed between music and clothing, remarking in Billboard, 'Clothing is a visual extension of what this company is about.' The clothing line was first presented in 30 Tower stores.

Tower sent a wave of panic through independent labels and distributors in September 1993 when it announced that it was consolidating its vendors. Henceforth, it would purchase approximately 70 record labels exclusively from a single distributor, INDI. Other distributors handling those labels would lose business they had previously done with Tower. The announcement led to a scramble among distributors of other labels to form a loose national network, hoping to remain in Tower's good graces. Although all Tower stores did their own purchasing, many regional distributors feared they could lose Tower business completely.

International Focus in the Mid-1990s

The year 1995 was marked by more milestones for Tower Records. In March it opened its Bangkok store, the first western-style music store ever in that city. The same month it opened an enormous new store in Tokyo's Shibuya district, bringing its total outlets in Japan to 22. Billed as the world's largest record store, the Shibuya Tower--a megastore if there ever was one--filled an eight-story building and boasted more than 52,000 square feet of sales floor. The store set a sales record on its first day of business--$450,000--four and a half times more than Tower's previous best opening day. Some industry observers questioned the wisdom of the mammoth store, speculating that it could mean Tower had overextended itself in a market where it was already well-represented and where thousands of other record stores were already doing business. The Shibuya store proved itself a star performer for the company for the rest of the 1990s, however.

Tower was the second largest record retailer in the United States by 1995, trailing only Musicland. Its annual sales exceeded $800 million. In April of that year it began selling records through America Online on the Internet, aided by the chain's new on-line magazine, Addicted to Noise. In August Tower teamed up with The Good Guys, a retail chain that sold consumer electronics, in the first WOW superstore in Las Vegas. It was the first time two chains ever shared a single store, down to the cash registers, without merging completely.

Tower had established a solid beachhead in South Korea by spring 1996. It opened a 10,000-foot-store in Seoul in June 1995 and, later, a smaller one in Taegu. In May 1996, it opened a second large Seoul store. As in other Asian countries, import restrictions and government censorship presented challenges to getting and keeping Tower's Korean stores stocked with music. Tower's three stores in Israel, in Tel Aviv, Haifa, and Jerusalem, also were thriving by 1996 and the chain was planning to add five more there by the end of the decade.

The year 1997 saw Tower expand its international activities significantly. It enlarged its presence in Singapore in 1997 when it took over the music departments of three stores at the Singapore airport. It began negotiations for a second Singapore franchise store that year as well. It extended its base in Southeast Asia into new territories as well. In September 1997 it became the first international music retailer to enter the Malaysian market. In January 1999, after nearly a year and a half of delays, it launched its first store in the Philippines. In October, it was the first international record retailer to enter the South American market, when it opened stores in Buenos Aires, Argentina and Bogota, Columbia. Previously, Tower had not ventured further south than Mexico City. By 1998 at least one-third of all Tower's sales came from stores outside the United States.

Planning for the Future

For most of the 1990s MTS Inc. was the object of speculation: When would it finally go public? Tower Records had always managed to finance expansion without the help of outside capital. Russ Solomon's early overextension of credit and subsequent bankruptcy also may have helped make him immune to IPO fever. In May 1998 Tower did not make a public offering. The company did, however, sell $110 million worth of seven-year subordinated notes intended to finance further international growth--into the Middle East, South Africa, India, and South America. At the same time, the issue won MTS $275 million in revolving credit from a group of banks headed by Chase Manhattan.

A year later MTS Inc. may have begun to question the wisdom of the note offering. In June 1999 it reported a loss of $2.6 million for its third quarter as well as for the nine months ending in April. Despite a gross profit of $76 million, it was forced into the red by sizable interest payments. MTS paid $4.5 million in interest during its third quarter of 1999 and $13.1 million for the nine months.

As 2000 turned to 2001, Tower Records continued to make wide-ranging plans for its future. Russ Solomon hoped to finally realize a lifelong dream of starting his own record label. A potential source of artists, he felt, could be Tower's own workforce, which included a sizable number of musicians or people who knew musicians. He also looked forward to the day when Tower had full department stores that would sell electronics, videos, books, photographic equipment, and clothes in addition to music. Solomon hoped to create a kid-in-a-candy-store atmosphere with such Tower department stores. Another ambitious program was a plan to begin selling records in a supermarket chain in Texas. Further expansion throughout the United States, into cities such as Memphis, Miami, and Houston, was also in the works.

Principal Subsidiaries: Tower Books.

Principal Competitors: Musicland Group Inc.; Virgin Retail Group Ltd.; HMV USA Corp.; Barnes & Noble Inc.; Borders Inc.

Chronology

• Key Dates:

• 1960: First Tower store opens in Sacramento, California.
• 1968: Tower opens its first out-of-town store, in San Francisco, California.
• 1970: Showcase store on Sunset Boulevard in Hollywood opens.
• 1979: Tower establishes a base of operations in Tokyo, Japan.
• 1981: First Tower video store opens.
• 1983: Tower opens its first East Coast store in Greenwich Village in New York City.
• 1985: Piccadilly Circus store in London, England opens.
• 1992: First Taiwan store opens; Tower acquires Bayside Record Distributing.
• 1995: Tower opens store in the Shibuya district of Tokyo, Japan, which is the largest record store in the world.
• 1996: TowerRecords.com is launched on the Internet.
• 1999: Acquisition of franchise locations throughout Israel; first store opens in Quito, Equador.
• 2000: First Tower 2 concept stores open within Good Guys automotive stores locations in Las Vegas.