Camelot Music, Inc. Business Information, Profile, and History

Company Perspectives:

Since its founding in 1956, Camelot Music, Inc. has developed into one of the most well-regarded specialty retailers in the United States. Today, Camelot ranks as one of the top five retailers in the music industry, both in sales volume and number of stores. During the last decade, Camelot has been one of the most productive mall-based music chains in the industry due to its leading production per square foot of retail space.

History of Camelot Music, Inc.

Camelot Music, Inc. is the third largest music retailer in the United States, with nearly 500 stores in 37 states and Puerto Rico. In the mid-1990s, following increased competition for sales from powerful non-music chains like Best Buy and Borders, and a general music business sales slump, Camelot entered bankruptcy protection, emerging in just over a year with renewed strength and plans to go public. The company, while still fighting for survival in a much-changed music retailing marketplace, is showing its determination to survive, creating an innovative web site as a means of marketing its products in cyberspace, and buying up additional chains of stores to extend its geographic reach.

Beginnings

Camelot Music was founded by Paul David in Massillon, Ohio, in 1956 as the Stark Record and Tape Service, a rack jobber which stocked LP and 45 rpm records in drug, specialty, variety, and grocery stores in the mid-Ohio area. A rack jobber operates by placing racks of products in stores, maintaining and stocking the displays, and paying the store for the space. David, one of 13 children born to Lebanese immigrants, was working as a sales representative for his brother's business when he noticed that a grocery store was selling used 45 rpm records. Taking note of the fact that they were not selling new LPs and 45s, he soon started his own business supplying racks of records to grocery and drug stores, later expanding his accounts to include large discounters like Woolworth, Kresge, and W.T. Grant. David's timing was perfect, as record sales were just beginning to take off in conjunction with the huge popularity of Elvis Presley and other Rock 'n Roll artists in the mid-1950s, with Motown and The Beatles just around the corner in the 1960s.

In 1965 the company opened its first retail store, in Canton, Ohio, adding a location at a Canton shopping mall a few months later. Camelot Music, as it was now known, concentrated on opening mall-based stores over the next few years, with a total of over a hundred by 1980. In addition to its own outlets, the company began to operate music departments in leased spaces inside large discount stores. Other, freestanding locations were opened as well. By the end of the 1980s Camelot Music had nearly 300 stores, including several new, giant-sized "Superstores," in addition to its standard outlets. The company's operation of leased spaces in discount stores, meanwhile, had fallen out of favor, and was phased out by 1990.

Over the years, a number of changes had taken place in the music business, and Camelot adapted to meet the demands of the marketplace. Vinyl LP and 45 rpm records, always subject to warping and scratching, were being supplanted by the less fragile cassette tape and compact disc formats by the late 1980s, with Camelot removing 45s from most of its stores in 1988, and LPs several years later. By 1988, cassettes accounted for about half of the company's sales, with compact discs making up a quarter of the total and LPs just five percent. Videotapes, added during the 1980s, had already grown to encompass a larger share than vinyl records, and were the source of some 10 percent of the company's sales. Other goods sold at Camelot stores included blank audio- and videotapes and music-related accessory products.

The 1990s: Further Expansion; Sale to Investcorp

Camelot had continually been expanding its number of locations and geographic reach, and in the early 1990s intensified these efforts, buying groups of stores from other chains, such as California-based Rainbow Records in 1990, and Philadelphia-headquartered Record World in 1992. In the latter case, Camelot teamed up with a United Kingdom-owned chain called Wee Three to buy part of the bankrupt company's holdings, with Camelot ending up with six stores and the inventory from several more. By mid-1993 the company owned more than 360 stores, and its annual sales topped $420 million. Keeping up with the times, Camelot remodeled a store in its home base of Canton to look sleek and futuristic, with banks of video screens, neon signs, specially lighted display systems, and a "New & Hot" bestseller area at the front of the store. The record industry's decision around this time to yield to public pressure and abandon the "longbox" cardboard CD display package also forced the company to redesign its methods of stocking and displaying products chainwide.

In late 1993, founder and majority owner Paul David decided to sell his interest in Camelot, partly owing to his view that the record business was heading toward a slump. The buyer was Investcorp, a Bahrain-based holding company which owned a number of different businesses including Gucci, Tiffany & Co., and Sak's Fifth Avenue. Investcorp was also expecting the music business to experience hard times, but was banking on major player Camelot to absorb floundering competitors' stores in the aftermath. Following the sale of Camelot, David turned the position of Chief Executive Officer over to Chief Operating Officer James Bonk, a 25-year company veteran. David was quoted as saying that he had chosen Investcorp over several other buyers because of the company's pledge to let Camelot retain the same management personnel and headquarters location. Following the buyout, the company was run in much the same manner as before, with additional new stores opening or being acquired. By January 1994, 16 Hastings Music and Books and three Cavages Music stores had been added. Investcorp's leveraged buyout had left Camelot with a large amount of debt, however, and this would weigh heavily on the company during the next several years.

The music retailing business was undergoing significant change at this time. Several different types of stores which traditionally had not sold music began to add and aggressively market it as a means of drawing in customers for their main lines of products. These included such large bookstore chains as Borders, discount superstores Kmart and Wal-Mart, and discount appliance chains Best Buy and Circuit City. The latter were particularly threatening to music retailers like Camelot, as they tended to sell recordings at significant discounts, and focus heavily on the bestselling CDs and tapes. All of this shifted business away from traditional music retailers. A Recording Industry Association of America study showed that record stores' share of the market had dropped from 70 percent in 1990 to just 52 percent five years later. In addition to this significant shift, sales of music recordings industrywide were falling off, as the baby boomers who had been "upgrading" from records to CDs finished that process, and the novelty of the new CD format, which had fueled a string of spectacular sales years, began to wear off.

1996: Bankruptcy and Reorganization

By early 1996, Camelot was experiencing financial difficulties. The company, with almost 390 stores, $400 million in annual sales, and 3,500 employees, announced in March that it would lay off 170 people and close 18 stores. In addition, as many as 80 other outlets were under review, with an estimated 20 to 30 more stores likely to close. Attempts were also being made to renegotiate leases at malls where some stores were close to the edge of failure. All of this could not keep the company above water, however, and in August Camelot filed for Chapter 11 bankruptcy protection. Under this form of bankruptcy, the company was allowed to continue operating while it reorganized and tried to pay off creditors. The company's debt was pegged at $476.7 million, with assets of $511.6 million. The largest part of the debt, some $300 million, was attributed to obligations from the leveraged buyout by Investcorp. A loan of $35 million was obtained from Chase Manhattan Bank to continue operating. CEO Bonk announced that the company would concentrate on its most profitable core group of stores, and intended to "become a leaner, stronger music retail specialist, committed to serving its customers and competing aggressively in the years to come." By this time the company had closed an additional 18 stores, and was expecting as many as 40 more to be shuttered. Other music chains had also gone into bankruptcy, including Nationwide, Peaches, Wherehouse, and Kemp Mills Music. National sales leader Musicland had suffered from losses and company restructuring, and many independent music retailers had gone out of business entirely.

One of the company's first efforts to get back on its feet came in November 1996, when it announced the creation of a World Wide Web site called CD Genie. The new site was set up to allow users to listen to 30 second sound bites from several hundred current releases and order discs online. Within a year the amount of sound clips was slated to be greatly expanded. Other services offered on the site included listings of store locations and music gift-giving advice. Prices were the same as in Camelot's retail stores, plus shipping charges, but customers were offered free subscriptions to Rolling Stone or Spin magazines after making a small number of purchases. The site's purpose was partially to compete with the growing phalanx of online compact disc retailers such as CD Now, but also was intended to help enhance sales at the company's struggling retail outlets.

Just over a year after filing for bankruptcy, Camelot filed a Joint Plan of Reorganization in U.S. Bankruptcy Court, which proposed eliminating the company's debt by converting it into equity for reorganization--in effect making the company's creditors its owners. This would also eliminate Investcorp's stake in the company. The plan was approved by Camelot's creditors and the bankruptcy court judge in December 1997, and the next month the company was allowed to emerge from court protection. In the 16 months since it had declared bankruptcy, the chain had closed a total of 88 stores, dropping in size to 307.

Free from court supervision, Camelot immediately began expanding again, announcing the acquisition of the 153 store chain The Wall, based in Philadelphia. That company's mid-Atlantic region, mall-based stores complemented Camelot's existing geographic distribution. In July 1998, Camelot merged with Spec's Music, which consisted of 41 stores primarily located in Florida. This put Camelot's total holdings up to nearly 500 stores, with outlets in 37 states and Puerto Rico. Later in 1998, the company began making plans to go public, with stock expected to be offered on the NASDAQ exchange.

Camelot Music, after years of steady growth that were derailed by market turbulence and a leveraged buyout in the mid-1990s, appeared to be getting back on track as the decade drew to a close. With major changes in music retailing still facing it, the company was reacting by launching a web site and acquiring chains of stores in complementary locations, as well as by focusing on its traditional strengths. Camelot's experienced management team, and the survival of its brush with bankruptcy (which a number of competitors had not managed), were clear signs that it was likely to remain in the game for some time to come.