National Record Mart, Inc. History

Address:

507 Forest Avenue
Carnegie, Pennsylvania 15106
U.S.A.

Telephone: (412) 276-6200
Fax: (412) 276-6201

Website: www.nrmmusic.com

Public Company
Incorporated:1937
Employees: 1,305
Sales: $129.9 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: NRMI
NAIC: 45122 Prerecorded Tape, Compact Disc & Record Stores

Company Perspectives:

We've learned the art and science of music buying and selling through more than 60 years of configuration changes, technological advances, and not-always-predictable musical and social trends. In the end, we always come back to what works best for us and our customers: MUSIC FIRST.

Company History:

With origins in the late 1930s, National Record Mart, Inc. (NRM) was the first music-store chain in the United States and is the nation's fourth largest specialty retailer of prerecorded music. NRM owns about 175 stores in 30 states, most of which are in the eastern half of the country. The company operates within five different store concepts: National Record Mart stores (targeting 12- to 24-year-olds and usually located in shopping malls), Waves (appealing to an adult market and positioned in upscale specialty stores), Music Oasis (the largest of the company's stores, either located in strip malls or free-standing, and appealing to a broad range of price-oriented consumers), Vibes (targeting college students and located on campuses), and Music X ("alternative music" stores based in malls). NRM also sells music online through two Web sites, where online shoppers can purchase new and used music products, download songs, and create customized CDs. The company is run by Chairman and CEO William Teitelbaum, who owns a 32 percent share in the company.

From Jitterbug Records to National Record Mart

National Record Mart began when Hyman Shapiro and his sons Sam and Howard decided to meet public demand for a store selling prerecorded music, a relatively new concept at the time. In 1937, the Shapiros opened their first music store, a tiny storeroom in downtown Pittsburgh called Jitterbug Records. The store sold used jukebox records--78 rpm "shallac" records&mdash′iced at one for a dime or two for 25 cents. The company had relatively little competition during this time, as prerecorded music was marketed through music sections in variety and department stores.

By 1941, the Shapiros had begun marketing new records in its original store as well as in two new stores, all three of which were renamed National Record Mart. Growth on a grander scale ensued during the postwar economic boom, and the stores began offering the 45 rpm records popular with American youth, in addition to the then-standard 33 rpm record albums. Hyman Shapiro's youngest son, Jason, became involved in the family business during this time, as did another key figure in the company's development. Around 1951, the company hired a teenaged Frank Fischer to wash windows and floors part-time at a Pittsburgh store location; after studying music at a local college, and following a stint in the armed forces, Fischer became a National Record Mart store manager and would eventually move through the ranks to become company president.

By the 1960s, the chain of National Record Mart stores totalled 20, all located in and around Pittsburgh. As the enclosed shopping mall came to replace downtown shopping districts as the preferred consumer outlet, new National Record Mart stores were more frequently established in malls. The company also kept pace with new technology in the industry; the development of stereo and quadrophonic sound meant enhanced product lines at National Record Mart stores.

In the 1970s, the retail chain expanded beyond Pennsylvania's borders, establishing locations in malls in Roanoake, Virginia, Buffalo, New York, and Chicago. By mid-decade, company founder Hymen Shapiro had retired, handing control of his company over to his three sons, who oversaw expansion to a total of 38 stores. In 1978, the Shapiros opened the company's first entertainment superstore, Oasis Records and Tapes, the name reflecting the growing importance of cassette tapes in the industry.

Still, the company remained a closely-held family operation into the 1980s, and expansion was slow and careful, with annual sales of about $40 million. The music-store chain had grown to 76 stores by 1986, when the Shapiro brothers were ready to retire. That year, the Shapiros sold the company to a group of investors, including the sons and daughters of the Shapiro brothers, headed by William A. Teitelbaum for about $10 million.

New Ownership in the 1980s

The 33-year-old Teitelbaum had little music experience at the time of the sale. A New York native and former polo player, Teitelbaum began his career in the finance department of L.F. Rothschild and later became a partner at Bear Stearns and Company, a financial services holding company. Teitelbaum was also the chairman and sole shareholder of the investment firm Remsen Partners, Ltd., and the sole director of Vista Properties Inc.

When he purchased National Record Mart, Teitelbaum admitted that he could not name a single artist on the alternative top ten list. "I had to slowly learn the industry," he explained in the Pittsburgh Business Times, adding "I had to make the change from looking at a green computer screen to understanding people." Nevertheless, Teitelbaum felt the time was right to enter the prerecorded music industry, which was on the brink of a transformation. Breakthroughs in digital technology were about to make magnetic media a thing of the past. Teitelbaum predicted that music-lovers would soon discard their records and tapes in favor of compact discs (CDs), which offered superior sound.

Teitelbaum's first attempt into the music industry in 1981 had failed. At that time he had tried to buy the CBS music library when it went up for sale. CBS was asking $100 million for the intellectual rights to all of its recordings, and the new owner would collect royalties every time the recordings were played. However, Teitelbaum could not persuade Bear Stearns to purchase the music library. So, in 1986, Teitelbaum and a group of investors purchased National Record Mart.

Plans for growing the company included aggressive expansion efforts to double the company's store total to 200; acquisition of small and mid-sized chains; aggressive advertising campaigns; and the introduction of a new concept store called Waves, which would eschew record albums in favor of CDs and cassette tapes. As the company celebrated its 50th anniversary, under new ownership but the constant leadership of President Frank Fischer, National Record Mart was ranked as the tenth-largest music retailer in the country by Billboard magazine. A new company logo, using the acronym NRM, was implemented, in an effort to eradicate the increasingly dated "record" from the company's name.

Financial Challenges in the 1990s

Despite high expectations, Teitelbaum's first few years with National Record Mart were not easy. The heavy debt the company assumed during the leveraged buyout, and its expensive plans for expansion, almost pulled it under. In 1991, industry experts predicted National Record Mart would file for Chapter 11 protection. However, Teitelbaum was determined to save the company. He sold off 20 stores to W.H. Smith's music chain, The Wall, for about $12 million.

The sale generated enough money for National Record Mart to go public. In June 1993, the company sold 1.7 million shares, which generated $10 million in capital that was used to pay off $3 million in debt. A few months later, the company switched bankers from Equibank to Barclay's of London, which gave National Record Mart a new $17 million revolving line of credit. With the profits from the initial offering and the new line of credit, the company was able to purchase the nine-unit Leonard Smith music chain, increasing the number of stores to 118.

The music industry considered Teitelbaum's turnaround of National Record Mart one of the most successful in the history of the industry. The National Association of Recording Merchandisers nominated National Record Mart for "Retailer of the Year." While the company did not win the coveted title, Teitelbaum presented each of his managers with a "retailer of the year" trophy for his or her outstanding effort.

Teitelbaum's turnaround of National Record Mart did not last long, however, as changes in the industry put a strain on the company. Specifically, large discounters, such as Circuit City, Wal-Mart, Kmart, and Best Buy, began selling prerecorded music at prices lower than the specialty store chains could offer. Many of National Record Mart's competitors filed for Chapter 11 protection during this time. Nevertheless, in 1996, Teitelbaum described the prerecorded music industry as challenging and remained optimistic. He assembled a new management team and hoped to profit from the folding of many competitors.

Teitelbaum also capitalized on changing demographics; as the baby boomers aged, the company shifted its focus away from teenagers and onto older, wealthier shoppers, aged 24 to 54. In 1996, the company refurbished its Waves Music stores, which targeted adult shoppers, to feature dome-shaped listening centers and interactive "Intranet" kiosks that allowed customers to download news and information about their favorite performers from the World Wide Web. Finally, Teitelbaum tried to attract patronage with exceptional customer service, something customers would not necessarily receive when they shopped at the superstores.

Some industry experts criticized Teitelbaum's plans for failing to focus on increasing the number of stores in the chain. Competitors such as Musicland, Camelot, Transworld, and The Wiz were expanding aggressively in an effort to generate sales. Teitelbaum quoted Muhammad Ali, saying he planned to "Let the other guy punch himself out." He added that while he did plan to expand the company, he would do so at a conservative, reduced rate. He planned to save money by purchasing existing stores instead of building new ones. He insisted that the company grow slowly and "absorb the body blows" of its competitors.

This strategy proved foresighted, and it worked--for a while. While its competitors began to fold, NRM went from being the nation's ninth-largest prerecorded music retailer to its sixth-largest, just by avoiding bankruptcy. Then, however, the competition became tougher, and NRM struggled. Large bookstore chains, such as Borders and Barnes and Noble, began selling prerecorded music, and in 1996, NRM lost more than $3.8 million on sales of $99.08 million. The following year, the company lost more than $1.1 million on sales of $99.43 million. Even though NRM was floundering, it had assumed less debt than its competitors.

During this time, NRM, backed by an unidentified investment firm, put in a bid for $80 million to purchase the 296-chain Wherehouse Entertainment. Industry experts doubted whether NRM--a company only one-quarter of Wherehouse's size--could raise the funds needed to buy the chain, which was operating under Chapter 11 protection at the time. The deal eventually fell through.

By 1997, the tables had turned and many in the industry believed NRM would be purchased by Wherehouse, which had emerged from Chapter 11 well-positioned with a great deal of cash. Industry trade publications speculated that the two companies would merge. In 1998, Teitelbaum confirmed that Cerberus Partners, Ltd., the New York Investment branch of a Bahamas-based company that owned the majority of Wherehouse, had purchased about 134,000 shares--more than three percent--of NRM's stock. Teitelbaum remained chairman and CEO of the company. He turned the role of the president over to Larry Mundorf, until the latter's resignation a year later at which time he assumed the presidency as well.

New Technologies and Products for a New Century

NRM entered into the online music business in 1998 when it launched two Web sites: http://www. wavesmusic.com and http://www. nrmmusic.com. Teitelbaum hoped the sites would prove superior to those offered by such competitors as K-Tel International, a music publisher and record producer based in Plymouth, Maine. Online shoppers accessing NRM's Web sites could initially select from over 25,000 titles. They could use the sites as "trading posts" to purchase and sell used products, download songs, and create customized CDs from more than 28,000 selections. NRM's sites also allowed dealers to sell overstocked CDs at reduced rates instead of shipping the CDs back to the manufacturer. The company received a percentage of the sales generated from these CDs.

Teitelbaum hoped the Web sites would open a new market for NRM, and he believed the Web sites could effectively compete with music mail-order companies rather than with the company's own retail stores. Around the same time, NRM signed letters to purchase 23 more stores, most of which were operating under the name Tempo Music. This purchase gave the company access to new markets in Hawaii and California and added $14 million in annual sales to the coffers.

In an attempt to diversify the offerings of its online service, NRM formed a partnership with Titan Sport, better known as the World Wrestling Federation (WWF), in March 1999. The partnership made NRM's Web site the exclusive sale source for certain limited edition WWF products. NRM's Web site was advertised on the WWF's site (wwf.com) as well as during WWF television programs. The company's partnership with the WWF increased customer hits on its Web site by 50 percent.

By mid-1999, NRM was maintaining about 175 stores in 30 states and had reported a modest increase in sales. The company had learned from its many ups and downs that to stay afloat in the prerecorded music industry, it had to adapt to industry and technological changes, which were often sudden and unpredictable. While NRM has proven it can survive in tumultuous times, the outlook for the specialty prerecorded music-store chains remained uncertain as the company moved into a new century.

Principal Divisions: NRM Music; Waves Music; Music Oasis; Vibes Music; Music X.

National Record Mart, Inc. History

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