Handleman Company History

Company History:

Handleman Company is one of the largest U.S. distributors of prerecorded videotapes and music, as well as computer software and books. It stocks the shelves of large retail chains, a task called rack jobbing. Handleman also licenses the right to exclusive manufacture of some video and audio products.

Handleman was founded in 1937 as partnership in distributing pharmaceuticals by Philip Handleman and his sons Joseph, Paul, and Moe. The firm soon shifted to selling health aids. By World War II, the company was being run by the sons. In 1946 another brother, David, joined the business.

During the 1950s the company made a decision that proved to be crucial to its future growth: it began wholesaling records. When Joe Handleman, then president of the company, wanted to buy a friend a gift, he was shocked at the poor quality of the record store's display and selection. He sensed an opportunity for a record distributor. With record sales already expanding and poised for far greater growth in the future, this was a fortunate move.

With record sales fluctuating wildly as trends came and went, Handleman became an expert in inventory control. Eventually stocking the racks for major retailers like Kmart, Wal-Mart, and Woolworth, Handleman became better at managing record displays than a large store could be. Record sales generally consisted of releases by many different artists. Some records had a short lifespan, others might become best-sellers overnight. Overstocking or understocking a record might prove to be a big mistake. As a result, major retailers handed over Handleman responsibility for supplying selections, deciding how many of each to stock, advertising records and setting up promotional displays.

David Handleman took charge of the company in 1967. In 1974 he became chairman and CEO. The following year, under his leadership, the firm moved into book distribution with the purchase of Sieberts, a record and book marketer.

By 1980 the firm stocked records at over 8,000 retail stores. It was a tough year for record sales, with sales across the entire industry declining. The U.S. economy was in recession, the usual crop of yearly recording hits failed to materialize, and Handleman's sales dropped to $199 million, down from $224 million in 1979. With those sales in 1979, Handleman built a large inventory in anticipation of another great year. When the sales slump hit, the firm was stuck with excess inventory, and many record companies restricted returns to 20 to 30 percent. As a result, the firm's suppliers forced it to lessen its future inventories. So, for example, in late 1980 the firm bought only 65,000 copies of a new Barbra Streisand, less than half of what it might have bought a few years earlier. Despite these troubles, in 1980 the company became the largest record and tape wholesaler in the United States, moving past the Pickwick division of American Can.

About half of the firm's sales were coming from Kmart. Handleman used optical scanners there, and at its other major accounts, to track customer inventory and send the information to a central computer. The firm used the information to examine trends and decide what to carry at its distribution centers and at individual stores. Handleman's gross profit margins averages about 27.7 percent for these services. The company had 21 distribution sites throughout the United States and Canada. It picked up a major new account when it began stocking records at the Zayre chain's 250 stores in the Northeast United States. This gave it a total of about 5,000 record and tape departments.

Handleman was also expanding its book distribution business. The firm ran the book departments in 2,000 retail stores across the United States. It would only take customers for whom it already stocked records. This allowed the same sales representative to handle music and books for the same store, keeping costs down and simplifying the sales process. About 40 percent of book sales came from romance novels geared toward female customers. Books and magazines accounted for about nine percent of Handleman's 1980 revenues.

Handleman accounted for about nine percent of all sales in the record industry in 1980, but because so much of what the firm handled were major releases, it accounted for 20 percent of total hit sales. As a result, nearly 90 percent of the firm's revenues came from handling recorded music. This reliance on the products of one industry gave the firm a narrow base, however. And with the total number of records and tapes sold declining by 18 percent over a four-year period, the company wanted to broaden its product lines.

In 1983 Handleman began a major push into stocking home computer software. The company moved entertainment and education software into about 250 retail stores, hoping that the anticipated growth of the market for home computer software would make it a major new area of growth. Entertainment software made up over 50 percent of software sales in the large retail outlets Handleman served. Handleman also stocked word-processing software and software designed to help users with home and personal finance. In addition, the firm stocked accessories like computer discs and joy sticks for games, as well as some computer books. With its national distribution and inventory management systems already in place, the move into software seemed logical, and the company hoped to stock it at 4,500 stores by 1986. In 1984, Handleman won a contract to rack all software sold at Kmart.

To offset the decline in overall music sales, the firm also carried more lower-priced selections, and paid close attention to local taste preferences, for example, stocking more ethnic music in stores located where it was popular. It also pushed specialty items like exercise records and children's music, which made up 20 percent of music sales by 1983. The firm now had 22 distribution sites and over 500 field representatives, giving it a great deal of flexibility in transferring inventory around the country. In the meantime, music sales began to look up again. MTV, the cable music video channel, began to grow in the early 1980s, as did sales of high-margin compact discs.

In the mid-1980s a new medium came along for Handleman: videocassettes. In 1984 Handleman's clients had video sales of $1.5 million. Though videos were expensive at the time and most consumers rented them, Handleman believed that people would buy them if the price was low enough. The firm began by selling copies of movies that were in the public domain. With no royalties to pay, Handleman could duplicate them and sell them for $15 a piece, in comparison to the going rate of $70 for a copyright-controlled Hollywood movie. As a result, videotape revenues reached $43 million in 1985. Videos brought in twice the revenue per square foot of other merchandise and retailers began giving them more shelf space.

With video sales strong, the firm decided it would make more money if it actually owned some of the video products it sold. In 1988 Handleman bought Viking Entertainment, a southern California-based rack jobber of pre-recorded video and audio. Viking brought Handleman the master recordings for 500 public domain movies. Though Viking only had sales of about $16 million, it stocked supermarkets and drugstores, areas where Handleman was weak. The firm hoped to use this base to expand into the supermarket and drugstore sector. Soon thereafter, Handleman acquired a group of four companies that acquired licenses to copy and distribute taped versions of movies. The group had total sales of $10 million and were acquired in a stock exchange.

In the late 1980s Handleman was still making most of its sales through huge retailers, with Kmart accounting for 41 percent of sales and Wal-Mart for 15 percent. Despite a huge boom in software sales throughout the United States, software only accounted for two percent of Handleman's sales, partly because few people bought software through huge retailers. The firm was doing better with videotapes, however. By 1989 the firm was the largest U.S. tape distributor controlling about 15 percent of the market. In early 1989 Handleman spent $10 million for Video Treasures, which owned licenses and sub-licenses to duplicate and sell more than 400 films.

Recorded music still accounted for a large percentage of Handleman's sales--58 percent of its 1989 revenues of $646.7 million--but the market was changing. Sales of LPs were declining rapidly, replaced by fewer but higher-margin sales of compact discs. Consumers were buying compact disc players rapidly, promising more CD sales in the future. The firm also began a limited foray into becoming a retailer itself, operating Entertainment Zone, the video and audio department of a hyperstore opened in Georgia.

In 1991 the firm bought the entertainment software rack-jobbing business of Live Entertainment Company. Handleman had sales of $702.7 million that year, which increased to $1.2 billion the following year. In 1992 Handleman began stocking products by Lotus Software. In 1994 it completed a 42,000-square-foot addition to its headquarters building. Realizing that it was overly dependent on large retail chains, the firm began a push into Mexico and Canada. At the same time, it added 239 Woolworth stores to its customer list.

The company restructured in 1995, forming three business groups. The Core Business Group comprised Handleman's traditional rack jobbing in the United States in Canada for music, video, books and software. The firm formed North Coast Entertainment to focus on efforts to expand retail operations and proprietary products. The International business unit was designed to pave the way for future international expansion. While Handleman's only foreign rack jobbing took place in Mexico, plans were underway to move into Argentina and Brazil. Since rack jobbing was such a mature market in the United States, future company growth depended on moving into new territory, and the firm announced that it hoped to garner one-third of sales from International and North Coast by 1999. Handleman named Peter J. Cline president of Core Business Group and Louis A. Kircos president of North Coast.

In 1995 the firm acquired Starmaker Entertainment, Inc., a budget video company with about $15 million in annual sales. It also bought a majority interest in Montreal-based Madacy Music Group for $22.7 million, and music and video rack jobber Levy Music and Video. Madacy's former owner, Amos Alter, remained as president. Madacy, which created specialty music products, had revenues of over $40 million. It owned Mediaphon GmbH, a German music supplier that owned over 2,000 classical music master recordings. To increase its presence in the computer and multimedia market, Handleman increased its ownership of Sofsource, a software development and licensing company. Handleman had already owned 27 percent, and increased its stake to above 50 percent.

To increase its book sales outside of the United States, Handleman began two joint ventures. One, with the Canada Publishing Corporation, Toronto, expanded its presence in Canada. The other, with Grupo Video Visa, created two new companies: one for sellthrough video and music products, the other for rack-jobbing services. Handleman expected to invest $20 million in Mexico over a two-year period. The firm also planned to move into Argentina and Brazil.

The number of music retail departments serviced by Handleman had grown to 6,500. Music accounted for $653.4 million of the firm's $1.23 billion total 1995 sales. The firm serviced even more video departments--7,400, and video sales had reached $461.6 million. The firm made $57.6 million from book sales in 2,600 retail departments, a drop of 13 percent. Meanwhile, software sales were showing signs of taking off, growing 36 percent to $53.3 million. The firm now serviced 4,700 software retail departments. Handleman remained heavily dependent on its two largest customers. Kmart, which was experiencing financial trouble, accounted for 40 percent of Handleman's sales, while Wal-Mart accounted for 25 percent.

Handleman also worked to decrease its costs. In September 1994 the firm opened an automated distribution center in Sparks, Nevada. The 324,000-square-foot center used automation to cut distribution costs on the West Coast. The center also separated sales and merchandising from the firm's other operations, leaving its 1,300 field representatives free to focus on customer sales and service. Handleman expected to open an automated distribution center in the Midwest in late 1995.

Principal Subsidiaries: Handleman Co. of Canada; Entertainment Zone, Inc.; Scorpio Productions, Inc.; Hanley Advertising Co.; Softprime, Inc.; Rackjobbing, S. A. de C. V.; Rackjobbing Services, S. A. de C. V.; Michigan Property and Risk Management Co. North Coast Entertainment, Inc.; Anchor Bay Entertainment, Inc.; Sellthrough Entertainment, Inc.; North Coast Entertainment, Ltd. (Canada); Sofsource, Inc.; Madacy Music Group, Inc.; Mediaphon, GmbH; Madacy Music Group, Ltd. (Canada); American Sterling Corp.

Principal Operating Units: Core Business Group; North Coast Entertainment; International.

Further Reading:

• Cochran, Thomas N., "Handleman Co.: Building Tomorrow's Business Today," Barron's, January 23, 1989, pp. 55-56.
• Gubernick, Lisa, "We Are a Society of Collectors," Forbes, July 24, 1989, p. 80.
• "The Middleman's Dilemma," Financial World, October 15, 1980, p. 30, 32.
• Taub, Stephen, "The Sweet Music of Computer Software," Financial World, October 15, 1983, pp. 28-29.

Source: International Directory of Company Histories, Vol. 15. St. James Press, 1996.