FEATURE STORY ‌ The Switch to Niche 

A revolution in the online marketplace makes local retailers a potential global force

click to enlarge Kent Wagner and Clayton Woodson are reinventing Millennium Music's business model with used CD's: "every day a greater percentage of our business is online."
  • Kent Wagner and Clayton Woodson are reinventing Millennium Music's business model with used CD's: "every day a greater percentage of our business is online."

If you were to pull into the parking lot of the Piggly Wiggly Shopping Center on James Island from Harborview Road and hang a left, you'd end up in front of the Video Station, the southernmost of the short retail strip's modest string of storefronts. Inside, units of wooden shelving spill over with thousands of VHS and DVD cases, 10 rows of them stretching back through a room not much bigger than a college student's apartment. Handwritten signs on the shelves hawk the contents of each: Drama. Suspense. Science Fiction. Comedy. Action. Classics. Other signs announce two-for-one rental deals on Tuesdays and Sundays. Battered cardboard VHS boxes moulder incongruously beside shiny plastic DVD cases, their once colorful cover images faded and washed out. The Seven Samurai. Jo Jo Dancer. Dangerous Liaisons.

The Video Station is one of the very last of its kind in Charleston. Owner Dan Kriekard has stood behind the register of the tiny store for 15 years. In that time he's outlasted Pic-A-Flicks, Video Houses, and National Home Videos on James Island. He's weathered onslaughts from Hollywood Video, Blockbuster, and Wal-Mart. He's watched videocassettes slide into obsolescence, witnessed the rise of the DVD and the triumph of digital cable, satellite television, and video on demand. He's seen his customers become Netflix subscribers, BitTorrent downloaders, and iTunes buyers. He's stood by as film distributors over the years squeezed the gap between when he got a movie and when cable channels got it: from 60 days to a month to, now, nothing.

"We have a great location here on Harborview," says Kriekard, who knows almost all his customers by first name. "It's a neighborhood thing, and that's the way I've operated it for all these years. We used to have to compete with price point and convenience and availability and selection. Now, I can carve out a little niche with selection and convenience. I can still supply an older film without making people wait a day or two like they do with Netflix. But I haven't seen the growth in the business I ought to see with the number of people moving into this area. So they're getting their entertainment other ways."

Kriekard's inventory does include a few shelves of new releases, but the greatest portion of it comprises titles going back 10, 20, even 50 years. These are not films you'll see anywhere in a Blockbuster these days, nor in a Wal-Mart or on Comcast On Demand. Some of them still exist only on VHS. He stocks titles that appear at The Terrace on James Island, and he can accommodate any customer with an impulse to view an Akira Kurosawa movie that same evening.

While any single one of these films will rent only very rarely, collectively they make up a significant portion of his rental business. Taken together, the rentals of new releases plus back catalog titles keep Kriekard in business. But eliminating either one would mean the end of the Video Station. As it is, Kriekard says, "I'm barely hanging."

To some eyes, the Video Station is a classic example of the 80-20 business model, also known as the Pareto principle, in which roughly 20 percent of the inventory accounts for 80 percent of all business. But if you were to extrapolate a little by taking the Video Station's business out of its bricks-and-mortar existence and plopping it down in the bitstream of the global online marketplace, you'd have a fair representation of another, more recently identified trend in business economics. Dubbed the "Long Tail," after the section of a standard economic demand curve it concerns itself with, this theory suggests that in the online marketplace, that back catalog of titles can become a crucial part of the revenue stream — potentially even more important than the new releases and popular sellers, taken as a whole.

Kriekard is limited by the size of his store and his customer base to a certain number of video titles — about 10,000, in his case. But in an online marketplace, with no limits on shelf space and a potential customer base of six billion, give or take, a seller can offer a far wider range of titles and open up new markets further down the tail of that demand curve. In an era without the constraints of physical space and other bottlenecks of distribution, narrowly-targeted goods and services can become as economically attractive as mainstream fare.

Last July, Chris Anderson, the editor of Wired, sent this theory booming like a thunderclap across the cultural landscape with his book The Long Tail: Why the Future of Business Is Selling Less of More. It's since become the go-to business buzzword of the moment, and you can bet it'll be appearing on end-of-the-year lists everywhere later this month.

click to enlarge When the long tail wags the dog: online commerce is ending the tyranny of hits, - shifting the marketplace equally to niche products available to anyone, anywhere
  • When the long tail wags the dog: online commerce is ending the tyranny of hits, shifting the marketplace equally to niche products available to anyone, anywhere

As explained by Anderson, the theory says that demand for products not available in traditional real-world stores is potentially as big as for those that are. "But the same is true for video not available on broadcast TV on any given day, and songs not played on radio," he writes. "In other words, the potential aggregate size of the many small markets in goods that don't individually sell well enough for traditional retail and broadcast distribution may someday rival that of the existing large market in goods that do cross that economic bar."

In other words, with the unlimited access the internet provides, the rare sellers, collectively, are just as important (or more) as the top hits. This notion stands to transform not just the way we buy and sell things online but, in a larger sense, the whole of what we perceive as popular culture.

The Long Tail is the engine driving some of the nation's biggest online retailers: companies like Amazon, Netflix, Google, iTunes, eBay, and other internet powerhouses. But there are very few Amazons and eBays and Netflixes, and hundreds of thousands of small retailers in the U.S. Taking full advantage of an economic model like the Long Tail for a King Street business is obviously impractical. But two of the theory's implications for smaller retailers make it supremely relevant to them.

The first is that we're transforming ourselves from a mass market into a niche nation, a society ruled less and less by a few mainstream-anointed "hits" that pander to the lowest common denominator (think Dan Brown's books, Britney Spears, and American Idol), and increasingly more by slivers of wildly different kinds of products that have tightly focused demographic appeal.

The Long Tail does not do away completely with the idea of mass-market fare and pop cultural dominance. There will always be the pop equivalent of the Olsen twins. But it ends the tyranny of hits, shifting the market equally to niches, making less visible but equally worthy products more prominent in the marketplace.

The second thing the Long Tail suggests is a result of the first: that people are changing their consumption and media habits. We have lived until now in a world of blockbuster-driven economics, one of scarcity, in which the things we bought and the media we experienced were defined by the limits on their availability: shelf space, channels, movie screens, parking spaces, square feet. Now, with the rise of online distribution and retail, we're entering a world of essentially limitless availability. We're no longer bound by those parameters, either as consumers or as producers. The Barnes & Noble in Mt. Pleasant's Towne Centre carries about 130,000 titles. But more than half of Amazon's book sales come from outside its top 130,000 titles, from the long tail of its back catalog.

The media environment has opened up similarly. There are now some 50 million blogs, tens of thousands of podcasts, and 17,000 magazine titles (compared to 9,000 in the '60s). TiVo, view-on-demand, iTunes, YouTube, and streaming web services now make the notion of a weekly living room appointment with a network program quaint, opening up the possibility of even more programming, all of it targeted to specific viewing demographics.

Yet at the end of the day, one number has not, and will not, change: 24. The amount of time we as consumers have to sift through and appraise all this new marketplace content is an unwavering constant.

With holiday sales in full swing, what, then, does all this mean for business owners like Kriekard, or for a boutique clothing retailer on King Street, or for local music stores trying to keep turning a profit when iTunes is among the top 10 music retailers in the U.S. and rising, and the nation's biggest music retailer, Tower Records, has given up the ghost and decided to liquidate all its physical locations?

Filter Effect

"I concentrate most of my time on web marketing. Online transactions make up at least half my sales," says Guilds Bennett, owner of luxe fashion outfit Miostile at 346 King Street. "I have a home on King Street, but we ship all over the world. One of our top shipping destinations is Singapore. I have no idea why. It's hard to get my head around that at times."

Bennett opened her store downtown in March 2005; about a year later she opened her online store, at Miostile.com. At just 28, Bennett has found that a familiarity and ease with the online marketplace translated into a keen interest in taking her own business online. She's since started a blog about the fashions she deals in and is considering a podcast. The designers Bennett carries aren't found anywhere else in town, and in few places outside L.A. and New York. Her business is driven by celebrity fashion choices, tabloid magazines, and blogs like PerezHilton.com and DailyCandy.com. Bennett's business has a foot on each side of the Long Tail: It's driven by mass-market appeal, but it's as niche as they come, due to the scarcity of supply.

click to enlarge At Miostile, Guilds Bennett sees half her total sales from online orders: "That'll continue to rise for us; it'll eventually be much more than what we do in-store."
  • At Miostile, Guilds Bennett sees half her total sales from online orders: "That'll continue to rise for us; it'll eventually be much more than what we do in-store."

Her website, therefore, is her business' most public face; the Miostile.com storefront gets far more eyeballs than her real-world version. It's received mention in national fashion-watching pubs like Lucky, InTouch, and In Style, and her blog helps her keep a high internet profile among other influential online fashionistas, linking back and forth with them to generate the kind of buzz that a customer leaving her shop and returning to Cincinnati simply can't create by word of mouth, no matter how satisfying the in-store experience.

"It's a niche market. I sell designers that a lot of people are looking for. It's very celebrity-driven, and we've been in a lot of national media. Having that national exposure and being in those tabloid magazines is part of it, there's no doubt."

Bennett says she feels it's important to have a real-world base or "flagship" instead of operating out of a warehouse. But she's also convinced that very little of her business' success, occupying the nether regions of the Long Tail as it does, is about the face-to-face contact with her clientele that someone like the Video Station's Kriekard depends on.

"It's about one word: Google," she says. "That's what it's all about. And being linked to other fashion blogs. Being on forums and chat rooms, you get linked from there. Customers don't know who I am and don't care. They don't care if it's coming from Hong Kong or wherever. Or whether it's coming from a warehouse. They just want it, and they want it overnighted."

In fact, a key part of what makes the formerly invisible Long Tail of products out there so suddenly powerful is the same thing driving customers in Hong Kong to Bennett's online checkout: what Chris Anderson calls "filters," or what we might more colloquially refer to as personal recommendations.

Word of mouth is the most easily understood form of filter; consumers have been relying on the guidance of friends for millennia. But the filtering tools provided by the internet — blogs, customer reviews, tags, file traders, and the endless varieties of social networking sites like MySpace, Frazy, and del.icio.us — allow personal recommendations to encompass anything any internet surfer has ever seen or heard of online. Some of the most effective of these are the automated "bots" that make recommendations based on your previous viewing or purchasing habits ("Customers who bought this item also bought..." and "If you like this item, you might also like...") Automated recommendations like these aren't based on popularity but on relevance, so infinitely obscure items are just as likely to be recommended as top sellers. This is where the Long Tail truly comes into view.

Because of this, Bennett sees Miostile's sales tilting increasingly toward her online business, eventually all but eclipsing her in-store revenues.

"You can only sell so much out of a store," she says. "But you can get to millions and millions of people in one day on the web. There's so much to learn, and there are no boundaries. This is where retail is going."

The Personal Touch

Bennett may be right regarding her own boutique's future, but economic prognosticators are more bearish regarding the economy as a whole. Almost 10 years after Amazon went public, online holiday sales are still less than one-tenth of the total. Granted, that's a huge number. But many don't expect it to rise much.

Based on figures from Thanksgiving to now, online sales during the holiday season this year are predicted to climb 24 percent to $24.3 billion, according to ComScore Networks Inc., a Reston, Va., research firm. Total seasonal sales, excluding online shopping, will increase five percent to $457.4 billion, says the Washington-based National Retail Federation. Most market watchers predict that online sales will eventually peak somewhere between 10 and 15 percent of total retail sales. But market watchers and predictions are notorious for being wrong as often as they are right.

Still, some Charleston business owners see plenty of reasons not to panic just yet if they aren't taking their businesses online, and there are plenty of them (see "Who's Riding the Long Tail," page 28). Clay Scales is the owner of 52.5 Records, an indie-minded music store that also offers rare and vintage vinyl and DVDs. 52.5 spent nine years on Wentworth Street before moving to a new location at 561 King; Scales has been with the company since the beginning, nurturing a population of regular customers, keeping an eye on the local rock, punk, and ska scene, and poking holes in corporate rock and everything it stands for.

While massive chains like Tower Records are crumbling, 52.5 has moved into a larger space. Scales attributes his resilience to a number of factors. As a retailer with a low overhead, he says he has a flexibility and mobility bigger companies lack. That flexibility also gives him the ability to diversify his inventory when necessary, he says. A larger space lets him bring in bands and host art exhibits that give his clientele another reason to come in. Most importantly for Scales, he has a business philosophy that makes the in-store, in-person experience more important than the transaction.

"An online sale is just a sale," he says. "Just buying something online is sort of cold. I think a lot of our customers feel the same way. Maybe there are some folks who actually enjoy seeing and talking to me," he laughs. "The person who buys something online isn't necessarily looking for that experience."

Yet Scales would also seem ideally positioned to take advantage of the increased power of the Long Tail, where hard-to-find and obscure items now can be marketed not just to a small community of sidewalk shoppers but to the global population.

Scales acknowledges he dabbled with an online mail-order business when he first set up his website corporaterocksucks.com a few years ago, with an online checkout and a secure payment system.

"I immediately realized that I couldn't stand it," he recalls. "I'm not in this business because I love selling. I could be doing anything if I just wanted to sell. I'm in this because I love music and talking about music and meeting the people buying the CD and talking with them. Even with a rare record, I'd rather sell it here for a cheaper price than put it on eBay."

A New Millennium

Not every business owner in Charleston is as fickle about moving their product, particularly the bigger retailers who, like sharks, can't afford to slow down business for an instant lest their margins be swallowed by overhead and back inventory.

Few businesses have been hit as hard by the internet as the music industry. While the Recording Industry Association of America regularly squawks about a sky-is-falling-scenario, mostly blaming digital downloading and piracy, few market watchers deny that a sea change is occurring in the way music is distributed.

The RIAA estimates that the overall retail value of the industry, physical and digital, was $4.9 billion during the first half of 2006. That represents a 6.1-percent decline when compared to the first six months of 2005. On the digital side, revenues from various formats, including downloads, kiosks, and digital videos, grew by a whopping 86.6 percent in the first half of 2006, with digital formats' share of overall industry value growing from 9 percent in 2005 to 18 percent in 2006.

According to a recent report by NBC Nightly News, there were 4,685 chain record stores in 1992, compared with just 1,695 today — a 74-percent drop. Tower Records, the single biggest chain retailer in the U.S., first filed for bankruptcy in 2004, then, in October, after yet another bankruptcy, the chain decided to close all its physical locations and set up shop online.

click to enlarge Video Station owner Dan Kriekard stares down the NetFlix economy: "April was the last month for VHS. They don't even make them anymore."
  • Video Station owner Dan Kriekard stares down the NetFlix economy: "April was the last month for VHS. They don't even make them anymore."

Ten years ago, Millennium Music owner Kent Wagner was as oblivious as the rest of the world to the changes brewing in his industry. Millennium had three successful stores in Charleston, franchises in Wilmington, Raleigh, and Durham, and plans for expansion across the Southeast. A decade later, Millennium has retrenched to a single store downtown, at the corner of King and Calhoun streets, and has only months left before the building's owners, PrimeSouth Real Estate, boot them out to construct a new complex of condominiums and smaller retail spaces on the busy corner.

But instead of wringing their hands or shaking their fists at the sky, Wagner and new partner Clayton Woodson are rushing to exploit the medium that's threatening to put them out of business.

"For a while we tried to ignore it," Wagner says. "The hardest part was trying to perfect traditional retail, then realizing that it doesn't matter how good you get — there's a line, like an asymptote. You can't sharpen a knife beyond a certain point. It took a lot to break through that and embrace the internet."

The result is an entirely new business model, one that mostly cedes the battleground of new album sales to the digital marketplace and focuses instead on the Long Tail — an inventory of tens of thousands of used compact discs that Millennium sells for exactly half what the same album would cost to download from iTunes.

"Our business model has changed, in a word, from 'new' to 'used,'" says Wagner. "We're big enough that we have a lot of useful momentum, but not so big that we're like Tower Records, too big to shift directions. It's great to be a mid-sized business with the advantages of both."

Millennium began its transformation a year ago, when it started offering a used CD trade for new iPods. That deal has since become one of its most popular services — 170 used CDs will nab anyone a top-of-the-line 80GB Video iPod that retails at $349, for example. The program is particularly appealing because, for iPod users, CDs are essentially round silver anachronisms, doing little more than gathering dust in a box in the attic once their contents have been legally burned to the user's iTunes library on a PC or Mac. Why not trade them in?

But the trade-in program also operates as the supply end of its new revenue model. Woodson and Wagner haven't eliminated new releases from their inventory, but their focus is on the warehouse-sized stock of used titles they now sell in-store and online at $5 per. (With an estimated 1,000 new iPod trades to date, they have an inventory of some 50,000 used CDs in inventory.)

The online store at feedyourplayer.com allows users to browse through a catalog of thousands of titles, but a purchase doesn't buy a digital download of the CD's contents, as it does on iTunes' music store. Instead, Millennium ships the actual CD (shipping is $2.99 for the first item, and .99 cents per unit thereafter) to customers, who are then free to listen to it or legally burn it to their hard drive, as they wish.

"You computer doesn't know whether it's new or used, and it doesn't really care," Wagner says. "Plus you get the cover art, the liner notes, all that."

Millennium sweetens the deal by pricing new CDs at $9.99 for each used one purchased. They've gotten rid of the old "Players Club," which offered due-paying members a discount on purchases (similar to Barnes & Noble's member program), and they've added DVDs, videogames, and Xbox consoles to the used CD trade deal. As they ramp up their online business, they'll phase out much of their in-store inventory — although the two say that the new location, wherever it is, will still provide a good physical browsing experience for shoppers.

Essentially, Woodson and Wagner reduced Millennium's prices 25 percent across the board, which might sound like suicide to a margin-obsessed manager.

"The thing is, a used CD is 70 percent less expensive than a new CD," Woodson explains, "but it makes almost the same margin. So we could have almost a 40-percent sales decrease and still improve our profitability."

While Millennium can do a decent business hawking used CDs to locals, the real potential for revenue opens up online, where a nearly infinite number of shoppers can browse through their entire catalog of back titles.

"The depth of the used catalog online is phenomenal. Inside these four walls, not as much," says Wagner. "Opening it up to the global customer is when the tail kicks in; there's just so many more people to sell to online. We actually have thousands of titles that can't be listed on Amazon because it can't match them up. I'm not saying those are titles that a lot of people would want — but that's the Long Tail, isn't it? All it takes is somebody's great uncle who's been looking for that title all his life."

This is not to suggest that creating a website and opening a secure online store is a silver bullet for every local retailer — or even a very good idea. Miostile's Bennett acknowledges that many locals would rather browse through her store online to get a feel for her stock, then visit in person to get the tactile experience that's so important with certain products, like clothing. And taking his inventory of movies online would accomplish little for Dan Kriekard, except to put him in deeper competition with Netflix and Blockbuster.

The real impact of the Long Tail will be felt first by everyday consumers, long before retailers start to become aware of it. As the culture of consumption shifts from being driven by a few heavily-hyped hits to one whose engine is as deep as the global population of quality creative output, retailers will take their cue from a significantly more sophisticated buying base: you and me. And they will either shift to accommodate that new demand or sink in the 21st-century marketplace.

"I think we'll still be around five years from now," says 52.5's Scales. "Though we may feel a little more like a museum then. Sometimes I feel a little bit like I'm running a museum now. But it's still something I enjoy. We'll be around. But I can't imagine saying anything else. This is all I know how to do, and it's all I want to do."

Who’s Riding the Long Tail?

A survey of locally-owned businesses on upper and lower King Street — downtown Charleston’s single heaviest retail strip — revealed that not all local retailers have caught the online commerce bug yet. Despite the proliferation of free, user-friendly design software and a glut of underemployed web designers, almost half of King Street business owners don’t even have a basic informational website to offer customers. Online catalogs and secure payment systems are even rarer.

202 King St.
Lula Kate
231 King St.
233 King St.
Simply Divine
255 King St
268 King St.
270 King St.
Sarah Anne's
279 King St.
Stella Nova
292 King St.
M. Dumas & Sons
294 King St.
295 King St.
A.J. Davis and Co.
296 King St.
Pete Banis Shoes
297 King St.
Granny's Goodies
301 King St.
Willy Jay's
300 King St.
Bits of Lace
302 King St.
Finicky Filly
303 King St.
305 King St.
Raymond Clark
307 King St.
Croghan's Jewel Box
308 King St.
Copper Penny
311 King St.
312 King St.
Grady Ervin
313 King St.
Elizabeth Stuart
314 King St.
Moo Roo
316 King St.
319 Men
316 King St.
Copper Penny Shooz
317 King St.
Bob Ellis
322 King St.
Oops Company
326 King St.
The Silver Puffin
329 King St.
334 King St.
Extra Mile
336 King St.
Susan Michelle
338 King St.
341 King St.
342 King St.
Tidwell Art Gallery
343 King St.
346 King St.
Rosita Jones
355 King St.
The Sportsman's Shop
359 King St.
University Books of Charleston
360 King St.
370 King St.
Millennium Music
372 King St.
377 King St.
Jackson Davenport
379 King St.
The French Hare
418 King St.
Boomer's Books
420 King St.
Felice Designs
424 King St.
The Dressing Room
427 King St.
English Rose Antiques
436 King St.
The Urban Electric Co.
438 King St.
441 King St.
Atomic Comics
451 King St.
Lulan Artisans
469 King St.
The Smockery
471 King St.

473 King St.

474 King St.

480 King St.

484 King St.

Haute Design Inc.
489 King St.

M. Craig & Company
493 King St.

Bluestein's Mens Wear
494 King St.

King Street Antique Mall
495 King St.

Honest John's TV Repair Shop
509 King St.

Morris Sokol Furniture
510 King St.
Coastal Classics
511 King St.
Dixie Furniture
529 King St.

Super Bad Men's Clothing
532 King St.

Star Beauty Supply
535 King St.

539 King St.

541 King St.
Magar Hatworks
557 1/2 King St.

52.5 Records
561 King St.




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