I was delightfully entertained over the weekend to read EMI Music had embarked upon yet another major restructuring of its recorded music business, and a “significant number” of people will be terminated. On top of the several thousand or so, whom already have “become redundant,” to use quaint British management-speak. At the head of the list are (ex) Chairman Alain Levy, and (ex) Vice-Chairman David Munns.
EMI simultaneously issued what is known in the trade as a “profit warning,” to the effect its revenue (and profitability) may decline by as much as 10% from the previous year, Gallo, P., “EMI announces restructuring,” Daily Variety (Jan. 14, 2007); Patrick, A. & Smith, E., “EMI Ousts Heads of Record Labels, Slashes Forecasts,” Wall St. Journal (Jan. 13, 2007); Smith, E., “EMI Issues Profit Warning, Parts With Top Music Officials,” Wall St. Journal (Jan. 12, 2007); Gallo, P., “EMI cues two for departure,” Daily Variety (Jan. 11, 2007).
The company’s press release included such choice euphemisms as, “de-layering” the group’s management structure, whatever that means, and strengthening its efforts in digital marketing. Will this, however, be sufficient? As Ethan Smith put it in his Jan. 12th article: “The music industry appears to be entering a free fall. In the U.S., album sales were down nearly 18% for the first week of 2007, compared with the year-earlier period. Sales of digital music have increased, but not nearly fast enough to offset those losses.”
Another consequence is, this makes it almost certain – a fait accompli, if you will – EMI will merge with Warner Music Group sometime later this year, and WMG will be the acquiring company. Fortunately, Eric Nicoli – a former biscuit maker – now will head the firm. I’m sure he’ll be able to put his finger on whatever’s the problem. Mr. Nicoli is rumored to be searching for a butcher and a candlestick-maker, to round out the executive troika.
Although not with Messrs. Levy and Munns, whom I don’t know, I had the privilege of working for some geniuses at EMI, and also some idiots … one in particular comes to mind, she was an accountant masquerading as a CFO, and for all I know, she’s now preparing tax returns at H&R Block somewhere in New Jersey. But the sad news of EMI’s woes led me to recall – out of the blue, as it were – another amusing incident involving EMI, which was the debacle known as “Rent-A-Center.”
This was back when the company was a conglomerate known as Thorn EMI plc. Rent-A-Center’s prosaic business was, as its name implies, renting out furniture and appliances, primarily to lower-income consumers. As analyzed in a Wall Street Journal expose, “Though it doesn’t advertise the fact, Thorn’s most profitable subsidiary has nothing to do with the superstars who record under its various music labels. Instead, the largest single contributor to Thorn’s operating profit is its most obscure, and by far its least genteel, unit: Rent-A-Center, a chain that thrives by renting refrigerators, furniture, diamond pinkie rings and assorted other merchandise to America’s urban and rural poor,” Freedman, A., “Peddling Dreams: A Marketing Giant Uses Its Sales Prowess To Profit on Poverty — Thorn EMI’s Rental Centers Push Sofas, Rings, VCRs To the Poor at High Rates — Repos and `Couch Payments’,” Wall St. Journal (Sep’t 22, 1993).
And just how profitable was Rent-A-Center, you ask? In the range of 20% to 30%, compared with conventional retail store margins of around 7.5%. Furthermore, although not mentioned in the article, profit is steady – that is, not subject to fluctuation, based upon the idiosyncratic (if not capricious) delivery schedules of major artists.
And how did Rent-A-Center achieve those margins, you ask? “Scrambling to meet ambitious sales targets set under Thorn, Rent-A-Center employees routinely encourage unsophisticated customers to rent more goods than they can afford, these people say. Then, when customers fall behind in payments, Rent-A-Center repossesses the goods and re-rents them. Customers who manage to make every installment may end up paying several times the item’s retail value — at an effective annual interest rate, if the transaction is viewed as a credit sale, that can top 200%. … Employees handling repossessions have been known to bring along members of a feared motorcycle gang as well as to vandalize customers’ homes, extract sexual favors from strapped customers and even, in one instance, force a late payer to do involuntary labor.”
Mr. Freeman describes one incident in detail. “The company earns considerably more by renting, repossessing and then re-renting the same goods than it does if the first customer makes all the payments. Derrick Myers, who was fired as manager of the Rent-A-Center store in Victorville, Calif., recalls one particular Philco VCR, for example, that he says retailed for about $119 — but that brought in more than $5,000 in a five-year period.”
Mr. Freeman then analyzes some of the company’s business practices. “So it is that behind every Rent-A-Center salesman lurks his doppelganger: Repo man. Repossessions are never pretty … Customers typically make their payments every Saturday and, throughout the morning, store employees work the phones exacting promises from the tardy. In these conversations, former customers say, they have been harassed, intimidated and even threatened with violence. Robert Keeling, a former manager in Gasden, Ala., … says that a favorite ploy is falsely informing customers or their relatives that a warrant for arrest has been issued for the theft of rental property.
“The telephonic onslaught resumes on Monday mornings, when 30% of customers are generally past due. If employees haven’t reached a customer by Tuesday, they hit the road. Although it is against company rules, they often make a “milk run” — picking up payments from customers personally. Or they leave a message on the door, instructing the customer to contact them. This process is repeated all week long. If they still don’t get results, it’s repo time. …
“It is unquestionably the most creative. On Halloween night in 1991, three Rent-A-Center employees in Utica, N.Y., dressed up, respectively, as the Cookie Monster, a gorilla and an alien life form and knocked on a customer’s door. Once inside, they successfully repossessed a home-entertainment system on which payments hadn’t been made in almost three months. Gary Gerhardt, the store manager who blessed this plan, calls the ruse ‘a last-ditch effort,’ adding, ‘it was the only way we could think to get someone in the door.’
“At the crack of dawn one Sunday, Mr. Myers, the store manager in Victorville, Calif., until March 1992, pulled off a particularly tough repossession by enlisting three burly Hell’s Angels. He adds that in other instances he vented his spleen on delinquent customers who wouldn’t come to the door by slathering superglue all over their deadbolts and doorknobs.”
Lending a certain piquancy to its collection efforts, “Yet another tactic in Rent-A-Center’s repo repertoire is the ‘couch payment’ — sexual favors exacted by employees in lieu of cash. Of 28 former store managers interviewed, six said the practice had occurred in their areas. Some store employees have boasted that they ‘have gone out to the customers’ homes, had sex with them, and then repo-ed the merchandise anyway,’ says Ken Dube, who spent time at a number of outlets as a field auditor.”
My favorite part of the article was a quote from Colin Southgate, EMI’s Chairman. “No wonder Sir Colin recently told a Las Vegas meeting of store managers that their unit was ‘the closest company to my heart in Thorn EMI and that ‘most businessmen would give an arm, a leg and probably half their body for its performance.’”
Those of us busy stoking the EMI fireplace were amazed. Nobody even had heard of Rent-A-Center, much less its association with Thorn-EMI. I’m sure it was disclosed somewhere in some annual report, but not quite like this. Rent-A-Center was said to control 25% of a $2.8 billion U.S. market – i.e., $700 million/year. This was quite a bit more – like maybe around three times more – than EMI’s U.S. music interests. And here they were, engaging in business practices making things like payola and under-reporting sales, look like child’s play.
I’m sure Frank Sinatra would be pleased.