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Dimple Group Takes On A Giant Four Little Record Retailers File Suit Accusing Best Buy Chain of Illegally Setting CD Prices Below Cost

August 20, 2003, Wednesday METRO FINAL EDITION Correction Appended

BYLINE: DALE KASLER DEE STAFF WRITER

Or years Sacramento music-store owner Dilyn Radakovitz has labored to make life easier for small record

The co-owner of Sacramento’s Dimple Records serves as president of a national association that promotes marketing and purchasing deals for small chains like her own. She recently co-signed a letter from dozens of small retailers scolding the Eagles for cutting a sweetheart deal with mega-chain Best Buy Co. The legendary rock band gave Best Buy a 30-day exclusive on a new single.

Now Radakovitz is making a frontal assault on Best Buy. She has joined four other small California music-store owners in suing the Minneapolis-based chain, accusing the company of illegally grabbing customers from the small retailers by pricing compact discs below cost.

"It’s a very big problem for all independents across the United States," she said this week.

The lawsuit, filed in U.S. District Court in Los Angeles, contends Best Buy’s "loss leader" strategy violates state law. It also argues that Best Buy has violated federal law by benefiting from 10 percent discounts on CDs from the big record companies.

Best Buy declined to comment on the suit.

Rivals have been complaining for years that big discount chains such as Best Buy and Wal-Mart price below cost to lure customers into their stores. The discounters’ dominance is one of the key forces in the downfall of West Sacramento-based Tower Records, which has defaulted on its debts and has put itself up for sale.

Plaintiff Rand Foster, owner of Long Beach’s Fingerprints record store, said he and the other storeowners singled out Best Buy because "they certainly seem to be the most egregious to us." The other plaintiffs are Mad Rhino of Claremont, Boo Boo Records of San Luis Obispo and Lou’s Records of Encinitas.

An expert on music retailing, Barry Sosnick, predicted the lawsuit faces and uphill battle.

Sosnick said the record industry tried unsuccessfully to curd loss-leader strategies in the late 1990s by withholding advertising support from the big discount chains. This strategy blew up in the industry’s face: Claiming that the record labels engaged in price fixing, attorneys general in California and 39 other states sued the big record companies and several retailers, including Tower, forcing a $143 million settlement.

Sosnick also noted there’s nothing remarkable about a big retailer cutting a better deal on CD prices by purchasing in mass quantities. "It doesn’t make sense that you would sell a small retailer with 20 stores at the same price you would sell a retailer who does 10 percent of your business," said Sosnick, and analyst at Carmel-based Adams Media Research.

He said small retailers have brought similar suits in the past, without success. Last your, for instance, a federal judge in Texas tossed out a case brought by three small video-store owners, including one in Sacramento, against Blockbuster Inc. and five big movie studios. The suit accused Blockbuster and the studios of cooking up special deals designed to squeeze the small retailers out of business.

But some record company officials say Best Buy could face problems under California law. One executive speaking on the condition of anonymity, said the case is being watched carefully in the industry because of the California Business and Professions Code, which says it’s illegal to sell "any article or product as a ‘loss leander.’"

Small and midsized record retailers have become an endangered species in recent years, thanks to competition from discounters, Internet stores such as Amazon.com and music downloader. Some executives believe the deep discounting by companies such as Best Buy is the biggest threat to the small merchants.

Radakovitz, who co-owns the four-store Dimple chain with her husband, John Radakovitz, said it’s almost impossible to compete on price against Best Buy.

She said it cost her company $12.04 to buy a CD that Best Buy sells for $9.99. "I try to match Best Buy’s prices myself, for a few days, so I don’t lose all my customers," she said. But there’s a limit to how far Dimple can go to match the discounter, she said.

Sosnick said small retailers will almost never be able to compete on price with the likes of Best Buy. "Survivability of the independent retailer depends on differentiation," he said.

Retailers, like Dimple, have tried to differentiate themselves. Radakovitz is president of a national retail group called the Music Monitor Network, a marketing consortium that works on behalf of independent record stores. Among other things, the network has produced CDs for sale exclusively in member stores.