Hastings Entertainment, Inc.

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Hastings Entertainment, Inc.

3601 Plains Boulevard, Suite 1
Amarillo, Texas 79102
U.S.A.
(806) 351-2300
Fax: (806) 351-2424
Web site: http://www.gohastings.com

Public Company
Incorporated: 1968 as Hastings Books and Music, Inc.
Employees: 5,3330
Sales: $398.7 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HAST
NAIC: 451211 Book Stores; 45122 Prerecorded Tape, Compact Disc & Record Stores; 44312 Computer &Software Stores

Operator of a fast-growing chain of multimedia superstores, Hastings Entertainment, Inc. retails books, music, videos, and computer software through a network of stores predominately located in small towns in the western half of the United States. By the end of the 1990s, Hastings operated 130 stores in 18 states. The company’s mix of product categories was the inspiration of Sam Marmaduke, regarded as a pioneer in cross-merchandising. Marmaduke’s son John led the chain during the 1990s, when expansion picked up pace, particularly after the company’s 1998 initial public offering. Further expansion was expected during the 21st century, with 500 potential sites for additional stores identified by the company’s management. In mid-1999 Hastings launched a new site on the Internet to sell a broad selection of multimedia software to the electronic global marketplace.

Wholesale Origins

Hastings developed from an enterprise named Western Merchandisers, Inc., founded by Sam Marmaduke. Regarded as an pioneer in the wholesale industry, Marmaduke started his career as a rackjobber in 1946 when he arrived in Amarillo, Texas, to take over the wholesale business left to him by his late father. In his mid-20s at the time, Marmaduke transformed his father’s small business, West Texas News Agency, into a family fortune, creating an expansive wholesaling business that later spawned Hastings, the retail arm of his wholesale business. Initially, Marmaduke achieved success by keeping operating costs down, an important aspect of his managerial approach and a characteristic Hastings would later inherit. More significantly, it was Marmaduke’s diversification into other product categories that propelled his wholesaling company forward and cemented his reputation as an industry maverick. “They said I was crazy,” Marmaduke recalled, describing his colleagues’ reaction when he diversified into wholesaling record albums in 1959. The bold, innovative move succeeded, however, leading to the incorporation of Western Merchandising, Inc. in 1961, the book and music wholesaling enterprise from which Hastings developed.

Hastings was formed in 1968 when the first Hastings Books & Music retail store opened in Amarillo. Marmaduke, who later confessed he made a belated entry into retail, succeeded in retail as he had in wholesale, cross-merchandising decades before other bookstores or music retailers. Along with Tower Records, Hastings was among the first chains to offer books and music within it stores. Marmaduke’s unique approach was emulated by his son John, who was named president of the Hastings business in 1973 and watched over the company’s first decade of expansion. By the end of the 1970s, there were 22 Hastings stores in Oklahoma, Texas, Arkansas, and Kansas, all situated in small towns—a trademark of Hastings that the company employed as its expansion strategy in the years to come. Growth picked up pace for Hastings at end of the 1970s as John Marmaduke and his father decided to expand by acquiring other retail chains. In 1979 Hastings purchased 29 stores that sold music exclusively and that were located in regional shopping malls. Converted to the company’s cross-merchandising strategy, the stores acquired in 1979 were followed by other acquisitions in 1981, 1983, and 1985. Expansion through acquisitions was coupled with internal expansion, as the Marmadukes used their profits to establish additional retail outlets, both freestanding units and stripmall stores. The first chapter of Hastings’s corporate history ended at this point, with dozens of retail units located in small towns scattered throughout the Southwest and Midwest. The next era began in the mid-1980s, when strategic changes were implemented that altered Hastings’s business philosophy and changed the characteristics of the chain that had developed between 1968 and 1985. The strategic repositioning of the company stemmed from the influence of Western Merchandisers’ biggest customer, Wal-Mart.

As Hastings developed into a regional retail chain, Western Merchandisers achieved prominence and robust financial growth by becoming a primary supplier to the Wal-Mart chain of discount retail stores. Hastings was similar to Wal-Mart in that both formats sold a variety of merchandise rather than a single product category, although Wal-Mart’s merchandise diversity was greater, to be sure. In 1985, however, Hastings increased the breadth of its cross-merchandising approach, adding video rentals to the books and music it retailed. The addition of a video department led to a new name, Hastings Books, Music & Video, Inc., and, more importantly, signaled the company’s decision to embrace the entertainment superstore concept. The first store to offer the three product categories, touted as the company’s first “triple combo” unit, opened in 1985 in Amarillo’s Wolfin Village Shopping Center. Equally as important as the foray into videos was a change in the company’s pricing strategy, an alteration that underscored the chain’s similarity to Wal-Mart. In 1986, searching for ways to beat back mounting competition, Hastings began discounting its merchandise. The experiment worked wonders, driving sales upward and convincing the Marmadukes that Hastings’s future lay as a discount chain. By the end of the 1980s, the company’s strategy was firmly set. The larger, all-media discount units the company was operating were realizing greater profits and sales. In response, the Marmadukes turned away from adding any more mall-based stores. Mall store leases were allowed to expire, directing management’s focus on Hastings’s blueprint for the 1990s: discount, triple combo, superstores.

With a prototype for future expansion established, the company pursued physical growth in its unique way. The prevailing characteristic of the chain was the location of its stores, nearly all of which were situated in small towns with populations ranging between 10,000 and 50,000. The company’s niche was in towns such as Warrensburg, Missouri, Marshalltown, Iowa, and Stephenville, Texas, communities where competition was limited and residents often were delighted to have the opportunity to purchase a broad selection of books, music, and videos close to home. “When we go to open a new store in a small town,” John Marmaduke explained, “and the people learn we are from headquarters, they don’t just want to meet us—they want to hug us!” For these small rural towns, isolated from the wealth of merchandise showered upon their urban counterparts, Hastings offered what one company official described as “discovery opportunities” by cross-merchandising. From a practical standpoint, the intent was simple, effective, and profitable: “We want to sell mysteries to people who come in and buy music, and we want to sell music to people who come in to by mysteries,” explained John Marmaduke.

1991: Marmadukes Forge Agreement with Wal-Mart

Although Hastings operated a number of stores in larger metropolitan areas with populations in excess of 250,000, the majority of the chain’s stores were in small towns, which represented the basis of the company’s strategy for expansion. The company used this approach to expand rapidly during the 1990s, a decade that began with Hastings’s sister company, Western Merchandisers, falling under the control of another company. Although separate companies, Hastings and Western Merchandisers were woven closely together, with the fate of one company having an equal effect on the other. Accordingly, when Wal-Mart acquired Western Merchandising in 1991, the corporate life of Hastings was affected as well.

Following Wal-Mart’s acquisition of its primary wholesaler, Hastings remained under the ownership of its founder and chairman, Sam Marmaduke, but both companies shared the same president and chief executive officer, John Marmaduke. Western Merchandisers and Hastings also shared overhead, distribution services, and headquarter support, and held their annual conventions together. Under this arrangement, the two companies prospered in the shadow of the sprawling Wal-Mart chain, but the close-knit relationship between Western Merchandisers and Hastings did not last. The numerous ties connecting the two companies were strained not from poor performance by either company, but from the success of each. Under the agreement reached with Wal-Mart in 1991, John Marmaduke was supposed to divide his time evenly between Western Merchandisers and Hastings. As Wal-Mart expanded its operations vigorously during the early 1990s, however, Western Merchandisers was forced to keep pace with the distribution demands of a fast-growing retail chain, which required an increasing amount of Marmaduke’s attention. He was spending two-thirds of his time matching the gallop of Wal-Mart, leaving Hastings, whose all-media superstore concept was demonstrating encouraging success, without the full attention it required. “When you dance with an 800-pound gorilla,” Marmaduke remarked, “the gorilla leads.” After several years, the two sister companies could no longer effectively share the familial ties that had characterized their relationship since Hastings’s creation in 1968. By the end of 1993, several months after Sam Marmaduke died of a massive heart attack, John Marmaduke decided not to renew his contract with Western Merchandisers and Wal-Mart. For the first time in its history, Hastings was going to be a truly independent entity.

In the wake of Marmaduke’s decision to forgo stewarding both companies, Wal-Mart sold Western Merchandisers to Anderson News Corp., one of the country’s largest distributors of consumer magazines. The divestiture was completed in August 1994, giving Hastings the freedom to pursue its own path. The chain, at this critical juncture in its history, comprised 95 stores spread throughout 13 states in the Southwest and the Rockies. Together, the stores generated approximately $300 million in revenue a year. With all his attention focused on this enterprise for the first time in years, Marmaduke faced a fundamental, pressing problem as he severed ties with Western Merchandisers (renamed Anderson Merchandisers). Hastings lacked sufficient infrastructure to support its existing operations and future expansion, having shared centralized functions with Western Merchandisers. To resolve this dilemma, Marmaduke organized a new purchasing staff, spent roughly $3 million to develop a management information system, and replaced other services and support previously provided by Western Merchandisers. Undaunted by this essential undertaking, Marmaduke concurrently announced expansion plans, targeting markets in Missouri and Nebraska as sites for future Hastings stores. Immediate plans called for the establishment of 20 new stores in 1995, as well as the expansion of 12 existing stores. The success of this initial expansion and the trouble-free separation from Western Merchandising instilled confidence for more ambitious expansion to follow.

Independence Fans 1990s Expansion

As Hastings pushed forward into secondary markets with limited competition—“running to daylight,” as Marmaduke described it—the company did so in a low-cost manner, continuing to embrace Sam Marmaduke’s focus on keeping operating costs to a minimum. Instead of buying property or constructing new stores, the company expanded by taking on shorter-term leases on vacant buildings. The strategy increased flexibility, allowing the company to move from one location to another with greater ease, and it reduced the capital required for expansion. Following this mode of expansion, Hastings fleshed out its presence in the western half of the United States during the mid-1990s, establishing nearly a dozen new stores a year. All expansion was financed internally, using the profits gleaned from existing stores. Between 1995 and 1997, Hastings opened 23 new stores, giving the chain 114 stores scattered among 15 states. Some units measured as much as 47,000 square feet, generally the stores located in areas with populations in excess of 250,000, but most averaged between 20,000 square feet and 25,000 square feet, representative of the typical, small-town Hastings store.

In 1997 Marmaduke accelerated Hastings’s expansion plans for the remainder of the 1990s. He announced plans to double the chain’s size to 200 by 2000, with immediate plans calling for the establishment of 20 units in 1998—the most in one year in the company’s history. As this expansion program was laid out, the company also began an extensive remodeling program scheduled to renovate all existing Hastings stores during the ensuing two years. For the resources to implement his expansion plans, Marmaduke turned to Wall Street through an initial public offering (IPO) of stock in June 1998. Although he had previously vowed to keep Hastings a private company, the financial demands of his proposed expansion campaign could not be met without a substantial infusion of cash. The IPO netted the company $36 million, with Hastings’s stock debuting on the NASDAQ exchange at $13 per share. Although less than the $14 to $16 per share debut for which the company had hoped, the IPO set the stage for aggressive expansion for the previously low-profile company. Management had identified 500 potential sites for new Hastings stores in small- to medium-sized markets.

Following the IPO, Hastings immediately began opening new units, providing evidence that the company’s future would be filled with frenetic expansion activity. Five new stores were opened in a five-week period, giving the company 129 stores in 18 states by late 1998. Another 20 stores were slated to open in 1999, as the company extended the boundaries of its operating territory. In May 1999, Hastings launched a new electronic-commerce Web site on the Internet featuring more than ten million new and used multimedia products. The launch of www.gohastings.com, which was supported by a national advertising campaign, and the company’s expansion plans suggested Hastings’s future financial growth would far eclipse the rate of growth achieved during the company’s first 30 years of business. Marmaduke, it appeared, was intent on transforming Hastings from a regional competitor into a national force. Whether Hastings could successfully make this leap was to be determined in the decade ahead, as the company pursued small markets with a large inventory of entertainment products.