Things Look Up at Upsilon

If all goes as expected today, Upsilon Corp. will post the best single-day sales figure in its history.

Looking for a competitive edge, Irvine-based Upsilon’s three music stores began holding Thanksgiving Day 50%-off sales on used compact discs in 1994. The result, according to President Jeffrey C. Walker: “Thanksgiving used to be our worst day of the year, by far. Now, it’s the busiest.”

Like thousands of other Southland retailers, the next five weeks will determine whether 1997 will be a cork-popper or a heartbreaker for Upsilon. While 20% of its annual sales will come between Thanksgiving and New Year’s Day, the company will rake in 50% of its annual profit.

Like most merchants, Walker and partner David Hurwitz are optimistic about their prospects this year thanks to the region’s booming economy. They’re projecting a 20% increase in sales, to $1.4 million, and a 10% gain in operating profit, to about $115,000, in November and December.

But a lot can happen from the spreadsheet to the sales floor, and Walker and Hurwitz face a host of challenges.

For starters, they own a rapidly growing company that, if improperly managed, could spin out of control in a hurry. Operating costs, for example, are up dramatically this year in three key areas.

Then there’s the competition--backed by big advertising budgets--from the likes of Wherehouse, Blockbuster, Best Buy and Tower Records.

There’s also the possibility that unforeseen events--another big drop on Wall Street, heavy rains from El Nino, a financial meltdown in Asia--could damage consumer confidence.

Finally, Upsilon’s fortunes are at the mercy of the recording industry and the strength of its offerings for the holiday season.

Upsilon’s operations are twofold:

About 25% of its $6.8 million in 1996 sales came from its three retail outlets: the CD Listening Bar in Irvine and Cool Stuff stores in Laguna Niguel and Huntington Beach.

The remainder came from its burgeoning CD wholesale distributor, Super Discount CDs, which sells to 600 independent merchants across the country.

Last year, Upsilon made Inc. magazine’s list of the 500 fastest-growing U.S. companies, checking in at No. 403 with a five-year sales growth rate of 703%.

With the store operations fairly mature, Walker and Hurwitz are focusing on distribution. The account base--their number of wholesale customers--has doubled in the last 12 months. This forced the company to move in April into an 18,000-square-foot warehouse in Irvine that is six times larger than its old facility.

The growth spawned the addition of 10 new employees in the last year--in sales, marketing, finance, store operations and the warehouse--for a total staff of 48.

“This has been our biggest challenge this whole year,” Walker said. “We’re trying to convert a lot of the work to other people so that we can manage the business.”

That concern is well-founded, said Alfred Osborne Jr., director of the Price Center for Entrepreneurial Studies at Anderson School at UCLA.

“The big challenge will come not so much in running the business, but making sure they have the systems and technology in place to handle the growth,” Osborne said. “Small firms often run into trouble when the administrative systems lag the growth of the business.”

The 1996 holiday season was the company’s best ever, with sales in the two-month period topping the $1-million mark for the first time, at $1.16 million.

If the ’97 campaign is true to past trends, the season will start off big today, trail off and then end with a bang.

“Music tends to be a last-minute purchase,” said Hurwitz, who is chairman and chief executive. “Typically, we have a big first weekend, and then it drops off dramatically until about the 15th. The last 10 days is when all hell breaks loose.”

Besides consuming more space, the company’s growth has radically altered its cost structure. Next month, it expects substantially higher expenses from last December in three key areas:

* Advertising outlays will jump 67%, to $20,000. The additional money will pay for a 10% increase in the number of MTV commercials, a doubling of the number of school papers that will carry advertisements, and a “bigger, better” ad in Billboard magazine.

* Rent will be 13.8% higher, to $23,122, thanks mostly to the larger warehouse and a rent increase at the 3,000-square-foot CD Listening Bar, the company’s largest store.

* Payroll costs will grow 22% for the month, to $47,600. Much of the increase is tied to the hiring of two people: marketing director Thuy Ngo, a longtime employee who was recently promoted, and graphic artist Craig Barker, who spent four years in Disneyland’s art department building models and signs. Barker’s immediate task is to improve and expand in-store signage at the company’s retail locations.

Despite the higher sales projections, inventory at the stores will be about the same as last year, $200,000 at the CD Listening Bar, $110,000 at each Cool Stuff store. Hurwitz isn’t beefing up the stores’ inventory because the company’s warehouse is close enough that it can get product into stores within hours, if necessary.

Warehouse inventory, however, has more than doubled, to over $1 million from about $400,000 last year because of the new accounts.

After much trial and error, Walker and Hurwitz have settled on an advertising strategy that they believe best reaches the typical music buyer: 12- to 30-year-olds. The company runs display ads in high school and college newspapers in Orange County, and 30-second commercials on MTV.

By comparison, its larger chain competitors bombard consumers with advertisements in the region’s major newspapers, commercials on radio and television stations, and direct-mail pieces into tens of thousands of homes.

“When you’re small and have a very micro target audience, you really have to create a buzz in the community,” said Leonard Pearlstein, chief executive of the El Segundo-based Team One advertising agency, a unit of Saatchi & Saatchi Worldwide. “Otherwise, you’re left to the whims of fate Las Vegas-style, with Las Vegas-style odds.”

Ultimately, “the new releases will determine whether it will be a strong quarter or not,” said Hurwitz, who buys the music for Upsilon’s stores.

This year he’s banking on “Reload,” the new album from heavy metal rockers Metallica, boxed sets of previously unreleased material from Led Zeppelin and The Doors, and greatest-hits offerings from Sting and John Mellencamp.

A Christmas album from teen rockers Hanson, “Snowed In,” could also be a hit, Hurwitz said. Then again, it could be a bomb.

“Sometimes, it’s hard to predict what’s going to be hot, and what’s not,” said Wes Dorsey, a buyer for Sacramento-based Tower Records. “The big names don’t always sell well.”

At A Glance

* Company: Upsilon Corp.

* Headquarters: Irvine

* Business: Operates three music and gift stores and a wholesale music distributor, Super Discount CDs.

* Stores:

CD Listening Bar

3995 A Alton Parkway

Irvine

*

Cool Stuff

18346 Beach Blvd.

Huntington Beach

*

Cool Stuff

30012 E. Crown Valley

Parkway

Laguna Niguel

Source: Upsilon Corp.