A case study of a secular sales decline: “This can’t go on!”


Not to be a pessimist, but yes it can.

I have been tracking Compact Disc sales for two decades now. Things were going well, until Napster and friends came along. CD sales had been growing since 1983, so the year-over-year decline in 2001 was an enormous shock to the industry. Down 3% was bad, but then the annual decline steepened in 2002 and 2003, at 7% each year.

I remember analysts and CEOs reassuring each other, both in private and in the media, that 7% declines: 1) were a temporary thing – it would be probably better next year; 2) couldn’t go on at this rate – 2-3% declines were likely to be the norm; and 3) at least it couldn’t get worse – who had ever heard of such an important and popular product falling by more than 7% in a year?!?!?

And for one brief happy year, they were right: CD sales actually went up by 2% in 2004. But it was only a temporary reprieve, and 2005 saw an 8% drop: slightly weaker than before, but “at least it can’t go on at this rate.”

It didn’t: it got worse. 2006 saw the first double digit drop of 11%. “This must be the bottom, right?” the same CEOs and analysts asked. Not even close: revenues fell 20% in 2007 and then 27% in 2008. The erosion continued, but at least the percentages improved a bit: after two more years in the twenties, 2011 saw sales drop ‘only’ 8%. Was this the new run rate? Nope, 2012 was back down into double digit declines at 18%.

Now take a look at the chart at the top of this post, and imagine you are a compact disc manufacturer at the end of 2012. What would you guess the 2013 number would be? The economy is doing OK, there are some good bands out there: maybe we can get back to single digits?

Negative 17.6% for 2013. Out of the last seven years, sales have fallen by more than 10% in all but one year. CD sales in the US are now 84% lower than in 2000. (And that’s in unadjusted dollar terms. Factoring in inflation, the decline is 88%.)

All of this may feel like I am picking on the compact disc industry, but that’s not my objective. Over time, many products or industries reach a tipping point and enter a period of inexorable decline. The folks who run those companies and the analysts who follow them ALWAYS make the same mistakes. Here are a few rules:

  1. It can always get worse. There is no “floor”, no magic number that your sales will hold at.
  2. It can stay bad much longer than you think. In a declining industry, there is no guarantee that good years will offset bad years.
  3. The only time you can say that the decline is at an end is when your sales are zero. At ANY point before that, telling yourself that “this can’t go on” is untrue, not backed by empirical evidence, and will lead you to make bad decisions.
  4. Which is not to say that (relatively) good years might not occur: see 2004 and 2011. But you can’t count on that.

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