Grand Rapids-based Family Christian Stores (FCS) filed a Chapter 11 bankruptcy last week.

FCS is the largest physical retailer of “Christian” books, music and gifts in the United States — consisting of 267 stores in 36 states. It’s only been a little over two years since new ownership took over and converted into a 501(c)3 non-profit (and a little over a month since FCS launched the addition of a filmmaking business).

“I can’t think of a more financially challenging time to be in retail,” said Josh Niemyjski, owner of Illect Recordings and Sphere of Hip Hop, an 18-year-old Christian hip-hop website. “The Internet, for better or worse, has changed everything.”

Bad News for Christian Hip-Hop?

FCS accounts for nearly 50 percent of all physical Christian music sales. Although physical sales have been steadily declining, this is where the entire music industry used to earn “virtually all its revenue,” according to the Recording Industry Association of America (RIAA).

The reality is that artists, record labels and the companies distributing them, which pour their souls and finances into creating and producing music, will be hit right where it counts — the balance sheet.

However, the implications on Christian hip-hop moving forward are limited. The concept of a Christian bookstore is dated, according to Humble Beast recording artist Propaganda, who admitted that this change won’t affect him or Humble Beast directly because they don’t physically distribute their music.

“The fact that they are going under is kind of a sign of the times,” he said. “The industry has just moved on.”

The End of an Era

This is the downfall of one of Christian hip hop’s largest allies historically. FCS, which is not affiliated with any particular denomination, has shown incredible support for Christian hip-hop by offering shelf space and featuring artists in their merchandising programs.

“It saddens my heart to hear this news,” said Grammy-nominated gospel artist Tonex, who was featured on and produced dozens of Christian hip-hop albums. “It’s like the end of an era. Family Christian was our Tower Records. … They completely went against the grain. They offered a platform that had never been available before.”

This was in part because the last two FCS music buyers, Dan Hubka and his predecessor John van der Veen are fans of Christian hip-hop and kept the shelves stocked long before Christian hip-hop was seeing the kind of success and approval it is today. That is because most Christian retailers weren’t willing to take a chance because they either thought hip hop was a passing fad or they believed it was the devil’s music.

Fortunately, this turned out to be good business for both FCS and Christian hip-hop, especially in 2001 when Christian hip-hop sales grew by a whopping 20 percent, according to Billboard.

What went wrong?

Chuck Bengochea, the CEO of FCS since last summer, cites the economic meltdown of 2008, the digital revolution and too much debt as the three reasons that led to a bankruptcy.

The first two reasons Bengochea mentioned are definitely factors, but they seem to leave FCS off the hook since, ultimately, they have no control over the national economy and certainly can’t stop entrepreneurs from innovating new ways for people to consume music.

Although Cliff Bartow, who was Bengochea’s predecessor, admitted in an interview with Publishers Weekly that “challenges Christian retailers face are no different than those of other bookstores or retailers.” He seemed to be optimistic about the digital revolution and believed that FCS was “not shut out of this digital age.”

Sleight of Handling and Shipping

FCS’s business practices may have played a role in its bankruptcy, said Jason Hollis of Life-Line Worldwide, the co-founder of Infinity Music Distribution, a company whose job was to get Reach Records’ products, among others, on the shelf for several years.

“Family Christian never pays the distributor,” he said. “They simply return a product and receive credit so that they don’t have to pay their debt.”

Hollis is referencing the “shell game” that retailers play with products by shuffling product back and forth to avoid paying the bill. This tactic often costs the distributor a lot of money and racks up surcharges for a label that chip away at an artists’ profits.

Here’s how it’s done: For example, a retailer is given 90 days to pay for a product after the product has been shipped for free. Products are placed on the shelf during that time, then everything that didn’t sell is sent back before the 90th day. The retailer often doesn’t have to pay for shipping to or from their stores. Then the retailer orders more copies of the same title they just sent back, receiving 90-day terms all over again. By the time a consumer picks up a product from the shelf, it may have been sent back and forth four times already.

Since retailers used to sell several thousand units of each release, distributors, labels, and artists eventually were paid. However, now there aren’t enough actual sales occurring to cover the cost of this maneuver.

More importantly, though, this begs the question, how can a retailer — that receives the majority of their product on consignment and doesn’t have to pay for shipping in either direction — be in so much debt … that they have to file bankruptcy?

“Christ said in a warning to his disciples that if we live by the sword we will die by the sword,” influential blogger and pastor, Douglas Wilson said. “Perhaps we can extend the warning and say that if we live by the boom-and-bust cycle, we will die by the boom-and-bust cycle.”

Cool story … but what’s next?

Artists and record labels are in a tough spot since digital has surpassed physical for majority market share as of 2012, and most of them want to release physical product — such as CDs or vinyl. This is why Josh Niemyjski wants fans of illect recordings to know that they “are committed to creating physical products.”

DJ Maj, a veteran of Christian hip-hop — who, like Tonex, purchased his first Bible at FCS — is holding out hope that they will not only recover but renovate.

“Family Christian was a lifeline for thirsty souls, including mine,” DJ Maj said. “Many retailers are facing challenges due to the changes in the industry. I hope bright minds can help turn FCS around to be able to once again impact our culture.”

Every business leader has to navigate through tough decisions and react to outside conditions that are out of his or her control. This is, of course, all the while working hard to keep the doors open and the balance sheet in the black — not to mention keep an eye on the debt.

With that said, it’s time for record labels to listen to the music consumer. The music business will continue to change, but there will always be music and there will always be business. Those who are nimble and willing to adapt — while keeping their integrity intact — will be just fine.