Not many were surprised When news broke earlier this year that music and book retailer HMV Group was struggling and was planning to sell as much as 10% of its portfolio in an attempt to shore up its balance sheet.
The evolution of the internet has made it so easy to buy – or “borrow” – music and books at the click of a mouse, that the fall of the high street stores selling them has been widely anticipated.
Julian Welch, Lambert Smith Hampton’s national head of retail, says: “In an age when even the average primary school child knows its way around apps, PCs and laptops; barely knows what a CD is; and for whom the vinyl record never existed, the need for a high street music store has ceased to be.”
But having been on our high streets for almost 100 years, is His Master’s Voice really ready to be silenced?
The consensus seems to be that HMV in its current form cannot survive – even the group’s management has that view – but many have not given up on the UK’s last remaining high street music retailer.
Stephen Springham, head of retail research at King Sturge, says: “Many people think of HMV as a bit of an anachronism, but I don’t.
“The management is being proactive in its response to structural changes in the market.”
HMV’s board is well aware that the world has changed since the first HMV store opened its doors on London’s Oxford Street in 1921, and last year it launched a strategic plan in an attempt to react positively to this change and create a profitable business by 2013.
That plan included three main proposals: to evolve the HMV product mix into related areas of entertainment; to expand its live and ticketing businesses; and to turnaround bookstore Waterstone’s.
While the third element of the strategy may no longer apply, especially with shareholder Russian oligarch Alexander Mamut reportedly hiring Credit Suisse to review options for the business, which many expect to lead to a sale of Waterstone’s, work on the first two remains a clear commitment for HMV Group.
“HMV is not just standing still and slowly dying,” says Springham. “HMV is now a diversified entertainment business.”
Entertainment
So perhaps the future of HMV lies not with the physical sale of books, films and music, but with entertainment.
The group says that it has accelerated the evolution of HMV as an entertainment brand by investing in high-growth parts of the industry. It says that during the past three years, it has focused on building, from a zero base, a strong offer in technology products.
Technology now accounts for around 6% of HMV’s UK sales and the firm believes that it can increase this to 12% by 2013. Other sources of revenue that are becoming increasingly important to HMV are entertainment-inspired fashion and related merchandise and mobile handsets.
But it is the live music market and the cross-selling related to it that is exciting HMV the most.
Last January, it spent £46m buying the MAMA Group, the owner of a number of music venues across the country, including the Hammersmith Apollo, W6, and the Forum in Kentish Town, NW5.
The value of live music is expected to become one-third greater than that of recorded music by 2012 and HMV wants to combine its live and retail assets to drive venue utilisation and product sales by leveraging artist and supplier relationships.
It expects the live music division to produce an operating profit of around £15m by 2012-13.
Springham says that investing in companies such as MAMA and joining up with Curzon Artificial Eye to launch cinemas in some of its stores means that it is likely to remain a high street name.
“HMV has changed its product mix so that music now accounts for just 28% of turnover,” he says.
Music market decline
HMV believes that the total music market will decline in value by around 1% pa and that revenues from digital music will be equivalent to packaged music sales in just two years’ time. The outlook for visual sales – those of DVDs and BluRays – is even starker. HMV believes that this market will decline by 3.5% pa. Book sales will decline by 3% pa. Meanwhile, sales of games are predicted to increase by around 2% pa.
HMV says that sales of online books and online games should each represent around 8% of its sales by 2012-13 and has taken steps so that it plays a major part in the online world – teaming up with digital media company 7digital.
Despite that, online sales still account for very little of its turnover. While some 39% of CDs and 34% of DVDs are bought online, just 10% of HMV’s business takes place in the virtual world.
Consumer buying habits have also changed dramatically. The casual music buyer is now just as likely, if not more likely, to drop a CD into their shopping trolley during their weekly food shop as they are to visit a music store. Those actively searching for music to buy are most likely to do it online – and if they are young to “borrow” it via online shareware.
According to music industry body BPI, sales of physical CDs fell from £112.5m in 2009 to £98.5m last year. Even a one-third increase in online sales was not enough to boost total sales, which were down by 7%.
It is these figures – and the ever-approaching maturity date of its £240m debt facility – that is driving the group to exit around 60 of its 600-strong UK portfolio.
After announcing an 11% decline in like-for-like sales (excluding the live music business) in the 10 weeks to 1 January – a result that it said could lead it to fail an April covenant test – HMV said it was taking “aggressive action” to manage its cost base tightly.
And like most businesses, one of the biggest costs it has to deal with is property.
HMV’s last annual report showed the group has costs of around £520m related to leases over the next two to five years.
As a group, HMV’s average lease length is less than seven years and a whopping 42% of its portfolio has a lease expiry within five years, providing the group with greater flexibility to aggressively manage property costs and space.
Ghost high streets
With this potential to hand back close to around 250 stores and create many more ghost high streets across the UK, HMV should be able to negotiate strong terms with its landlords.
It is this position, plus the fact that despite falling sales the group remains profitable, that makes many believe that HMV does have a future, albeit one where – like all retailers – the group will have to think much more about what the customer actually wants.
“The inexorable rise of the e-retailer, combined with the major supermarkets, continues to hit the high street hard. But this does not mean we should all dash for the life rafts,” says LSH’s Welch.
“Shopping remains the number-one leisure activity in the UK. People do actually like to browse around the shops, touch and feel what they want to buy, to visually compare.
“But as with all leisure activities, it needs to be enjoyable. The shopping environment needs to be of the highest order, service levels at their very best, product lines second to none.
Welch adds: “Retailers need to tune into an increasingly sophisticated consumer base; one that shops online because it is easier and cheaper, one that demands satisfaction, and if it is to be dragged back into the shops, needs to receive a top-rate shopping experience.”
HMV take note.
History of HMV
The first HMV store was opened at 363 Oxford Street, W1, in 1921 by The Gramophone Company (later EMI). Last November, HMV Group signed a deal to vacate its store at 360 Oxford Street, picking up a £14m premium from US retailer Forever 21.
In 1966, HMV began to expand its retail operations in London, continuing throughout the 1970s, doubling in size. Within six years it had become the country’s leading music retailer. HMV Group, as we know it today, was formed officially in 1998 to buy HMV and bookstore chain Dillions from music production company EMI and Waterstone’s from WH Smith. It launched on the London Stock Exchange in 2002.
