You will have read this morning that HMV has entered in to administration with the potential loss of over 4000 jobs. This is deeply sad and on the back of the collapse of Comet and Jessops in recent weeks it is perhaps the worst period in retail since the demise of Woolworths. Much of the commentary on HMV would suggest this is a result of structural failure, that the model simply has no place in modern retail. In my view this is rather simplistic. The reality is that HMV has faced a set of unique (in their combination and complexity) challenges that have served to paralyse the business over a period when change was crucial.
HMV’s demise can be traced back to the original stock market flotation in 2002. There is a conflicting argument as the reality is that the funds generated from the float served to fuel HMV’s expansion and competitor acquisitions. This expansion allowed HMV to build the best economies of scale in their market and to be the last man standing (Our Price, Virgin/Zavvi, Woolworths, Silverscreen, Sanity, Borders, MVC…the list goes on). However, being a PLC also presented the Management team with significant barriers to future proofing the business.
At the same time HMV was floating in 2002, BT had just 136,000 Broadband subscribers and additionally Apple’s IPOD had recently launched in October 2001. There were some predictions about how these two products would affect the market but in truth very few people predicted just how quickly they would be adopted. Broadband offered consumers an opportunity to not only browse products in a different way but also to consume them differently. Many critics of HMV have suggested that they should have launched a download service earlier however in reality there was stiff resistance within the wider industry. The Wild West days of the noughties and the plethora of pirate websites where you could download unlimited amounts of content for free initially pushed music and film companies to further retrench their position (on providing official channels). By the time they had realised the tide was against them, Apple amongst others had taken up the mantle (Apple were not really associated with music/film consumption before 2002). HMV have been playing catch up ever since and the brand had been severely compromised as a result.
The pirate websites also revealed an unsavoury insight in to our own cultural acceptance and views on theft. Unfortunately many people did not see illegal downloading and CD/DVD pirating as morally wrong. How often did you see individuals selling pirated product, unchallenged in pubs or street corners? I suspect this cultural acceptance is entrenched in the mix tapes of the 80’s and the romanticism that this still evokes. This created two major issues for entertainment retailers – lost revenue and erosion of what consumers were prepared to pay legally.
In 2002 it was not uncommon to pay £13.99/£19.99 for a Chart album or film and much more for older back-catalogue products. Today you will often see the same products on sale for £7.99/£13.99 respectively, or less. This is quite a dramatic price deflation when you consider that over the same period a loaf of bread (800g) has risen from an average of 60p to £1.30 today. The price deflation was deepened by competitors running loss leaders in a bid to survive, the market entry of the supermarkets and finally internet shopping.
During the same period of price deflation there has been a very real increase in costs. Payroll has continued to rise and unfortunately HMV has an expensive supply chain model. The cost of getting products on the shelves is much more expensive than it is for a Supermarket with employment-as-a- percentage-of- sales being close to double that of the Supermarkets. A typical HMV store has significantly more SCUs (product lines) than virtually any other similarly sized retailer. Each SCU has to be processed and put on shelves individually, a time consuming exercise but an essential one if you want a wide selection. The only way to have reduced this cost would have been to move this back-catalogue purely on-line.
This however was also extremely problematic. In the early days online retailers were making very little money. Amazon ran at a loss for many years…without paying much tax. HMV were in a tricky situation on two counts. Moving their online business off-shore would attract negative press, a consumer backlash and a legal minefield. This coupled with a reluctance to under-cut the physical retail pricing model meant that the website failed to gain momentum. By the time that ‘perceived’ consumer sentiment had begun to soften, HMV had fallen too far behind. This is clearly a huge mistake but to some extent an understandable one.
The stock market- fuelled expansion brought further issues. Growth was fundamentally underpinned by store expansion with over 100 stores opened in a 5 year period. The dynamics of the market dictated that expensive leases were signed and for long periods.
The way in which we consume entertainment has changed dramatically over the last 5 years (Permira bid over £800 million for the business in 2008). I myself use SKY+ to record TV series to watch at a more convenient time while I download films directly via Apple TV. I download and play the occasional game on my smart-phone and stream music via Spotify. I still buy CDs, I love browsing and physically selecting products but not in the same quantity that I did in the past (having children hasn’t helped to be honest). The market has also changed significantly. The music industry is continuing to move towards singles rather than album releases while Hollywood is not producing blockbuster films in the same quantity that they did prior to the recession.
When I visit an HMV store I get the sense that they have lost touch with who their core customers are and could be by trying to appeal to everyone. They desperately needed to radically overhaul the product offering. They have made some inroads into the technology market but this is a relatively low margin arena and is not enough to sustain stores of their size (neither big enough nor small enough). The appetite to pursue this further has not been there and this has been driven by a Management team with either limited vision or who are constrained by the PLC ownership model. Had HMV been owned by a rich benefactor I genuinely believe the brand was salvageable. I don’t think there is a place for a specialist CD/DVD retailer for all the reasons stated but there is a place for a retailer that celebrates popular culture. A combination of fashion, technology and yes, some quirkily packaged entertainment products. Had some brave decision been made earlier HMV might not be in the position it is today.
The truth is that HMV has suffered a long and agonising death, by a thousand cuts. I can’t think of another retail market that has faced the same set of challenges and in such a short space of time. I sincerely hope that someone with a passion for the brand, and some spare cash, comes forward to save what is a truly iconic institution. Just as I was finishing this blog I received the following email from a contact that I suspect sums up what many feel about this sad news:
“It really is – I’ve just been reminiscing with my boss – things like; the first tape/LP we ever bought, all the presents we bought and were given from HMV, the cool posters i used to spend hours leafing through. Of all the casualties of the current retail market, this has hit me the hardest.”
On a final note, a by-product of HMV and the overall physical entertainment market’s demise will be an increase in costs elsewhere. Expect your broadband cost to continue to rise (if you can only download your music you are a captive customer) and your satellite TV package costs to continue to rise…
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