THANK YOU AND GOODBYE

No, I am not packing in the blogs. However I use this title to capture the essence of yet another “problem” retailer.

The end of 2018 continued its sorry path in terms of devastation within the UK retail sector. His Masters Voice (HMV) is no more. That doyen of music retailing: HMV went into administration for the second time in six years. It must be said that this time it appears to be terminal.

Rescued by corporate restructuring expert, Hilco, in 2013, it appeared to be turning around during the past few years. However a major decline in DVD and CD sales hastened its demise. KMGP took over the administration and are currently seeking new investors. This is unlikely to happen anytime soon.

Why has this retailer, which has been around since 1921 and currently has around 125 stores in the UK, employing over 2,000 people found itself in such a mess? Let’s look into it in more detail.

Firstly we should acknowledge that the usual reasons are offered for such struggles in the retail sector. High business rates and rental costs, Brexit uncertainty and wary customers, unwilling to spend too much on entertainment are right up there in the “explanation stakes”.

However in my view this case masks one of the most glaring examples of a company ignoring the realities of the market. We often discuss in retail marketing classes the need for companies to proactively assess changing market trends, perceptions and behaviours: otherwise it is most likely that they will go out of business. This seems to be the case with HMV.

Superficially HMV would appear to have performed to an acceptable level as late as 2017. It increased its share of the physical music market from 26.7 per cent to 27.7 per cent (year on year). Its market share in the DVD segment increased from 20.1 per cent to 21.2 per cent during the same period.

However such figures masked the reality of the market-place. There was an inexorable move to people buying CD’s online, where the combination of much lower prices and quick delivery made for a more compelling value proposition than physically visiting an HMV store.

More worryingly for HMV most young music consumers had changed their buying behaviour more fundamentally: they were switching in droves to digital music services from operators such as Netflix and Spotify.

You might well ask how a long-established retailer such as HMV failed to monitor such change and react accordingly. It is a good question. Perhaps we can pick up some of the reasons in a statement by a former CEO, as far back as 2002, who rubbished the dangers from online retailers and music download operators. He also ignored the move by supermarkets into this sector. Such trends proved to be more than that. They changed the way in which people consumed music world-wide.

As is the case with many struggling retailers, irrespective of sector, HMV was very late into the online retail channels, preferring to rely instead on the “bricks and mortar” approach. This relied on the presumption that most shoppers prefer the “live” music environment that can be created in an outlet, the joys of browsing for their favourite artists and genres of music and the occasional promise of a live band playing at the stores.

While it is true to say that many of us like the physical store environment, the much more attractive proposition of lower prices from online channels continued to hold sway and indeed increase in recent years.

HMV is the classic example of a company that ignored reality and instead continued to plough on with its existing strategy, with a genuflection to online channels. It is surely a case of “too little too late”.

To be fair to HMV the high costs of operating physical stores: something that we have flagged up in previous blogs, has not helped. For instance in the context of business rates, it was faced with a bill of £15 million in 2017. With further rises in place for 2018, this was only going to go one way – upwards! By comparison online giants such as Amazon do not face such costs. This is clearly a case of a glaring imbalance in terms of competition.

Hilco, when it took over in 2013 succeeded in establishing more favourable relationships with its suppliers and also renegotiated more favourable deals with landlords. However to use a nasty analogy, you cannot stem a tsunami with ply board. Inevitably the market and more specifically the consumer will have its say in shaping the future.

Sadly for Hilco, music shoppers shifted far more quickly to streaming services than the experts anticipated.

This shift also raised questions as the willingness of people to actually pay for music. Then as now, there are many illegal streaming services providing music for free. Inevitably a culture of “can pay, won’t pay” prevailed. It is not hard to see why. If your favourite music is free and the quality of sound is excellent, what’s no to like about adding it to your collection?

Apple and its iTunes model changed to some significant degree, peoples’ conscience about paying for music. Most people are willing to pay something for music, as long as it is perceived as being value for money. Unfortunately music producers and retailers traditionally relied on the presumption that people would be willing to pay high prices for their favourite CD’s and DVD’s. This belief have been well and truly shattered by the emergence of digital music service providers.

Basic conceptions of selling music via full albums were also shattered: people want to pick their favourite tracks and not having to shell out on all of the tracks on a pre-developed album.

In my view HMV has fallen into the “sin of irrelevance”. Its products have no resonance any more with what people actually want.

This was rammed home to me recently when I purchased a new laptop. There was no facility for playing CDs or DVDs on the product. This confirmed to me that the product designers recognise the irrelevance of such a feature. In the future there will be no way back for such products. Yet walk into an existing HMV store (do so before they close) and you will see that the vast majority of the inventory revolves around CDs and DVDs.

The only area which exhibited signs of growth in the music sector is ironically a throw-back to the past. Vinyl sales have continued to grow as older shoppers rediscover their youth and younger people are attracted by the sound that emanates from this product. HMV has done well in this area and perhaps there is some way back if it wishes to survive.

Some commentators argue that a drastically “stripped-down” HMV (with only a dozen or so stores and a much stronger online presence) can operate in the vinyl area.

To be fair it is currently doing so, particularly with one of its subsidiary – FOPP. This was formerly an independent music retailer and has traded for over twenty years, with one or two problems.

Whether HMV has any relevance in such as retail space is very debatable. I accept that some of these independent music retailers offer the attractions of surprise, excitement and curiosity. Whether a slimmed down HMV can do so or not is a moot point.

Let us monitor the situation over the coming year.

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