HMV – the fall and rise?

Written By:

Stephen Springham, Knight Frank

08 Feb 2019

6 minutes to read

Categories: Retail UK

• Having erroneously declared December “the worst trading performance in a decade”, the BRC reported surprisingly robust figures for January (by my reckoning, the best monthly performance since June last year and the second best January performance for five years). Total retail sales were up by 2.2% and like-for-likes were ahead by 1.8%. Very little media coverage of strong figures, admittedly only for one of the quietest months in the retail calendar.
• Former stock market darling Superdry’s fall from grace continues. Group sales declined by 1.5% to £269.3m in the quarter to 26 Jan. The business blamed the lack of any extended period of cold weather in its key markets. Store sales were down 8.5% and, more worryingly, online sales dropped by 0.7%. Underlying profit before tax guidance for the 2018/19 year remains unchanged at £58.4m, down from £97m in 2017/18.
• Furniture retailer Made.com has posted a 37% uplift in full-year revenue to £173m in 2018. UK revenue grew by 34% to surpass £100m for the first time. The online retailer currently operates in nine European markets and plans to launch in Portugal, Italy, Denmark and Sweden this year. The business will also unveil its upgraded London showroom this month, which is trebling in size to ca. 12,000 sq ft. It also plans to open a showroom in every country in which it operates, starting with the launch of a flagship in Hamburg, Germany.

Stephen Springham, Head of Retail Research:

“Who on earth still shops in HMV?” Or “who even still buys CDs and DVDs?” Two of the paraphrased questions that sum up the general reaction to this week’s news that HMV will survive, having collapsed into administration for the second time just after Christmas.

The business has been taken over by the Canadian music retail tycoon Doug Putman, owner of Sunrise Records. Some 27 stores are closing, including the flagship store at 363 Oxford Street - without which the Beatles may never have existed (perish the thought). Even though HMV has itself only re-occupied the site for the last five years, replacing previous incumbent Footlocker.

I struggle to write dispassionately and objectively about HMV. It is probably the retail brand that I have had the most affinity with for much of my life and definitely the retailer (on the non-food side) that has secured the highest share of my hard-earned cash. But then again, I am of a certain age (when HMV was by far the coolest brand on the high street), a committed ‘muso’ (do people still use that term?) and owner of a huge vinyl and CD collection. My bias is unlikely to extend to a generation that cannot see beyond Amazon on the physical side and Spotify / Netflix on the digital side.

Few retailers have been exposed to such sweeping structural change as HMV – the rise of online, then the transition to digital. Most commentators point out that it was an online laggard and cite this as a core reason for its demise(s). Not true, HMV was actually a pioneer in online retailing, launching HMV Direct as long ago as 1996, if memory serves me right. At the time that Amazon (founded in 1994) was still in nappies and only selling books. But a major turning point in HMV’s history came when it came under private equity ownership (Advent International) in 1998. In a classic case of private equity short-termism, HMV Direct was starved of investment and left to drift to virtually nothing.

Ironically, in the 1980s and 1990s, HMV actually benefitted from structural change. The advent and proliferation of CDs was matched by the rise of VHS (try telling your children that back in the day the typical cinema to TV cross-over time was 5+ years and the only way of filling the gap was to buy on video), and then the transition to DVD (and to a lesser degree, blu ray). But then came digital and streaming, a structural change to which HMV seemingly has no answer.

Will the business survive, even under new ownership? The recorded media market is widely considered to be in terminal decline, yet was still worth around £4bn last year and is stabilising rather than free-falling. “Who still buys CDs/DVDs?” – clearly some people still do. Some prefer physical product to digital. At the same time, much has been made of the “vinyl revival” and, refreshingly, Mr Putman is clearly keen to major on this side of the business. Although vinyl is again a growth sector, this needs to be put into sharp perspective – it is still a very small market and, in reality, probably won’t sustain HMV on its own.

Certain parallels may be drawn with HMV’s erstwhile stablemate Waterstone’s. This was a business that was subject to similar structural change, teetered on the brink for a while, radically downsized, but has enjoyed something of a renaissance under new ownership and fresh management. But these parallels aren’t watertight – the notion that digital will completely supplant physical books has proved wrong and we are now at the point where physical is again growing at the expense of digital. I’m not convinced that music and films/TV programmes will follow a similar path.

But there are more generic lessons that HMV could learn from Waterstone’s. Waterstone’s stores are much more than places you buy books. Yes, there is a demonstrable and absolute passion for the product, but the stores are designed as places you want to go and spend time. The product offer extends beyond books to other complementary categories, such as stationery and gifts. The new stores are individual in character (dare I use the dreaded “experiential” word?), with strong autonomy granted to store managers. Staff are helpful and knowledgeable and the whole focus is customer-centric.

Only by adopting similar principles will HMV survive. Some initial signs are good. The 27 store disposals include a lot of the higher profile / glamourous locations, so there are no ‘sacred cows’ on that front. The business needs to make money, not just a statement. Also, it is good to see a dedicated owner that believes in the concept, as opposed to someone that is just out to make a fast buck. The product range has already been broadened into complementary areas (headphones, turntables, clothing and gifts). Is a residual 100 store portfolio viable? My gut feeling is this figure may need to come down a bit more. If HMV is to survive, its future is as a niche operator, rather than a mainstream operator on every high street.

Retailers come and go and objectivity always trumps sentimentality in the tough old world of retail analysis. But HMV’s obituary is not something I ever want to write.