End of the road for HMV?

I admit it, I’m very sad and even somewhat depressed about the news that HMV has been placed in administration after 92 years in business. That said, you’ll notice that I didn’t say ‘shocked’ or ‘surprised’, because frankly this moment has been coming for some time now.

Actually, I genuinely thought that HMV would collapse early in 2012, but that time the management was able to hammer out a financial rescue package with the banks to keep it afloat. But once news emerged that the entertainment retailer’s pre-2012 Christmas sales had suffered a 8.1% like-for-like drop. That’s pretty disastrous, and clearly meant that insolvency could only be a matter of weeks away. It turned out to be just days instead.

The signs were clear in-store: there may have been piles and piles of sales stock, but strangely it simply hasn’t been selling – customers weren’t interested in the store’s selection of discount titles even at rock bottom prices, so the piles stubbornly stayed put. Meanwhile the rest of the shelves in the stores that I went to in London were showing obvious signs of not being restocked even of comparatively recent releases. To anyone who has seen a retail chain collapse in progress in the past – and there have been plenty of recent opportunities, sadly – these were clear and ominous signs.

When HMV staff started slapping on blue cross stickers onto large swathes of their remaining stock in preparation for a 25%-off clearance sale starting on Saturday, it gave every impression of a desperate and feverish attempt to liquidate as much stock as possible before having to call in the receivers. I figured that they would limp to the end of the month before the collapse, but rather than two weeks it was actually just 96 hours later that the edifice crumbled.

I still find it amazing that a chain which had been handed a de facto high street monopoly by the collapse of a succession of rivals apparently still could not survive in business.

What are the reasons behind it?

The obvious culprit is online stores undercutting HMV’s prices on CDs, DVDs and computer games. And you have to have some sympathy for HMV here because they faced a far from level playing field; some online stores like Play.com were taking advantage of a tax loophole available to businesses based in the Channel Islands, while Amazon.co.uk has notoriously been indulging in some very near-the-knuckle accounting practices relating to VAT and corporation tax. HMV wasn’t able to follow suit, while also having the overheads of high street rent and staff wages to support.

However, just blaming online buying isn’t the whole picture by any means. After all, what was to stop HMV from setting up its own online business in the Channel Islands? Well – it did. Unfortunately the enterprise was pushed and pulled from all directions by corporate priorities: pursuing low prices to match the likes of Play.com and Amazon.co.uk just drained further sales from the high street stores, and embarrassed the physical shops by emphasising how overpriced they were even to their own online operation; but being forced to match the same prices, offers and sales as the stores made them look absurdly expensive in the online realm. They literally couldn’t win.

Anyway, ‘online’ is no panacea. Play.com was once the poster child for e-commerce, but it’s been in decline for some time and when the government finally got around to closing the Channel Island tax loophole, the company announced it was pulling out of retailing altogether just a week before HMV was forced into insolvency. If even Play.com can’t make online retailing work without an opportunistic tax break then who can?

For the record: I’m not one of those who has ever piled on to the companies that have made use of some creative but completely legal accounting practices. Everyone – individual or business – seeks to get the best deal on tax possible to them, and Amazon.co.uk is no difference. They might get a break on corporation tax and VAT, but they’ve also built huge facilities in the mainland UK and employ a lot of staff in the process. Besides, do you really want to crack down on Amazon.co.uk now and force it out of business like HMV and Play.com before it, and leave us with nowhere at all to buy CDs, DVDs and games while also adding to the unemployment numbers?

Another culprit for the demise of HMV is supermarkets which now stock top CD, DVD and even game titles and therefore take the top-selling cream off the market that otherwise would have gone to HMV. On the face of it, it’s difficult to see how supermarkets can undercut HMV quite so much on these top titles. After all, supermarkets can’t take advantage of the same creative accounting that online companies have been able to; they have the same overheads in terms of rent and staff wages. It’s unlikely that the supermarket chains can get better bulk purchasing deals than HMV, and hard to see that CDs and DVDs are worth making ‘loss leaders’ supported by profits from the sales of other goods in the same way that alcohol often is. So how come supermarkets were able to consistently undercut HMV and steal the business?

This one comes down to HMV’s expansionism at the height of the entertainment market from the end of the 1990s through the first decade of the 21st century. As well as opening up new stores they also diversified into books (buying up the Dillons/Waterstones book chain) as well as cinemas and live music venues. That was fine at the time, but the borrowing the company did to fund this strategy came back to impale them after the credit crunch took effect. Not only have the last few years of austerity taken their toll on consumer spending power which in turn has curtailed sales in the entertainment sector as a whole, it also forced HMV’s management to be fixated on managing its debt burden rather than developing the business.

The last couple of years, HMV has been all about servicing its debts and fending off creditors, selling off relatively profitable assets like Waterstones and the live music business in order to get the cash together to meet the next bank loan repayment. The more the company contracted, the more it forced the remaining debt burden to be heaped on the core business – the stores. The only way of generating enough revenue from the remaining rump was to increase prices, treating their market like a monopoly when the truth was this just forced disgruntled customers to look online or to supermarkets instead. Far from increasing HMV’s revenues, price gouging (as it came very close on occasion) just killed it.

The moment I really knew that HMV was toast was when the management announced a new retail strategy: they would pull back from stocking CD and DVD and instead focus on developing new products in personal entertainment technologies. Or as one wag put it: the visionary HMV management decided to exchange their existing share of the £1.6bn CD market for a hope of a share in the £160m headphones market, which was already in decline as the demise of high street electronics stores like Dixons demonstrated. Sorry, but that never seemed like a winner: and if it’s your emergency Plan B then you really are terminally screwed as a company, as it’s proved.

What’s going to happen now?

So now we’re facing the prospect where there will be no stores on high streets selling CDs and DVDs, and only the formerly insolvent Game chain currently surviving to service the computer game market. Back in 2005, there were around eight stores in my local city centre (Kingston-upon-Thames) which were either CD/DVD specialists (Virgin Megastores, Silverscreen) or were big stores with large sections selling CDs and DVDs (Woolworths, WH Smiths, Borders.) Now as we enter 2013, the last sick man standing is about to drop down dead.

Is there really insufficient consumer demand left on the high street to maintain a single CD/DVD retailer anymore? I genuinely find it hard to believe. Yes, I know that online sales, downloads and streaming services have taken a huge chunk out of the music sector; but a lot of people either can’t go that route or prefer to be able to walk into a store, browse, and walk out holding a physical item in their hand. Not everyone wants to be forced to go to Amazon.co.uk for every single electronic entertainment item that they buy, surely?

Even in the 24 hours since the news of HMV’s insolvency hit the wire, there have been some green shoots of optimism breaking through the icy frost in the high street retail business. Knowledgeable sources confirm that many – a majority, even – of HMV stores actually trade a reasonably strong profit in their own right, it’s just that this is soon swallowed up in unsustainable debt servicing. Free the stores from this debt burden and do some basic reorganisation of the chain (which would include a ruthless pruning of their the deadwood from their 239 store, which will inevitably cost at least some of the 4500 jobs currently at risk) and you have a viable business, surely?

This must surely be the plan of the administrators Deloitte, and it must be hoped that they won’t follow the astounding strategy of PriceWaterhouseCoopers at Jessops, which permanently shut down the entire photographic retailing chain just 48 hours after taking over. But in these troubled economic times, does anyone have the funds to risk coming in and salvaging what’s left of HMV?

There are a few companies with pressing reasons for doing so: the record companies, TV networks, film studios and computer games manufacturers for starters, who rely on home sales of CDs, DVDs and games to keep their own core business afloat. There’s a serious risk that the loss of a high street retail channel could tip many of these businesses into financial problems; and as for the companies that make and distribute the products, it’s hard to see that they have much of a future at all if HMV isn’t replaced.

But won’t people just buy online or at supermarkets, as we’ve just discussed? Well, certainly some sales will go to these channels: the big blockbusters and family films which are already among the six to eight new titles per week that the supermarkets deign to stock will be okay, and ironically so will the very niche products like indie arthouse pictures and vintage classics since most hard core collectors will be motivated to seek out the titles online or even directly from the distributor if necessary. It’s the huge ‘middle mass market’ that’s at risk: the sort of films not big enough for the supermarkets to want to waste shelf space on, but are nonetheless only bought on impulse when someone walks into a shop and sees a cover that piques their interest, albeit not to the extent that they would bother seeking out online.

You’ll perhaps notice that I’ve shifted to talking about films here, and that’s deliberate. I’m not sure that the high street music market has the same claims to surviving the current storm. That’s because most people browse their music on the radio (or by streaming services) and form their purchasing decision right there and then so it’s the most natural thing in the world to boot up the PC and have the music on their iPod 60 seconds later. Moreover, these days it’s usually a specific single track they want. You can get that single serving on iTunes, but the high street stores selling the music on albums alone actively fail to even offer the specific product that customers want. No wonder sales are collapsing.

Films are different: you don’t simply hear them on the radio and decide you want it, so what’s going to drive sales if you can’t see rows of titles in a store? There’s also no equivalent of wanting a ‘track only’. And the downloads from iTunes, Netflix et al can be big and time consuming if you’re on slow broadband, and if you have metered internet usage then you can pretty much wipe out your entire month’s capacity with half a dozen films and a couple of TV shows if you’re not careful. Oh, and the end product is significantly poorer from the online download/streaming versions as well, even for DVD – let along high-def Blu-ray.

Still, the signs are clearly on the cards. While I think film sales on physical media via shops are still viable for the time being, the fact is that as technology and networks improve then films will indeed eventually go the the way of music sales. Or at least, they will once the crusty ancient ‘I want something real to hold in my hand, dammit’ oldtimer brigade die off.

Who’s to blame?

Let me come clear: I’m one of those crusty ancient oldtimers. Not to extremes: while I would prefer to have an actual product in my hand, if I only want a single track then I’m obviously going to buy it from iTunes. And if an entire album is half the price online than it is in the stores, then I’m going to treat the physical product as a prohibitively expensive luxury item and settle for the download there, too. My preference may be to buy the physical item, but it doesn’t override my rationality.

That preference has led me to keep supporting HMV by buying items from there regularly over the last few years. Indeed, my obsessive DVD buying has at times made me feel like I’m single-handedly servicing HMV’s entire debt mountain by myself. I value the high street presence, and I recognise that overheads make it more expensive to run than an online operation so I’m willing to pay out a little extra premium in order to support it.

For example: my last visit to HMV was on Sunday, the day before the news about the insolvency hit the headlines, and there were lots of vultures eagerly circling the discounted stock in the hope of picking the bones of the carcase clean before the corpse starts to reek of decay. Admittedly, one item I bought was indeed something in their 25%-off blue cross fire sale, but the other two were items that were full price and which I could have got a pound or two cheaper if I’d ordered online. But the price was still reasonable, and it wasn’t something I was going to bother with ordering from a website, so I paid it in the meagre hope that it might help the company survive in some shape or form. I’d have bought other things, but everything else I looked for was apparently out of stock – which itself tells a crucial tale of the problems facing high street retailers.

That loyalty has its limits, mind you. Just a few days before this crisis erupted, I noticed that the latest release in the BBC’s Classic Doctor Who DVD range was for sale at £25 at HMV (in store and online) compared with £14 at Play.com and Amazon.co.uk: I’m sorry, but a 78.5% overhead is simply too great to swallow, so the order went to Amazon.co.uk instead.

I have the same sense of wanting to support other high street stores under threat in the current economic downturn, so when I can I buy large format books from local bookstores and even made a point of buying books for Christmas gifts for several people from local bookstores as a way of showing support. Better that than sleepwalking into having no bookstores left on the high street in a year or two. Unfortunately even this resolve is tempered: for my own reading I’m increasingly preferring to read novels on a nice, light e-reader, with the added advantage that the bought volume doesn’t add to my already overburdened bookshelves in my tiny flat. Even if that means buying the e-book from iTunes or Apple.

So even I’m crumbling and losing my fortitude, feeling like Canute trying to order back the inexorable tide to zero effect. Soon, the choice on the high street will be gone and I’ll have no choice anyway. I’ll be very sad when that moment comes, and wonder what will become of the high streets when they’re just a collection of ghostly empty spaces quickly forgetting why they were ever gathered together in the middle of town in the first place.

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