THE NEW MUSICAL BOX

DEATH THROES ON THE HIGH STREET?

I hadn't expected to return to the subject of record stores quite so quickly: regular readers may recall a long piece I wrote in October last year which outlined the rise and fall of the record store phenomena in the UK. (You can check it out here: Record Stores ). I ended it by being relatively positive about the future, recognising that it would be a smaller and more niche future - but nonetheless, one in which record stores continued to exist in some way.

Two piece of news this week illustrate the precarious nature of the record retailer business model. Firstly, HMV has gone into administration - and secondly, on-line CD and DVD seller play.com has announced that from March, it will withdraw from its direct retail business.

But, what does this tell us? Does it say that HMV was badly run? That no-one buys CDs anymore? That the record industry no longer cares? Let's take a look at some of the factors swirling around the UK economy that have impacted these two very different animals.

HMV

With 239 stores in the UK and employing over 4300 staff, HMV is still a big business. Any big business needs to keep its eye on the competition to ensure it's not left behind. HMV did what it could: when video cassettes started being replaced in popularity by DVDs, it gave over large parts of each store to this product.  It tried to tackle the growing threat from on-line retailers  by launching its own download business. It saw that bands were increasingly making their money out of touring, so it bought a string of legendary music venues here in the UK. Finally, it acquired the book chain Waterstones and added to it when the Ottakers chain became available.

So, it had acted swiftly and decisively?

Well, not quite. Let's look at each of the moves and their subsequent consequences.

DVD Invasion

HMV was always seen as a record retailer, a business brand wrapped up with music and record labels. Once a London-based retailer, it embarked on a store expansion programme in the late 1960s, so its ubiquitous High Street presence has only been around for thirty to forty years. As the shape and purpose of town and city centres has changed across the years, HMV had to react. In the expansionist 80s, retail parks and out-of-town locations started becoming popular and large stores de rigeur. HMV was left with a large town centre estate, but often stores would end up in the wrong bit of town as the retail axis changed. As long as people kept buying, the downside wasn't too serious - even when competitors such as Virgin, Tower, Borders and so forth appeared to be much fleeter of foot and nimbler in their marketing and promotion. 

The attractions of HMV weren't its prices - it was not the cheapest store - but rather the large range of stock, the in-depth selection of genre music and the knowledge and enthusiasm of its staff. For record buyers who were uncertain about what they wanted, it was a good, friendly place to go. The larger stores -such as Southampton - had several floors and segregated the musical range into Classical, Genre and Rock & Pop. I - and no doubt many others - could spend hours browsing the shelves and choosing music to buy. The arrival "instore" of the DVD was no doubt seen as a wise move by the HMV hierarchy, but what it did was to remove quite a bit of the CD sale space, chipping away at the very qualities which brought the punters in. After DVDs, books, magazines, T-Shirts, games and gadgets followed - a typical High Street HMV was no longer a record store. Indeed, the newer retail park sites (such as Bournemouth's Castle Point) changed their layouts so that upon entering, racks and racks of DVDs were the main feature - with CDs and music shunted off to a less enticing part of the floor-space.

The genre-lines were cut back dramatically, so whereas at one time, Southampton had a whole floor devoted to folk, country, jazz, blues, rock & roll and all the rest, it now had two small racks with an extremely poor choice. From promoting HMVs own music label (part of EMI), it moved to swathes of DVDs and almost seemed to apologise for having to stock the odd bit of folk or jazz. The consequence? HMV was no longer a browsing destination, no longer a place to go to talk to staff experts - but an almost Tesco-like "pile it high and sell it cheap" emporium, only it wasn't that cheap.

Download Explosion

It can of course be argued, that the DVD invasion was simply a reaction to how consumer buying habits had changed - and the launch of its on-line download facility was another string to HMV's bow. The late 1990s saw the growth of a number of download websites, some from enthusiastic music fans, others from tech-savvy entrepreneurs. Here is not the place to go into the history, but essentially, the success of downloading only hit once two things happened: firstly, the widespread availability of home PCs with decent download speeds and secondly, the birth of easy and attractive download software and sites. Apple got in on the act through its purchase of Soundjam in 2000 and renaming it iTunes and since then, it has grown into a world-wide phenomenon. 

HMV started in a very tentative fashion by remodelling some of its larger stores to include a bank of PCs from which customers could buy direct from its fledgling download store. Again, one can see the thinking of the HMV marketeers, but this hybrid approach turned out to be the worst of all possible worlds, not helped by HMV's on-line pricing structure and the clunky and awkward software platform. The in-store terminals were phased out and a big promotion of a new download site replaced it: it was smarter and tidier, but still not the easiest thing to use - and by the time that the music-buying public was aware of it, iTunes had grabbed a substantial lead. So, the problem now was - how much money could be thrown at it to compete? But with an ageing estate of bricks and mortar coupled with its over-expansion into book-retailing meant that money was in short supply - and management attention was diverted elsewhere. HMV's on-line download site never did bridge the gap and it sits there as part of HMV.com, quietly dying away.

On-Line Tax Haven

The other threat that HMV was up against came from other retailers who sold physical copies of CDs - but they did so on-line and at a lower price. Play.com was the biggest and most aggressive: HMV were caught off-balance by the marketing tactics of this Jersey-based upstart. Play.com took advantage of a tax loophole there allowing them to buy and sell their wares without having to pay 15% VAT. That coupled with a clicks and mortar back office meant much lower overheads and the chance to sell products at a price that undercut HMV.

The response from the HMV management was to replicate Play.com's success by opening a similar operation in Guernsey, also taking advantage of the tax loopholes noted above. For a short time, they looked as if this might work for them, but again, events conspired against them. Brand awareness was all important - and Play.com was the on-line king of brands. HMV was seen as a High Street brand, so new consumers tended to opt for the upstart rather than the veteran. HMV also had the oft-repeated dilemma of a dual-track business whereby on-line sale prices were cheaper than store prices - and although there was an economic rationale for this, it didn't sit well with the punters.  

The death knell had been lurking in the background for some time: UK retailers had long complained of the tax loophole in the Channel Islands that allowed HMV and Play.com to base themselves there and essentially not to have to charge VAT. Pressure had been growing on the UK government and the States of Guernsey and Jersey to "do something about it" and in April 2012, "Low value consignment relief" (the technical phrase which allowed VAT-free sales on goods up to a value of £18) was outlawed by the UK government. Imports to the UK had to pay full VAT of 15%, thus removing almost overnight the key rationale for these CI-based businesses. 

Play.com still exists, but they have announced (9th January) that with effect from March, it's direct retail business will close, leaving the brand to concentrate on its "marketplace", whatever that might mean in the longer term. 

Live Music

In a parallel move, HMV had obviously noted that the old record-label and record company model was also suffering various stresses and strains. Bands increasingly saw their financial future coming from touring and live performances, rather than from the sale of singles and albums. It wasn't an overnight switch, but as new technology enabled new entrants to take a more DIY-approach to producing their music, music venues became the new commodity. Boosting this idea of live music was the explosive growth in the number of music festivals in the UK, festivals which needed bands and artists - all leading to more tours, more bands "getting back together" and a change to how many people consumed their music.

HMV's response? In 2009, it joined up with the MAMA Group to buy a 50% share in their business of owning iconic music venues. This brought the HMV brand to places such as The Hammersmith Apollo which became the HMV Apollo. Later that year, it bought the business outright, but running music venues in a crowded market place is a tough thing, it needs time and investment, and with the stresses and strains elsewhere in its business, HMV sold out just two years later to bring in some much-needed capital.

Books And Other Distractions

The final elements of HMV's portfolio, and an increasingly large distraction from selling music, was its ownership of the High Street book chain, Waterstones. It had over 250 stores around the UK and had been founded by book-seller extraordinaire, Tim Waterstone in 1982. It took a revolutionary approach to retailing and was bought out by W H Smith in 1993, Waterstone's former employer. By 1998, Tim Waterstone had decided to try and buy back his stores and launched a bid for the whole W H Smith empire. As a protective measure, W H Smith sold the Waterstones stores to HMV for £200m - and HMV brought its founder back to head the business.

Ottakers, a boutique-style rival chain of booksellers was added in 2006, but by then, on-line sales of books was having an impact on the abilty of the whole chain to compete. Whilst profitability was maintained to some extent, sales and market share were falling - and HMV, strapped for cash, sold the empire to A & NN Capital Fund Management in 2011 for barely a quarter of what they had paid for it 13 year earlier. The other threat to the business was the increasing acceptance by the public of e-books and book-readers such as the Kindle. HMV won't have to face that challenge, but I do hope that Waterstones manages to ride out that storm and survive.

High Street Woes?

So, we're back to HMV being put into administration on January 15th, 2013.

Some might think that no High Street store should be immune from the economic reality of life in 21st century Britain, change is for the good and maybe one day, we'll be anxious about the loss of iTunes or some such other on-line business. Others argue that for towns and cities to survive, a strong retail presence is vital - and speaking personally, the social cohesion of a town is down to retail, entertainment and employment attractions. If these disappear, what future is there for our towns and High Streets? Reinvention will happen, but I do trust that there will be a happy mix of real stores and virtual stores, I hope that the pleasures of shopping and browsing - the tactile experience of books and music in my case - will live on.

HMV itself may well survive in some form.

It's too early to say specifically what will happen, but already there are encouraging noises being made by the record and entertainment industry that its physical presence is a necessary element of the future. I suspect they fear being held in thrall solely to the on-line world and hope for a bit of competition. I hope too that there's a recognition that not everyone chooses (or is able) to buy on-line. A buyer for the group may have some advantages: if they have the funding to buy the brand and the stores, then they start afresh with no debt. Some stores will close, of that there is no doubt. They're in the wrong places now, they're the wrong size and they may well be locked into punitive leases. I fear for the staff numbers too. However, with some genuine focus and (that horrible word) re-purposing of their offering, HMV may yet survive.

We shall see.

Alan

15th January 2013