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HMV THRIVES DESPITE SQUEEZE ON MUSIC RETAIL

By Nicky Godding

Reports of Mark Twain's death might have been exaggerated at one time, but no longer. Rumor has it that Franco, too, remains dead. But HMV Group stands ready to challenge any expectation of its imminent demise. In fact, having beaten back threats from grocery superstore and online competitors alike, the U.K.-based, music and DVD retailer wants it known that it has managed to cling to life very nicely indeed.

After posting stronger-than-expected Christmas sales, HMV, which opened its first store on London's Oxford Street in 1921 (as The Gramophone Co., a seller of 78 RPM phonograph records) surprised pundits with a group sales increase of 9.9 percent and a same-store sales rise of 9.4 percent. The company took in £57.3 million ($115 million) in operating profit last year, on group sales of £1.9 billion.

“The initiatives we are undertaking to revitalize our business have helped to deliver a highly successful Christmas,” said Simon Fox, HMV's chief executive, just after the announcement of these results, in January. “Having stabilized the business, we will continue to focus on revitalizing our store propositions as well as growing new channels to market, and carefully managing margins and costs. The group is, therefore, well positioned for the next phase of its turnaround.”

The company's CD sales rose 2 percent from the previous year's holiday season, despite the format's downward trend. Sales of DVD players, MP3s, box sets and special-edition DVDs were strong too. This is quite a contrast from just a year ago, when Fox was lamenting a sizable loss of customers to online music downloads.

Maidenhead-based HMV (so renamed from the Gramophone Co.'s slogan, “His Master's Voice”) operates nearly 700 stores throughout the U.K., Ireland, Canada, Hong Kong, Singapore and, until last August, Japan. The U.K. operation, which includes the Waterstone's 323-unit bookstore chain, is leading the recovery (group sales across the U.K. and Ireland divisions are up 16 percent in the aggregate), but sales are up internationally too, at 2.3 percent.

What has changed? In March 2007 Fox announced a three-year turnaround plan that included moving toward high-growth electronic games and state-of-the-art entertainment technology and boosting the company's volume of online business. In addition, HMV says it wants to be market leader wherever it operates, not No. 2 or lower. So last year the company sold its 62 stores in Japan, where it was the No. 3 retailer, with little realistic prospect of improving, and redeployed that capital.

The company did just that in the U.S., too, in the late 1990s, where for 10 years it had operated a handful of stores in the Northeast, including in and around New York City. HMV withdrew when it became clear that it had little chance of competing against the likes of Virgin Megastores and the now-defunct Tower Records. The company says it has no plans to re-enter the U.S. or to widen its reach to other countries. HMV is still market leader in Canada, where it has 116 stores and where it was named the 2007 Canadian Music Industry Awards Retail Chain of the Year — for the 19th successive year. But those market-leader ambitions have a way to go in Hong Kong (the company operates five stores there) and Singapore (two stores).

HMV launched a new format last September at Merry Hill Shopping Centre, in Dudley, West Midlands. This 8,000-square-foot Next Generation store embodies HMV's blueprint for the future. Not surprisingly, the store puts a strong emphasis on technology. The traditional store window has been replaced with a plasma screen measuring 5 meters by 3 meters (17 feet by 10 feet) and featuring promotions and ads for music, movies and video games. Customers can hang out at the “social hub,” where they can browse music and entertainment sites on iMacs to their hearts' content, or indulge themselves at the in-store Lovejuice smoothie bar. Further, the Merry Hill store offers exclusive deals on cell phones, accessories and other technology.

HMV followed up that first unit with a smaller Next Generation store (4,000 square feet), at Tunbridge Wells, in October. These two stores “are both trading to expectations,” HMV spokesman Gennaro Castaldo told SCT, though he declined to specify. He did cite plans to continue the Next Generation rollout at Heathrow's Terminal 5 and in High Wycombe and Liverpool, and to convert some existing HMV stores to the new style, beginning with the store in Brighton. Though the preferred size for the new format is between 6,000 and 8,000 square feet, in major cities the company will be seeking sites measuring 12,000 to 15,000 square feet.

HMV is doing all the right things, but it still has a job on its hands to maintain its place in a challenging sector, says James Flower, a retail analyst at U.K.-based Verdict Consulting. “What has helped HMV is the huge market growth in computer games and consoles,” Flower said. “The new store has a reduced exposure to physical music and more space given over to digital download kiosks and increased sales area for computer goods and accessories. Their focus on providing an exciting in-store experience offers customers something they can't get anywhere else, either from grocery stores or online, and it's this they must maintain and continue to enhance to keep their share of the market.”

Just as music sales are in danger of decline, so are DVDs, says Flower. As home bandwidth gets bigger and consumers become increasingly accustomed to video on demand, they will be downloading more movies and buying fewer DVDs. Even so, “there will always be a place for these stores which occupy a strong space in the gift-giving sector.”