HMV’s top dog could be in the kennels once again
Entertainment retailer HMV started 2020 fighting to keep 10 stores open under the pressure of high rents and business rates. But with the High Street flat-lining and a contracting physical entertainment market, should HMV's owners have foreseen this before snapping up the beleaguered music retailer last year?
HMV enjoyed significant growth since it opened its first store in London’s Oxford Street in July 1921 - that is until its last six turbulent years anyway.
For those few who didn’t frequent HMV every Saturday like I did as a teenager (looking for European techno CDs), or walk past one on every high-street, it specialises in the retail of pre-recorded music.
Initially, HMV grew its store base around London and expanded to a portfolio of 25 stores by the late 1960s. HMV continued to be a strong brand on the high street and the advent of the CD, and later the DVD, were major catalysts for worldwide growth to more than 400 stores.
However, more recently it has struggled with competition and generally being very late to the party to capitalise on its brand in the digital and online race.
In order to understand where it is today and where it could be going, it’s important to understand where it’s been. There have been three main “owners” in the past six years to get your head around:
- HMV Group plc – the original group born out of EMI that listed in 2002.
- Huk 39 Limited – owned by Hilco Global, the American group that bought HMV out of administration in 2013.
- Sunrise Records and Entertainment Limited – owned by the Canadian group Sunrise Records that bought HMV out of administration in 2019.
So, why has this retailer gone through two administrations in recent years? Here are some key points to note in each of these owners’ acts:
- HMV Media Group plc was formed in 1998, following the acquisitions of HMV, Dillon’s and Waterstones.
- In 2002, the newly named HMV Group plc was listed on the London Stock Exchange.
- At its peak, it operated 285 stores across the UK and RoI, and held the position of the UK’s largest specialist retailer of music, film, computer games and books.
- Trading started to deteriorate significantly from 2010 onwards (2010: £2bn, 2011: £1.15bn, 2012: £0.87bn).
- The Group announced its intention to close 40 HMV and 20 Waterstones stores which resulted in a 20% drop in share price.
- A divestment strategy followed whereby Waterstones was sold for £53m in June 2011, HMV Canada was sold for £2.0m to Hilco and a number of other businesses were offloaded.
- Deloitte was appointed administrators in January 2013 putting 4,350 jobs at risk.
- In January 2013, Hilco bought the £176m debt from the HMV administrators significantly below par. This effectively put Hilco in control of HMV’s future.
- In April 2013, the HMV business was bought out of administration by HMV Retail Limited (owned by Huk 39 Limited aka Hilco) for an estimated total of £50m, saving 141 stores and 2,500 jobs.
- Following a restructure of the business, store rationalisation and renegotiations with suppliers and landlords it posted positive EBITDA results from 2013 through to 2017.
- However, revenues dropped from £311.3m for the 39 weeks in 2013 to £235.8m in the 52 weeks in 2018, a like-for-like fall of 43% over those five years.
- In 2018, HMV once again posted an EBITDA loss blaming a “tsunami of challenges facing UK retailers…in the entertainment business”.
- Finally, in December 2018, KPMG was appointed administrators of this latest HMV incarnation.
- In February 2019, HMV was acquired out of administration by Canadian company Sunrise Records (run by music mogul Doug Putman) for an alleged £883k (the same buyer of HMV Canada when it when into administration only a couple of years earlier).
- Sunrise Records opened the Vault in Birmingham in October 2019, the largest HMV record store (the size of 12 tennis courts).
- In January 2020, HMV confirmed three stores will close with others likely if they can’t renegotiate landlord deals.
So, now we’re up to date with the relevant history, where is this high-street top dog, Nipper, going and could any of this have been foreseen?
Quite simply, yes and it may well have been, and it could very well still be part of Sunrise’s strategy. We don’t yet know; Sunrise Records and Entertainment Limited hasn’t yet filed any financial statements (they extended their first accounting period to 30 May 2020), so we can’t read too much into their financials or their strategy. However, there are a few things we can learn from the past and the wider industry.
Market, strategy and musical chairs
This is the story of a brand that really did not get it right strategically during the shift to digital, and the three owners have had very differing strategies since.
The original team was late to the digital party, very late (read more on this later). They diversified through the acquisitions of bookstores (which were also hit by digitisation), MAMA (which owned a number of venues and operated a number of live music venues and festivals) and 7digital (digital music and radio services platform).
However, a number of these were offloaded to clear some debt and to focus on their core product of the retail store. Other than the late-to-market streaming service with 7digital, they never really capitalised or brought these businesses together to develop a cohesive experiential strategy, which could have helped them catch up or even put them ahead. They even trialled a cinema in their Wimbledon store which was a success but never fully rolled out.
Next on to Hilco. Hilco is the turnaround specialists, but was it really in it for the right reasons or were they bleeding HMV dry?
Hilco took over HMV to mixed emotions; they kept the stores on the high-street and jobs (mostly) but some viewed that Hilco were not there to revive HMV rather get the best value out of them while they could. A store rationalisation programme followed, along with overhead savings, and they posted positive EBITDA results.
At this point, HMV was selling a commodity but at a higher price than other channels such as supermarkets and online competitors, and Hilco moved them into selling more gadgets with higher margins.
In its latest guise this past year, HMV under Sunrise has opened a new flagship Vault store in Birmingham which promises to become a "nirvana for music and film fans" with dedicated spaces for an “unrivalled” selection of LPs (as sales of vinyl hit a 25-years high) and an "unparalleled" range of specialist music titles, plus movies, books, posters, t-shirts and exclusive merchandise. A permanent stage has been installed in the Vault to showcase live music and performances. Doug Putman’s strategy is firmly focused on the experience, vinyls and some diversification of in-store products.
The physical music market is still worth a reported £2bn in the UK and experiential is certainly the way retail has gone to firmly complement the online shopping experience. Whether this is enough to pay the exorbitant costs in prime shopper real-estate is another question.
For me, this is another example of “get your strategy right”. Finance should be there to help model what it could look like, but wider customer preferences need to be stress-tested to support and help drive these essential business decisions, something finance should be there driving.
Digital competition and demographics
It’s a little like the Kodak story just rinsed and repeated, or do I mean the Blockbuster story? For some reason, HMV is still clinging on, but only just.
They have been ripe for decay for some time now. First it was Play.com taking advantage of “low value consignment relief” in the Channel Islands, whereby Jersey or Guernsey-based online sellers of goods under £18 (later £15) could sell products to UK customers without charging VAT and thus under-cutting high-street retailers.
Then it was Apple iTunes, then it was Spotify, then it was Netflix and then it was Amazon (I think in that order!). HMV were sitting ducks to all this change and competitors were driving the digital agenda while they were still shifting low margin goods in prime real-estate locations.
Paul McGowan, executive chairman of HMV and its former owner Hilco Capital, said “Even an exceptionally well-run and much-loved business such as HMV cannot withstand the tsunami of challenges facing UK retailers over the last 12 months on top of such a dramatic change in consumer behaviour in the entertainment market.”
He pointed out that HMV sold 31% of all physical music in the UK in 2018 and 23% of all DVDs and Blu-rays, with its market share growing month-by-month throughout the year. However, the chart below, which highlights consumer spend in the UK on physical and digital music, video and computer games, is hugely relevant here.
It shows that while the market for digital music, video and computer games has grown significantly in the past 10 years, physical music, video and computer games have fallen considerably. So, while HMV’s market share may grow month on month, it’s not enough in a contracting physical market.
While the future is hard to predict, it is one that absolutely could and should have been factored into forecasts!
I can’t not mention the High Street as one of the key factors here in both administrations and store rationalisation programmes. Despite renegotiating leases (both during the Hilco tenure and now under Sunrise), premises costs will be astronomical where they are located, and HMV stores tend to be a reasonable size.
But it’s no longer the rents that are the problem, it’s the rates that are destroying their bottom line. As we all know, with such a huge fixed cost, you need to shift a lot of volume, especially where it is low margin, like CDs or DVDs, to cover them.
The finance team partnering with real-estate specialists would have made a bet on rent renegotiations before making signing this deal. Equally, they ear-marked a number of stores to close based on performance and high premises costs relative to turnover.
Entrepreneurs are risk-takers. They generally think optimistically. While I love the fact that finance should be there to help navigate through this (insight), they do also need to be there to control and look at the “what if?” from all angles.
How did Hilco get it wrong in 2018 and not react quick enough to market conditions? For me, it’s a little ironic that Sunrise bought HMV from Hilco out of administration given Hilco are supposed to be the “turnaround specialists” and have huge experience on the British High Street.
Having said that, Sunrise, led by Doug Putman, are the music experts and have vast experiences with their record stores in Canada, albeit it in a different and arguably less mature market than the UK. Moving to become more of an experience is exactly how brands should behave with their “clicks and mortar” approach.
My view is the original owners were ignorant to the changing market and were caught out like many others (Kodak, Blockbuster), the second owners took what they could from it and its latest owner probably has the right strategy wrapped around it, albeit in a declining market that may only leave purists.
Sunrise likely went in with their eyes open on this with a strategy around rationalisation and beating down overheads. And with that, finance will absolutely have played their part in this approach. But, while we don’t know the full terms of the deal, buying HMV for £883k was, quite honestly, a bargain.
What this space for an update when we see Sunrise’s first financials!
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Alastair is founder and Chief Dreamer at flinder. flinder provides accounting, consulting and rich real-time management information for growing businesses. As well as his work with fast-growth businesses and transforming finance functions, he writes for AccountingWeb in a monthly column, sits on the ACCA Practitioner's Panel Network and was...