Brainfood: Behind the spin

THE DILEMMA

by
Last Updated: 31 Aug 2010

If music and book retailer HMV thought things could only get better after an off-key 2005, it had a rude surprise in the new year. Battered by price-slashing supermarkets on one side and upstart online retailers on the other, its profits plummeted over Christmas. As shares slumped by 10% to hit a two-year low, CEO Alan Giles said he would quit this year after nine years in charge. Things were no rosier at HMV's book chain: in a buoyant book market, Waterstone's year-on-year sales were down too. The dilemma is simple: if HMV is to compete with its new rivals on price, it'll have to lose much of what has made it successful - the high street sites, its vast back catalogue and its specialist staff.

THE SPIN

Giles remains bullish: 'I have every confidence that the business will work through its issues, and I am determined to demonstrate that over the next 12 months.' He will 'rethink the HMV formula', having already instituted pre-Christmas price-cutting and moved the group into digital downloading. His departure, he claims, is unconnected with its ailing fortunes. 'I hate to sound like an old fart, but I have been in retailing for 30 years and want to step away from doing a full-time executive role.'

THE STRAIGHT TALK

There's no denying that the timing of Giles' departure has sapped confidence in HMV. It's hard to find a pundit in the book, music and DVD sectors who thinks the company is doing well. Says Tim Waterstone, founder of the bookseller: 'Waterstone's has had seven years of HMV ownership and gone backwards in every one.' The Sunday Telegraph describes HMV's problems as 'serious, structural and here to stay'. With nimble competitors driving prices down, it can't compete on price, maintain margins and retain specialist music knowlege. Says Matthew McEachran, retail analyst at Investec Securities: 'HMV is on the slippery slope towards being a discounter.'

THE VERDICT

These are desperate times for high street music retailers. The supermarkets have snatched a 28% share in chart CDs, while online retailers have carved up lucrative back-catalogue sales. HMV underestimated how quickly the musical landscape was changing - Giles had downplayed the impact that internet sales would have on profits, predicting that they'd plateau at about 10% of the market, a forecast that even he now admits looked woefully short-sighted. If, in Giles' own words, HMV spent 2005 'running to stand still', 2006, without a change in tactics, could be the year it falls further behind.

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