Coming as it does hot on the heels of a profit warning from HMV chief exec Simon Wolf last week, in which bad weather was blamed for poor trading over the vital Christmas period, this news highlights City concerns that HMV might be getting very close to the limit of its banking covenants.
Credit insurance is used by firms to guarantee payment on stock delivered to customers in the event of that customer becoming insolvent and unable to pay its bills. And like all insurance products, the more likely that scenario becomes in the view of the provider, the more expensive the guarantee. Rather like a homeowner moving from a secure gated community in a leafy suburb to an edgy urban neighbourhood – and finding that the price of insuring against burglary goes through the roof.
So what’s happened here is that the insurers have taken a look at HMV’s latest figures and decided that they don’t want any more exposure to the business because in their view it is no longer an acceptable risk for them. In and of itself this is not the end of the world – suppliers can still choose to trade with HMV at their own risk. And they probably will - given that it is the last remaining high street music store, most of those suppliers are heavily dependent on the group and don’t really have much choice.
However it is another sign that the general view on HMV in the wider commercial community is hardening, and that the confidence so crucial to making the wheels of business run smoothly is beginning to ebb away. It’s also been the cause of many a sage reminder that one of the first signs of real trouble for many retailers in recent years has been credit insurance aggro – recession casualties Zavvi (formerly Virgin Megastores) and Woolworths both suffered this fate in advance of the eventual demise.
But it’s worth pointing out that as a business HMV has still plenty going for it – as already noted, it’s the only remaining high street music chain (for those of a certain age who spent most of their teenage Saturday mornings rummaging through racks of vinyl this is still pretty hard to believe). So, zero competition from that direction, although maximum competition from online retailers and music downloads.
If MT were to hazard a suggestion, we’d say HMV could make much more of its single biggest advantage – its stores. The shopping experience is pretty much the same now as it was back on those distant Saturdays and that’s not good enough. A fresh approach could reap dividends pretty quickly…