HMV needs to shrink and speed change to survive
British retailer HMV may need to close hundreds of stores and sell its Waterstone's book chain to provide the money to accelerate its shift away from declining CD and DVD markets and secure its long-term survival.
January 05, 2011 / 21:29 IST
British retailer HMV may need to close hundreds of stores and sell its Waterstone's book chain to provide the money to accelerate its shift away from declining CD and DVD markets and secure its long-term survival.
The 90-year-old group needs to get faster, and better, at moving into growth markets like ticketing, live music and technology products, or it risks going the way of failed rivals like Woolworths, Zavvi and Borders UK, analysts said."Put simply, the market is changing faster than HMV is changing. That is what they have to address," said John Stevenson, retail analyst at brokers Peel Hunt."Do I think HMV will still be around (in about 10 years time)? I think it probably will be. But it will be a considerably smaller business and whether Waterstone's and HMV will be in the same group is another question."HMV said on Wednesday sales from UK and Irish stores open over a year fell 13.6 percent in the five weeks to Jan. 1, and it would close about 60 shops over 12 months as it battles to meet a test of its lending rules in April.Its shares, down over 85 percent since its flotation in 2002, dropped as much as 27 percent to a new low of 23.75 pence.HMV, which runs over 700 stores in seven countries, blamed part of the sales decline on severe winter weather in the run-up to Christmas.But analysts were in no doubt the main problem lay with long-term trends like cut-price competition from grocers like Tesco and online retailers like Amazon, as well as the growing popularity of digital downloading."Clearly there are other structural factors at work," said Nick Bubb at brokers Arden Partners.UK music industry body BPI said on Wednesday sales of CD albums fell 12.4 percent to 98.5 million last year, and analysts said the growth in video-on-demand and e-books meant the markets for DVDs and books were likely to follow suit. HMV, with a pedigree reaching back to the early days of recorded music under the His Master's Voice label, has responded by trying to reinvent itself as a broader entertainment brand, expanding into everything from live music to cinemas and clothing.Matthew Piner, senior retail analyst at Verdict Research, said the strategy was right, but needed to be executed better and more quickly.SMALLER, FASTER, BETTER"They need to be more aggressive in their turnaround. They need to get the right people in, get the merchandising right and get it all tied in," he said, highlighting HMV's expansion into clothing as an area for particular improvement.Accelerating its transformation will cost money, however, and with worries over debt levels, that could mean closing more stores and possibly selling the Waterstone's books business.Piner suspected HMV would have to go well beyond the 60 store closures planned for the coming year and thought that, after improving its performance in recent quarters, now might be a good time to try to sell the 300-plus Waterstone's stores."It (Waterstone's) doesn't really fit well with the core of the business ... and if they need the money to turn the rest of the business around, they may not have much choice," he said.The problem though -- despite repeated expressions of interest in the business from founder Tim Waterstone -- could be finding a buyer with good enough financial backing, or prepared to offer an acceptable price.Analysts said HMV was unlikely to gain much from selling its international business, which is mainly focused on Canada, and were sceptical whether recent stakebuilding by Russian entrepreneur Alexander Mamut would lead to a bid."While the valuation appears undemanding on conventional measures, we believe there are safer investment opportunities elsewhere and view the shares as a value trap," said Kate Calvert at brokers Shore Capital.Greg Hodge, research director at Planet Retail agreed, adding that while the HMV brand was held in great affection by British shoppers, that had not been enough to save Woolworths."People are sad when they're gone (old retail brands), but they're not prepared to put their hand in their pocket and shop there now," he said. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
