HMV’s last stand has new toys but not much future

SIX years ago, David Cameron famously taunted Tony Blair in the House of Commons by saying “He was the future once”. And at that point, ahead of Christmas 2005, the HMV Group seemed to have a future. Annual profits were still well over £100m, the age of digital downloading seemed a distant threat and HMV’s Waterstone’s subsidiary was busy plotting a takeover of its smaller rival Ottakars. And, although trading at Christmas 2005 was fairly disastrous, HMV rejected a chunky bid approach from the private equity firm Permira in early 2006 because it undervalued the medium and long-term prospects for the group.

Fast-forward to Christmas 2011 and things have unravelled quickly, despite several strategic volte-faces and management changes. The once profitable overseas parts of HMV’s far-flung empire, in Japan and Canada, are long gone. Waterstone’s too has gone, although it appeared to many people to be the least bad part of the group. The famously solid HMV shareholder dividend is long gone too, a victim of the heavily-indebted balance sheet. And now the much-vaunted diversification into live music is ending, with HMV likely to sell its music venue and festival business (HMV Live).

And so it’s Custer’s Last Stand. The remaining core retail business of HMV UK surrounded by the rampaging forces of Amazon, the supermarkets and the digital world. Who’d be a music and video specialist on the high street? Three years ago, after its rivals Woolworths and Zavvi were dragged under by the credit crunch, HMV was the last man left standing – but that gave barely a year’s breathing space.

Amid all the gloom, the physical market for CDs and DVDs, although declining alarmingly quickly because of downloading, is still surprisingly large, at around £3bn. But Amazon et al. and the supermarkets probably now account for over 70 per cent of the market, and HMV can take little comfort from the likelihood that they are probably not making much money out of selling CDs and DVDs either, because these behemoths can afford to run loss leaders, given their huge range of other products.

If you can’t beat them, can you join them? HMV has manfully tried to replace the declining part of its business by selling new products and services, but without conspicuous success so far. Video games are an obvious complementary product, but at this point in the cycle games are nearly as tough a market to be in as CDs and DVDs (just ask that other endangered high street entertainment retailer, Game Group). A year ago, HMV tried to expand its rock band T-shirt business into a fully-fledged clothing and accessory department called HMV Studio, but that didn’t work either.

And so to the last roll of the dice: HMV as a technology retailer. This is more promising: many consumers may not buy CDs any more, but they still need headphones to listen to music on their mobile electronic devices. And everyone wants a tablet PC for Christmas, don’t they? Ultimately, a profitable future for HMV in technology may turn out to be yet another mirage, given the competition, but it is just possible that technology will be enough to keep the wolf from the door for another 12 months, before the banks force the next, inevitable, raft of store closures, as HMV manages its way to inexorable decline.

Nick Bubb is a retailing analyst.