The rise and fall of HMV: Why great companies find it so hard to adapt

I FIRST started work on the HMV advertising account in 1982, little knowing that I would handle the business for over 25 years, and that my path would cross HMV’s during a golden period for the record retailer. I say record retailer because that’s what it sold back then in 1982 – records made of vinyl.

The products that made HMV such a profitable company were just around the corner – CDs and video. The invention of CDs meant we all wanted to replace our record collections with these tiny “indestructible” disks, and we were happy to fork out £16 or £17 for each one. It also became de rigeur to have a library of videos prominently displayed in the corner of your living room. CDs delivered such incredible margins for HMV that the House of Commons set up a Select Committee to investigate. The then chief executive Brian McLaughlin got a serious grilling, but ultimately nothing was done to the pricing structure.

The advertising strapline we created was Top Dog for Music, and that’s exactly what HMV was. Record companies kowtowed to this all-powerful retailer, offering millions to contribute to its “cooperative” advertising. What choice did they have? It was the only way of getting their products to the consumer. “Co-op money” became a drug that would prevent HMV from undertaking genuine brand advertising of its own.

Times were good, and HMV expanded across the world – to the US, France, Germany, Canada, and Japan. In 1986, it opened the world’s largest record store in Oxford Street. Things kept getting better, as computer games arrived along with DVDs, and profits went from strength to strength. Such was the heady feeling of success that HMV brought together all its store managers and head office staff for a three day “conference” every year. It was usually somewhere exotic – once a five star hotel in Marbella, with Billy Connolly as the cabaret act. This engendered amazing loyalty from the music fanatical store managers, and a feeling that they really were Top Dog against the bitter rivalry of Richard Branson and Virgin Megastores.

But if they had looked out from that luxury beach hotel, they might have seen a few dark clouds forming on the horizon. But no one was looking – the sun was shining too brightly for HMV.

HMV continued to grow through the 1990s, up to 325 stores. It bought the book chain Dillons and later Waterstones – a further 195 stores. In 2002, it floated on the stock market with a £1bn valuation. Not long after, Beechwood (the agency I founded with my business partner John Wood) was asked to re-pitch for the business.

For some time, we had felt the tides of change coming for HMV, and here was our opportunity to say what we felt. “The three greatest threats to HMV are online retailers, downloadable music, and supermarkets discounting loss leader products,” I said. I suddenly realised the managing director had stopped the meeting. “I have never heard such rubbish. I accept that supermarkets are a thorn in our side, but not for the serious music, games or film buyer. As for the other two, I don’t see them as a real threat. Downloadable music is a fad, and people will always prefer the atmosphere of a music store to online shopping.” It’s important to remember that the dotcom bubble had just burst, and many were mistaking this stock market meltdown for an internet meltdown. None of what we recommended saw the light of day.

Regrettably for HMV, our predictions came true, and to an extent we could never have envisaged. By 2006, the company was ailing and a new managing director was brought in to sort it out. But HMV continued to make its single biggest mistake since the late 1990s – a lack of investment in its online offering. It chose to diversify into electronics (a business that was already failing on the high street) and entertainment, through venues like HMV Apollo. This, and a deep aversion to risk, may have stemmed from a disastrous foray into conventional mail order in the early 1990s, when HMV Direct was set up and later folded.

Which company was better placed to exploit the internet than HMV – the power of its brand, its heritage, its unrivalled access to content from film, game and music companies? Which company would now be better placed to take advantage of social media? It was a mixture of hubris, arrogance, and a feeling of invincibility that failed HMV. It was overtaken by the march of technology faster than it could ever imagine. And by the time it started reinventing itself and diversifying into other areas, it was too late.

Philip Beeching is a former advertising executive at Ogilvy & Mather, Allen Brady & Marsh and Yellowhammer. He blogs at www.philipbeeching.com