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HMV to close 60 stores as Christmas sales disappoint

By | Published on Thursday 6 January 2011

HMV

The HMV Group will shut 60 of its retail outlets in the next twelve months – probably 40 HMV stores and 20 Waterstones shops – after admitting its Christmas trading figures were pretty poor yesterday. With the company’s year end profits now expected to be at the lower end of expectations, HMV top man Simon Fox pledged to make £10 million in cost savings in the next year. The firm’s share price nevertheless tumbled yesterday morning.

It’s the HMV chain that is causing the problems, with sales in its all-important Christmas period down 13.6% on last year. The retail group says the poor weather in the run up to Christmas was at least partly to blame, though that wouldn’t explain why pre-Christmas sales at Waterstones shops were pretty much equal to the same period in 2009. Perhaps book lovers are more snow-resistant than music fans.

Of course, HMV has been suffering for years now as both online retailers – mail-order operations and download services – and the supermarkets steal an ever increasing share of their three traditional markets: music, DVD and games. The window of opportunity ten years ago to dominate the online version of HMV’s traditional business was small, and the retailer (and its then main competitor Virgin Megastore) was way too slow to rise to the challenge, letting upstarts like Amazon and iTunes seize by far the biggest slice of the online pie.

Aware that the decline of HMV’s traditional high street revenue streams is only likely to continue, Fox has been pursuing a strategy of diversification over the last couple of years, both diversifying the company’s product lines in its stores, and moving into areas of the entertainment industry outside of retail, in particular through its acquisition of artist management, festival and venue group MAMA. Some might now argue that the latest sales figures from the HMV shops suggests that the first part of Fox’s diversification plan has failed.

The latter strand of diversification – the move into management, ticketing and live music – has in the main been a success, and is why some remain optimistic about HMV’s long term future. Though more pessimistic analysts in the City point out that HMV’s retail business is still by far the biggest part of the company, and profits from the new ventures are not, as yet, growing fast enough to make up for the decline on the high street.

The store closures and other cutbacks are not so much motivated by the slump in profits, but by covenants the company has with its money-lenders. HMV has £150 million in debts, a fair of portion of which were run up as part of last year’s MAMA acquisition, and Fox has admitted that meeting the terms of those covenants this spring will be “tight”.

That said, while the store closures are possibly being undertaken mainly to please the bank, there is an argument that with high street retail in terminal decline, having two largish units on every high street (one for HMV, one for Waterstones) isn’t viable long term.

Therefore reducing the number of stores HMV operates, rather than increasing the number, as they have been in recent years, especially since the demise of former rivals Zavvi, is probably a good thing long term, even if it is stressful in the immediate future. And while some are predicting HMV might sell off Waterstones to raise some cash, there is actually a case for merging HMV and Waterstones stores in smaller shopping centres, reducing overheads without affecting market reach.

So, a slightly gloomy day for HMV, and clearly some difficult decisions are now ahead for Fox and his team, though some still see much potential for one of the last remaining big British music brands.



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