HMV Falls Into Administration: The Business Reasons For Its Failure And Whether It Can Be Saved

The Business Reasons Why HMV Was Doomed To Fail

On Monday 14 January, reports began circulating that HMV, the nation's much-loved music retailer, was in negotiations to hand over the keys to administrators Deloitte.

By Tuesday morning, the rumours had been confirmed, putting 4,000 people's jobs at risk. Here, the Huffington Post UK analyses the key business failings which saw the failure of this high street staple.

Failure to tackle online technology

Julie Palmer, partner at Begbies Traynor, said that if nothing else, HMV's administration should be a warning shot to the high street that bricks and mortar retail will not be propped up in the face of a migration to online retail and digital products.

"It remains to be seen what proportion of the HMV estate can be salvaged, with record and film companies keen to maintain a high street portal for hard copy sales," she said.

"But its pending administration can only be seen as a further blow to landlords and employment in the sector; affecting many primary high street locations and a workforce with a high level of already under-employed youth workers."

The Huffington Post UK's tech editor has put together a list of the top five online technologies that killed HMV, and top of that list is iTunes.

Apple launched in iTunes Music Store in 2003. While sceptics said it would never be able to compete with music pirates, Apple quickly proved it had more than enough to challenge both them and physical stores still stocking CDs. Digital sales of music have risen exponentially in the decade since its launch, while CD sales have crashed.

HMV's own forays into digital music sales never took off, and its latter attempt to capitalise on digital with gadget sales also seemed a limp response. Streaming services like Spotify are the final nail in its coffin.

Having said that, piracy also had an impact - While the actual and potential lost revenue is impossible to measure accurately, it undoubtedly taught HMV's young customers to look online for music, games and films ahead of looking in the shops.

"HMV hasn't embraced the way in which people want to consume music. It doesn't provide a bespoke service any more," Simon Dunmore, house label Defected's founder told HuffPost UK in January.

"It all changed when it tried to compete with Tesco and it was never going to win that battle. So why not let Tesco have the mainstream and instead provide a specialist, informative service? People like to be informed about new music but if you go into a store today they don't even employ specialist staff."

HMV also failed to keep up with innovations in direct mailing offerings - despite running its own direct mail order service since 1992 and opening its first web store in 1999, the rise of Amazon as the UK's largest online retailer over the past decade took the company completely by surprise.

One Click ordering and cheaper products, delivered more quickly, meant HMV continually lost ground to Amazon online.

Similarly, it didn't take the lessons from the failure of Game - while video games have never been more popular, the way people consume them has changed - digital distribution channels like Steam for PC gaming, Apple's App Store and the PSN and XBox Live networks have shown there is a different future on the horizon; a future HMV was unprepared for.

Finally, HMV failed to ignite the mobile-shopping masses - more consumers are shopping with their mobiles than ever before, and HMV's failure to produce a smartphone-specific way of shopping was to its detriment.

Shopping for physical goods in physical stores has waned in popularity throughout the past decade

Bank debt

While many commentators pointed to HMV's failure to drag itself into the 21st Century, many more highlighted its continuing debt problems. Although it had sold off a number of assets in the past year, including its ownership of book store chain Waterstones and the Hammersmith Apollo, it was still in danger of breaching its banking covenants at the end of 2012.

Putting it simply, the retail estate was too large, and the company too indebted. Property expert at Blackstock Communications Andrew Teacher, told HuffPost UK that if HMV had realigned its property portfolio years ago to preempt decline of physical sales, and made moves to generate digital revenue in partnership with its real estate and physical stores, as John Lewis has successfully done, then it may have avoided the administrators.

"Other likely victims of the year ahead will include any similar stores that have an oversized physical presence and are unable to compete with the growing versatility of the internet," he added.

Ben Yearsley, head of investment research for Charles Stanley Direct, told HuffPost UK: "With asset support in mind, the fact that the entire estate was leased and not owned left investors with little or no margin of safety. It is very hard to see how HMV can be restructured as a mainstream high street business."

Stocking physical CDs and games requires space however, and it may be that this was something of a vicious circle.

Richard Perks, director of retail at Mintel suggested half the problem could be that to have a reasonable selection of recorded music and video just took up too much room - more space that the business can afford.

As to whether HMV could have been saved, Perks was negative. "It would have needed to be more dynamic and more radical, but by the time it realised that it was probably already too late and it wouldn't have had the cash to roll new ideas out," he said.

"Can Deloitte save it? No. In fact, I suspect that, like Jessops, the shops may all close today. The question is, who owns the stock. If it is the suppliers then they will take the stock back and there will be very little left to clear."

This makes sense - there were press reports of agreements between suppliers and HMV for months before the store's decline in 2013; retailers will have had an interest in keeping the store going as it proved to be a useful distributor for them.

But with some labels, HMV asked too much. Defected's Simon Dunmore told HuffPost UK the chain had asked to retrospectively discount all of the stock it was holding and credit it against the new releases it was buying - a request which Defected bluntly refused.

"Why would we do that? It makes our position worse if HMV goes out of business," Dunmore said prophetically earlier this year.

Company Watch's business analyst Nick Hood said HMV would have stood a far greater chance of rescuing a slimmed down operation if it had "faced up to reality earlier, rather than five years too late".

Five years ago, Hood believes there would have been buyers available for its surplus stores, and the chance to build a decent online offering while funding was still available for the transformation.

"Perhaps it was unfortunate that it was also in another rapidly changing retail market back then with Waterstones, which was one distraction too many," he added.

"The hopeful comments today about rescuing some of the stores may prove to be misplaced, despite the optimistic noises coming from the administrators. The iconic brand will probably survive online, as other recent retail failures have lived on.

"But many of the HMV stores are on expensive leases and in size formats which don't suit the sort of re-born independent record shop offering which is prospering around the UK. It's tough to make a viable business out of middle aged nostalgia."

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