HMV: If you don’t fix it, you’ll end up broke…

The name Margaret Anne Lake might not ring too many bells. But if you were in the UK towards the end of the twentieth century, you’ll be familiar with her alter-ego Mystic Meg.

Having made her name as an astrologer in The Sun, Meg was catapulted into the national consciousness when she was given a slot on the fledgling prime time National Lottery draw programme.

In an attempt to build excitement and pad out an event that took two minutes to complete, Meg was brought in to ‘predict’ the winners.

Her predictions were suitably vague.

The norm was something generally along the lines of “the winner would live in a house with a 3 in the number, in a town beginning with L or M and have bought their tickets from a woman.” with a sprinkling of astrological terminology for extra authenticity.

However it would seem that back in the mid-to-late 1990s Meg wasn’t the only one struggling to see what the future held. Far away from the glamour of TV, a number of well-paid businessmen were busy making decisions that would see their organisations squander their dominant positions.

And a couple of weeks ago, after struggling along for years, both HMV and Blockbuster UK, once leaders in their categories, hit the buffers and called in the administrators.

Bad Advice

The wisdom ‘If it ain’t broke, don’t fix it‘ is relatively modern – it dates from 1977 – and was attributed to businessman Bert Lance in the May issue of the magazine Nation’s Business.

The phrase caught on, partly because it made a point in a catchy way. But like many wisdoms, it doesn’t tell the whole story.

Just because something works now, doesn’t mean it always will. And those in position of responsibility have an obligation to future proof their organisation.

Back when Mystic Meg was in her pomp, the digital revolution that helped bring about the demise of both retailers was in its infancy. But signs of its potential were there, particularly for HMV.

The first was how people acquired their music.

Software that ripped files from physical storage, coupled with faster web connections, gave birth to peer-to-peer sharing. Programmes like Napster, Kazaa and Limewire removed the need for physical reproduction and distribution.

The whole entertainment industry never really came to terms with illegal downloads, opting to use legal threats and emotional blackmail, rather than adapting their businesses to meet the demand.

In reality, not all pirated content would ever  have been bought legally. Peer-to-peer applications offered users the freedom to sample new artists they would never have paid for and get digital versions of music they already owned physically, easily and without it costing them money.

One of the reasons people wanted their music digitally is the second reason the digital revolution helped bring about the demise of the likes of HMV – the way people consumed and stored music.

The emergence of the digital music player, culminating in the release of the iPod in 2001 meant that people also wanted their music in a new format. They could now store their entire collection on one machine.

When people had upgraded their vinyl to cassette, and then their cassettes to CDs, HMV had been in pole position and reaped the profits. However a digital format didn’t require physical stores and HMV didn’t react. Their model was suddenly ‘broke’, but they didn’t realise in time to fix it.

Avoiding failure

Can such demises be avoided? The future is notoriously hard to predict, but there are some guidelines that can help companies avoid suffering a similar fate to HMV.

1. Be alert to new and niche competitors

Back in the 1980s and 1990s, HMV may have considered their competition to be the likes of Tower Records, Virgin and Woolworths. When they all disappeared, it might have seemed that HMV had won the battle. In reality they were all killed by the same bullet. The game changed as companies diversified.

Back in 1981, following a dispute with Apple Corps, Apple Computing agreed not to enter the music business. Now, iTunes offers over 28,000,000 songs.

Just because someone isn’t a direct competitor now, doesn’t mean they never will be.

2. Keep an eye on the Path to Purchase

HMV didn’t suffer because people suddenly stopped wanting to buy new music or watch films. What changed was how people acquired their material.

Online downloads provided a new way to access digital music. For those who wanted physical media, Amazon et al provided an alternative way to buy CDs and DVDs. Now that nearly 80% of UK households have broadband connections, consumers can stream films at the press of a button or watch a dedicated Movies channel.

Sometimes people will still want physical media immediately, but just not often enough to sustain a business as big as HMV.

3. Understand the next generation

Many years ago, I worked in Woolworths. A large proportion of the music we sold was to youngsters spending their pocket money on their latest idol. While online might have been niche in the mid-to-late-90s, the youngsters of today have grown up with it. As a result, consumers under 35 won’t have had the opportunity to develop an engrained habit of buying their music in physical stores like HMV. Buying entertainment online is no longer an alternative, but the norm.

4. Play to your strengths

While online retailers can offer lower prices and a wider catalogue, physical retailers offer immediacy and have the opportunity to provide enhanced in-store engagement.

Shoppers want convenience, value and experience.

Browsing for and buying music, film and computer games ought to be a fun, pleasurable act. Online shopping will continue to grow across pretty much every category. Physical retailers need to understand their role in fulfilling shoppers’ needs. Sometimes it will be about delivering the product quickly and easily, but sometimes it will be making the act of shopping an enjoyable experience that merits a slight price premium.

5. Be prepared to change

Taking all of the above into account, it might be easier to spot how a business structure that is dominant now might not be so successful in the future. It is often said that defending a title is harder than winning it in the first place.

However, it can be done.

McDonalds have long dominated the fast food industry. Just over a decade ago, their restaurants were tacky red and yellow places with plastic seats.

Yet they saw that their competition was no longer just the likes of Burger King, but also other food outlets and increasingly the likes of Starbucks et al who offered a more pleasant in-store experience.

Now their outlets have all been refurbished with designer furniture and offer free wifi.

They also observed other trends that would impact them. From obesity to ethical sourcing of produce and packaging, they adapted their business to stay one step ahead.

Their menu still offers the old favourites, but also includes lighter options. Their burgers come from British and Irish farms and much of their packaging is made predominantly from recycled materials.

As a result, they are still thriving on the high street.

On demographics, devices and ‘Downton Abbey’

“Keynesian paradigm shift” was a term Zeitgeist was introduced to back in those glorious days of university. We’re often on the lookout for that next shift. 2003 was the first time when Zeitgeist began to take blogs seriously, as your average Iraqi citizen started writing journals online that gave more of an insight into the invasion than any “embedded” Fox News reporter. Incidentally, anyone looking to know more about the way news was covered by those reporters under the care of the US military at the time should check out the fascinating documentary “Control Room”.

There’s has been much discussion of more paradigm shifts over the last couple of years as PVR / DVR devices like TiVo and Sky+ have set various network TV honchos and advertising execs fretting about the lessened impact of advertising caused by delayed viewing. Advertisements on television are scheduled at a particular time to appeal to a very particular audience, and may be very ephemeral in nature (eg for an upcoming event or film). Having viewers watch the commercial at a later time might be bad, as it could be – in the advertiser’s eyes – too late. But having the viewer fast-forward through the commercial break altogether is disastrous. Simply put, companies won’t pay to have an ad on TV if no one is going to watch it. This of course is especially relevant to shows with covetable demographics, i.e. Watched by the financially comfortable, as ironically they are more likely to have purchased a device that makes those advertisements fast-forwardable.

However, recent news should cheer those whose job it is to worry about such matters. In the first place, as the world economy stutters into recovery, advertisers are funnelling money back into mainstream media, particularly television, as we reported on last October. Moreover, as Variety recently reported, the feeling of watching a show as it is broadcast “live” is a special one. This has long held true for sporting events and the Oscars, but increasingly it applies to popular sitcoms and dramas, too. Shows like ITV’s recent Downton Abbey revealed that people made a point of watching the broadcast live so that they could engage more in the online conversations that were taking place on social networks like Facebook. UK TV ratings are now at their highest since records began.

This brings up two points, one of cultural philosophy, the other of political science policy. In the mid-1930s, Walter Benjamin wrote a seminal piece of work known as “The work of art in the age of mechanical reproduction”. The crux of this paper rested on the idea that there is something infinitely intangible and special about seeing the genuine artefact; beholding the original Mona Lisa in the Denon wing of the Louvre is a more special experience than looking at it on a postcard. There is an “aura” to it. If we extrapolate this to the world of film and television, that aura is fed now by social media chatter amongst friends.
From a policy point of view, an argument that Zeitgeist has mentioned before bears noting, that of technological determinism vs social constructivism. It posits the argument over whether what a technology is intended for necessarily dictates how it is used, and influences user behaviour. With a heightened demand for the live experience, evidently this is not the case with PVRs. Recent studies show that people are fast-forwarding through commercials less and less, and, as mentioned, gravitating toward enjoying the live experience more and more. A savvy person might ask how we can mesh these two worlds together. Zeitgeist wouldn’t be surprised to see in the near future programme recommendations appearing on your PVR from friends you are connected to over social networks.

Downton Abbey is worth noting again. In the past, when we have thought of wildly successful shows and films, thoughts of the latest teen sensation might have come to mind. And while Twilight and Justin Bieber do occupy a significant part of the current Zeitgeist, shows like Downton Abbey illustrate that there is another audience – a rapidly growing one – that is only just beginning to appear on the radar of media executives. As The Economist recently pointed out, the baby boomer generation has a relatively high spending power, and buys a relatively high quantity of media like CDs. And while, according to Variety, movie studios plan to release some 27 prequels or sequels this year, there are also signs for hope too. The King’s Speech came very close to not getting made after debacles with funding, and Black Swan had a similarly bumpy road to production; Variety says it “kept losing its funding until the day before principal photography”. These were two of the greatest (and most mature) films of last year according to Zeitgeist, with the former winning both Best Picture and Best Director. Black Swan has grossed more than $100m in the US. The only other film from Fox studios to do the same was the latest Narnia incarnation, which must have cost north of $200m to make, once marketing is included. Films about royalty and ballet are ones that will appeal to the superannuated audience, and not coincidentally perhaps the ones with the highest profit margins. The much-coveted 18-49 demographic is an anachronism, let’s think bigger (and older).

White sky in the morning, profits warning!

How will the snow affect the UK retail landscape?

While the news at the time focused on stranded air passengers, a crippled transport network and the need for some inventive parenting to explain why Father Christmas was unable to deliver presents on time, the after-effects of December’s heavy snowfall are now being felt strongly on the UK high streets and shopping centres.

With the tinsel and fairy lights still in full view, it has been a far from Happy New Year for the number of retailers forced to announce that their sales were lower than expected with the consquences ranging from store closures and job losses to profits warnings. Many cited the unwelcome cold snap as compounding difficulties brought about by the economic crisis, changing consumer habits and threats appearing from non-traditional competitors.

First to register concern were HMV, who admitted in an unscheduled trading statement, that like-for-like sales across its UK and Ireland outlets had plunged by 13.6% in December. Having seen other music and entertainment retailers, including Zavvi, Our Price, Tower Records and even Woolworths bite the dust in recent years it isn’t surprising that the entertainment specialist is feeling the heat while the rest of us freeze.

Zeitgeist has already touched on how ‘In some industries, the concept of owning something tangibly has become redundant;‘, with music and film sitting high on that list. More worryingly for HMV as the owner of Waterstones bookshops is Amazon‘s online dominance of the category and the rise of devices like the Kindle and regular smartphones that are likely to eat into book sales in the coming years.

Deeper Problems

While the sub-zero temperatures may have kept shoppers out of their stores the weather can’t take all of the blame. This weekend, this half of Zeitgeist bought a CD as a friends birthday present. A quick look online showed the item retailing on HMV.com at £8.99, however in-store I was obliged to pay £17.99. The Sales Assistant helpfully told me that the difference was because online sales are shipped from Guernsey. I rather suspect that the lower price has more to do with the fact that other online stores such as Amazon.co.uk and Play.com are also selling the item for £8.99 than where the item is shipped from.

It’s not hard to see why the bricks-and-mortar stores are in so much trouble when they have to sell items for nearly double the online price to cover their overheads. In this instance the extra cost doubles as a ‘Failure to Plan‘ tax for me, but increasingly shoppers will go online for their entertainment needs rather than paying a premium for the convenience of getting it immediately on the high street. Alternatively they’ll simply download or stream it and do away with the need for any physical material purchase.

This final option shows how behaviour change can be brought about with the right motivations. For years now, we have been encouraged to reduce unnecessary waste and raw materials to help the environment. However, it is the convenience of having music, film, games and books stored digitally, rather on discs in plastic boxes or paper, that has proved more of a driver than any desire to save the planet.

Others Affected

Another retailer to be affected by how we now spend our leisure time is Games Workshop who issued a profits warning of their own soon after.

Two other retailers who also issued a now on-trend profits warning are greeting cards merchants Clinton Cards and maternity and babyware retailer Mothercare.

For Clintons this is the second such warning in six months and time will tell whether ‘strategic intiatives‘ taken by the board will have the desired effect or whether as a nation, a new generation is growing up to wish ‘Happy Birthdays’ and ‘Merry Chistmases’ via text message or social media sites.

Encroachment on their traditional market by the major multiples hasn’t helped Mothercare and brokers Seymour Pierce have questioned quite how much of their problems are down to the snow.

With the Christmas period so crucial for many retailers there may be more similar statements being prepared in boardrooms up and down the land. The slightly milder weather in early January may help ‘The Sales’ boost some bottom lines, but with a number of retailers choosing to delay exposing shoppers to the increase in VAT the bargain hunters may not spend enough to make up the shortfall, particularly if they are saving for a more expensive 2011. If a handful of retailers do go under it begs the question, ‘Who will take over their retail space and what will the retail landscape look like in a couple of years from now?’.

Such gloomy announcements from household names will do little to help the economy and improve consumer confidence, particularly once the seemingly permanent VAT rise comes into effect everywhere.

In the meantime we’ll have to wait and see what legacy the snow is going to leave in other sectors such as insurance, utilities and travel. Either way, it might be an idea to start saving now for those premiums and gas bills.