Why did HMV fail? Interview with George Scott of retail analysts Conlumino

In the wake of today’s news that HMV has called in the administrators, putting 4,000 jobs at risk, we asked George Scott, retail consultant at analysts Conlumino whether the move was inevitable – and how other retailers in similar situations could avoid a similar fate.

Internet Retailing: Was HMV a victim of the success of online retailing? – and if so, why?

George Scott, retail consultant at Conlumino: Yes, HMV’s demise is a structural failure; it failed to keep pace with both the shift to digital entertainment content and online retailing. HMV continued to focus its core business around ‘physical bricks ‘n mortar’ retail through a national network of 250 stores in a market where nearly 75% of music and film are downloaded or bought online.

Of course HMV is not the only victim of the move to digital downloading and online retailing. The failure of Woolworths, Virgin Mega Stores and Zavvi is a testament to this long-term shift in business model.

Indeed this event shouldn’t come as a surprise, in the wake of wider retailers failing to innovate and effectively cross the digital divide; Comet and Jessops being notable examples of retailers failing to blend their instore offer with an online presence. It raises a more fundamental issue – it’s not just about ecommerce; in the digital world it’s about having a compelling multichannel presence.

This is not an issue unique to the UK. In France recently, Virgin Mega Stores filed for administration, while the other of the two largest music retailers, Fnac, has put an end to its digital downloading service.

More poignantly, there is a useful lesson here from the US, which is widely deemed as an indicator of future trends UK retail. HMV withdrew from the US in 2004. Apple’s iTunes has grown to be the largest music retailer in the US; Wal-Mart was the market leader until 2008, but is now competing with Amazon for second place. This is more than likely a sign of things to come.

IR: What could it have done – if anything – to respond?

GS: HMV did make some positive strides to digitise its offer. It tried to integrate selected electrical and gadgets, but this was not substantial enough to compensate for its declining core business. It also bought 50% of online music store 7digital in 2009, but these changes were very much incremental in a market which is changing very quickly.

HMV also faced increasing competitive threats from grocers, who are keen to leverage their scale advantages in pursuit of new non-food growth areas. The supermarkets are extremely competitive on price and they too are investing in their digital offers. Tesco, most notably, has its own download service.

Despite these challenges, HMV had strong brand heritage and resonance on the UK high street. It had a nostalgic cachet that reminded consumers of weekend store visits and browsing its music catalogue before the digital evolution. To this extent, there is hope that HMV in some format has future, but the question is what format.

It should have invested in integrating digital content into its store much earlier. A greater emphasis on digital downloading would have had greater traction with younger generations. It should also have been proactive, rather than being laggard, in its migration to online retail.

IR: How should other retailers in a similar position act now to develop their multichannel/online capabilities?

GS: Retailers need to think less about ‘online’, and think more about ‘multichannel’. For traditional high street retailers, a migration to online is costly and takes time. To compete with etailers such as Amazon and Apple, retailers need an online offer which adds value to their instore experience.

Some form of online offer is a must to meet the demands of online consumers. Offering vast choice and competitive price on entertainment products is especially essential. This needs to be allied with an investment in instore environment. Pushing digital downloads will go some way towards this. However to compete with intangible, impersonal online players, traditional retailers need to offer something different. Compelling customer service, with instore downloading kiosks are two means to achieving this. Of course the implications of this, is that physical formats, especially those in secondary and tertiary locations, will be less viable in the market ahead.