Comment: HMV - Hope May Vanish?

It is often said that hope springs eternal and that is certainly the way HMV’s management seem to feel, as they still confidently expect profits of over £10m this year, despite their dependence on Christmas trading and despite dismal trading over the last year. But HMV might stand for “Hope May Vanish”.

Of course, HMV actually stands for His Master’s Voice, the title of a famous painting of 1899 by Francis Barraud, of the dog Nipper listening to a cylinder phonograph.

Jump forward 113 years and technology has moved on apace, but, encouragingly, people still want to listen to music, even if they don’t buy gramophone records (or CDs) any more.

Technology has, in fact, literally saved HMV over the last year, as if it hadn’t managed to successfully replace 11% of its sales mix by switching space to selling new technology products then its banks would have pulled the plug.

It may be stretching things a little for HMV to say today that its shops have “become a credible destination for an expanding range of entertainment devices”, such as tablet computers, but the phrase “entertainment device” is interesting.

HMV has certainly done well to build a surprisingly big share of the booming market in headphones. But the emphasis on credibility in HMV’s statement is also key.

Consumers don’t naturally think of HMV as somewhere to go to buy tablets or iPods etc, but that can change. It is also possible that management can change their spots and deliver on their bullish promises but, unfortunately, there is a credibility problem about HMV as there have been way too many strategic volte-faces in recent years.

Remember when two years ago HMV tried to expand its rock band T-shirt business into a fully-fledged clothing and accessory department called HMV Studio?

Remember all the hype about the potential synergies in ticketing and customer loyalty from moving into the live festival and concert business?

And have you been to the HMV Curzon Cinema in Wimbledon? It’s actually still going and was probably one of the better ideas in recent years, but HMV was never going to have enough upper-floor space in other stores to make the Cinema venture more than a bit of a one-off.

The more pressing problem has been what to do with all the space on the ground floor devoted to racks of CDs and DVDs, in a market declining inexorably at 10% to 20% a year, and pay the rent on that space.

HMV now claims that its entertainment suppliers have rallied round and given them much better buying and payment terms and stock control. But who’d be a music and video specialist on the high street surrounded by the rampaging forces of the mighty Amazon, the supermarkets and the digital world? Not unlike JJB Sports, the suppliers may be desperate to keep a major player alive but they can’t force consumers to shop at HMV.

The sad demise of Game left an opportunity for HMV to pick up some of its market share in video games, but there is a reason why Game went bust. And all this seems terribly reminiscent of the end of 2008 when, after its rivals Woolworths and Zavvi were dragged under by the credit crunch, HMV was ‘the last man left standing’ in high street music retailing, which gave it the sum total of about 12 months’ breathing space.

There is also a reason why HMV now has a market capitalisation of only £15m relative to an ongoing sales base of some £870m, and that is that HMV is still in hock to its banks and it will sooner rather than later need to raise more money from its shareholders.

For their sake, it is to be hoped that the much-vaunted £10m profit in the year to next April doesn’t turn out to be simply a ledge on the precipice.