Why HMV really went down

It’s not like we didn’t see this coming. Two years ago I said that HMV’s management was no longer working for shareholders, but the banks. And I said it would be a good idea to short the stock. It certainly was.

But that’s enough gloating. Today I want to show you the real reason for HMV’s demise.

And I think there’s a very important lesson to be learned here. Because there are hundreds of quoted companies on the stock exchange walking the same path. Staving off insolvency on the one hand and promising shareholders everything is fine and dandy on the other. Oh, and how about a little bonus too… In short, this really should be a wake-up call for investors.

The media pundits have given their reasons for HMV’s collapse – and pretty obvious they are. But changing consumer habits needn’t have led to HMV’s crack up – and certainly not so soon.

HMV is a lesson in how not to manage a business in an industry facing change.

In fact, only last week, I flagged Enterprise Inns as a business in an industry similarly devastated by change. And yet my Enterprise bonds have done fantastically well, and as for the shares… well, they’re up over 300% in the last year.

Let’s look at what really went wrong with HMV. Because I can tell you, the root cause runs far deeper than the superficial musings of the media. I mean, did you know that in 2006, management turned down a bid offering shareholders £762m (£1.90 a share!) for the company?

Management said it was an insufficient valuation for the company. And then they went on to destroy the whole darned thing…

What were they thinking?

The wise guys saw the writing on the wall for HMV as early as the nineties. Back then EMI, the owner, hived it off into a separate business. By 1998, the company was dumped on an unsuspecting public in a public flotation.

We’ve seen this trick hundreds of times. Woolworths and Comet were spun out of Kingfisher group and Kesa (respectively), allowing the stronger group to survive. Think about our once famous car industry too. The stronger marques like Jaguar, Land Rover and Mini were agglomerated into successful foreign enterprises… the rubbish ended up in Rover group and bankrupted by inept management.

During the mid-noughties, Richard Branson’s Virgin group sold the UK megastores business and they were rebranded under the banner Zavvi. 

What I’m saying is that the music retail business was recognised as a bad one way back when. And in many ways, the industry was restructuring all by itself. Record stores (I still call them that!) were going bust left, right and centre.

Now, rather than welcome what economist Joseph Schumpeter terms “creative destruction”, HMV management fought it. Remember those stores that Branson had dumped and were now labelled Zavvi – well, Zavvi folded on Christmas Eve 2008. Now, guess who decided to pick up nearly half the stores? HMV of course!

They bought stores from failed music chain Fopp too.

But for these guys it clearly wasn’t sufficient to double down on music retailing. Oh no… in 2006, HMV bought failing bookstore group Ottakars and merged it with its own Waterstones. Of course, you don’t need me to tell you that the book industry was soon to follow the record industry into creative destruction!

What were these guys thinking? Where others feared to tread, they boldly flashed shareholder cash. And as they did, the shares fell from over £2.50 to nearer £1.50. By 2006, private equity group Permeira offered shareholders a get-out card. They offered £1.90 a share. But management said “take a hike!”

From there, HMV headed into even more muddled acquisitions. And more pain for shareholders.

Getting away with murder

Having finally caught on to the plight of the book and music retailing industry, management decided to take bold action. By the end of 2009, HMV bought MAMA group in a deal worth £46m. MAMA manages music artists and live events. It owns plenty of fantastic venues and bars in central London too.

So, HMV changed tack. Of course it all led to more costs and more management time absorbed with the new non-core businesses.

Management forgot what business they were in. And I don’t mean the music retailing business. I mean the business of gradually running down retail units and adapting the business model to the new times. Yes, I know they tried. But frankly their web presence wasn’t nearly good enough. And they were too late in following competitors that were selling out of tax-free zones.

In the end, it was a mad scramble to introduce t-shirts, calendars, electronics, etc to their stores. It was, of course, too little, too late. By now, they’d built up mountains of debt.

Frankly, the private equity guys couldn’t have done much worse with HMV than the management did… and they offered what now looks like an incredibly generous £762m for the business.

Now, had HMV folded under private equity ownership, you can be sure the media would have had the knives out for the private equity boys.

But when it comes to the stock market, management can get away with murder. So beware!

What do we learn from this?

Far too many investors run shy of industries in decline. But we have to remember, it’s not the plight of the industry that matters, but how management deals with creative destruction.

Because destruction clears the path for new growth. I’ve banged the drum for Supergroup, a clothes retailer that’s found the sweet spot between bricks and clicks. Now, if I had a quid for everyone that’s told me they wouldn’t touch any stock in the retail sector…

I’ve also talked about Enterprise Inns – the UK’s largest pub landlord – another industry in decline. But to deliver fantastic shareholder value, all it’s done is to gradually trim its pub portfolio and manage the debt position.

So let me leave you with today’s take away. It’s a business lesson that comes from way back in the old days when record shops were as popular on the high street as a bookie is today. It’s from the band (and business guru) Bananarama…

“It ain’t what you do, it’s the way that you do it. And that’s what gets results.”

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    You mean there is more to Bananarama than meets the eye….?

  • Headhunter

    I’ll tell you why they failed: Lousy management. Before Christmas I went into the Chichester store on four occasions to buy music and DVDs. There was, on each occasion, a queue of more than 20 people and four cash registers in operation. It reminded me of the Post Office. I left without making a purchase four times. I knew what I wanted to buy and who I wanted to give it to and they frustrated my plans. As a result, some got other presents and others nothing at all. The trouble with a place like Chichester is that there is nowhere else to go for this kind of purchase. It takes a perverted form of genius to turn a monopoly into a failure. I rest my case. Anyone who knows how to run a business like this can buy it cheap from the administrator and clean up.

  • 4caster

    Granted, you’ve been advocating readers to avoid, sell or even short HMV for over two years now. But I have a long memory. Less than three years ago, on 5th March 2010, your mate David Stevenson, in MoneyMorning, offered quite contrary advice:
    “It’s not without risk, as you can see, but high street music and book retailer HMV (LSE: HMV) is currently about as cheap as you can get, on a 10% yield and a p/e of just over five. Now that’s something you don’t see very often!”

  • SteveH

    The key question here is how has it worked out for the directors since they turned down the offer. Seven years of bonuses, expenses and high pay, versus something like 6 months notice and whatever they would have got out of the deal might mean they made a logical (ie profitable for them) choice.

  • JamieLS

    It’s been obvious to anyone with half a brain that the purchase of physical CD’s, Books and Videos is on a huge downward slide as the public becomes more and more used to buying online and downloading. This also applies to film rental hence yesterday’s announcement concerning Blockbuster.

    Surely the management of HMV must have seen the writing on the wall and if so they had 2 options – 1. sell the business pronto to the highest bidder or 2. redically change the business away from physical sales and get into online sales.

    They did neither and so the business folded. Blame 100% with management.

  • Andy

    Headhunter. Comment#2. I had a similar experience at Jessops last summer. They re-designed their shop in my town so that it was virtually impossible to get served or make face to face contact with staff.
    The shop was full of confused and frustrated consumers trying to work out how to pay, including me.
    A classic business lesson in how not to do business: recognising change and then compounding the damage by withdrawing the one advantage bricks have over clicks, staff expertise.
    You couldn’t make it up!

  • David Stuart

    Yes Andy, they did the same in York. I went in there (much larger store but much less in it – supply problems then?) noy long before last Christmas and walked out in less than 2 minutes!

  • Paul M

    Retailers need to create real ‘in-store theatre’ for consumers to even visit, never mind spend. This coupled with a cohesive online strategy is key, HMV did neither and totally missed the way the market and consumers are changing. It shows poor leadership and management and obviously people absolutely not in tune with either the market changes or their customers.

  • Colin Selig-Smith

    Dussmann in Germany are doing fine. Better than fine.

    They’re not a music store though, they call themselves a culture super store (KulturKaufhaus); books, music, videos, games, tickets. Sounds kind of like HMV’s type of business? There’s more; they have live talks, readings, lectures. Their local store is always packed and they are pulling in a fortune, I’ve spent hundreds of euros there myself.

    You’re right Bengt the problem absolutely is British management.

  • Neil

    #9 – absolutely right. If there’s no value-add, why would I go to HMV for a CD when I can search Amazon, Play, Tesco, specialist on-line music stores and get the produce I want at a lower purchase cost to me? I need to feel helped and values in a shop.

    How could Jessops have improved the customer experience? Why not offer basic 30 minute group photography lessons with the purchase? 1 per £100 spent? This would reinforce printing and framing of good photos, and get the customer back in the store, so you capture the on-sell of goods and services too.

  • Skelly

    As always, much to ponder in Bengt’s article. I’m not sure why the reference to the automotive industry was included though.
    All three of the successful British brands mentioned would have disappeared 5 years ago had it not been for support from their respective holding companies (contrary to press reports at the time, there was no government support received).
    Presumably, if that had happened then their management would also have been labelled ‘inept’?

  • Neill

    Whilst large GENERAL retailers can survive, SPECIALIST retailers eventually hit the rocks. JJB Sports, Black’s Leisure, Jessops, HMV all had their short time in the sun, but as fashions change the rot eventually sets in.

  • David

    The real reason HMV failed was because they were too overpriced. I still like buying CD’s and I like browsing record/CD shops, however after a number of trips to HMV I simply stopped going in because all of the CD’s and DVD’s were so overpriced compared to other stores and online.
    If they had had better deals and innovated a bit they may have survived.

  • Nick Fury

    HMV – Huge Management Violations and as for Virgin well they eventually got F—– too!

    You would have thought it would have been last man standing takes all, but theyeven screwed that up!

    However, blame also rests with unfair tax avoidance policies of companies like Amazon andoff shore tax haven addresses too in Guernsey, Jersey, etc and the governments lack of statutory response to stop it.

  • Colin Selig-Smith

    @ 12 and 14

    You should take a look at the executives and board of HMV. Their pedigrees don’t have the word “music” listed anywhere. All are finance types who wouldn’t know their a*se from their elbows. It gets worse, some are ex Jessops, some are ex JJB. My word with talent like that at the top the company has been doomed for three years or more.

    You’re usually better off with foreign run companies, they tend to put people who know the business at the top, in Britain all you get are these financial bean counters who think the accounts are the business rather than a record of business transactions.

  • Robin

    HMV probably went under because they paid their taxes.

    This reminds me a bit of my experience when trying to open a bank account with HSBC in stratford. They have ‘appleletized’ the store meaning they no longer sit you down in some private booth while discussing your financial affairs. Its all done on the main floor baby, in front of any old joe who chooses to stand behind you.

    Boy did I feel like a pleb then. So I don’t have a HSBC bank account now, and am frankly disgusted.

  • jayben

    Greed killed hmv, just like it killed blockbusters, the whole video game trading industry is huge, and could have kept them in business, but they would offer you 12pounds for a game and then sell it on for 30pounds….All of their cds and dvds were overpriced compared to places like asda and tescos……..no respect for your customers and no respect for the financial climate your in and your destined to fail……

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