‘The atmosphere of a music store’

Nonetheless, in the face of competition from the internet, HMV followed the wrong strategy. It failed to compete effectively online, even though it had the assets and reputation to do this. Its former adman, Philip Beeching, recalls an advertising pitch shortly after the company’s stock market flotation in 2002:

I said, “The three greatest threats to HMV are, online retailers, downloadable music and supermarkets discounting loss leader product”. Suddenly I realised the MD had stopped the meeting and was visibly angry. “I have never heard such rubbish”, he said, “I accept that supermarkets are a thorn in our side but not for the serious music, games or film buyer and as for the other two, I don’t ever see them being a real threat, downloadable music is just a fad and people will always want the atmosphere and experience of a music store rather than online shopping”.

The former Chief Executive Alan Giles, who stepped down in 2006, had been talking for several years about the right time to place HMV’s “big bets” on digital – iTunes launched in 2001, the iTunes store in 2004 – but the moment never quite arrived. When he did quit, after poor Xmas trading in 2005, he blamed internet competition. But perhaps if the company had spent less time messing about with the takeover of the bookstore chain Ottkars, and more on the music business, it might have been more focused.

A race to the bottom

And having failed to make its digital bet, it then failed to develop a retail strategy that differentiated itself from its online competitors. “Baby, let me follow you down” is a price race to the bottom which benefits consumers in the short run, but not in the long term. Bookshops made exactly the same mistake, as James Daunt noted when he moved to run Waterstones (after it had been sold by HMV). Piling cheap and discounted products near the doors doesn’t help to underline the value of what you’re selling. Effectively, HMV was less convenient than its online competitors, and less good value. But it didn’t even start to explore what an ‘experience’ proposition might have looked like. Curation would have been a better strategy, as I argued in my Blink article recently, but that would have required thinking about how the stores were designed, and also paying more to hire and keep better quality, more informed staff, anathema to modern retail.

In passing, some of the lazier commentary on HMV points out that younger people don’t tend to buy hard-format entertainment content. But hard format sales of CDs, DVDs and Blu-ray still account for three-quarters of the market. And if you’re in a declining sector, the decline is going to be slower if your remaining market is an older demographic that has more money than younger consumers do.

Consolidation

One of the other consequences of the domination of business practice by financial interests and financial targets, along with cheap capital, is that businesses have expanded aggressively by acquisition and takeover. It’s a lot simpler than having to develop the business organically. The result has been rapid consolidation – and in the retail sector, any specialist category now has only one retailer left standing; one music chain, one bookshop chain, one stationery chain. Or none at all, in the case of the camera shop.

For HMV, that means it still sells 38% of all hard-format music and 27% of all DVD and Blu-Ray discs. These are market shares that are conventionally regarded as being monopoly levels. So there’s something dysfunctional about an economy in which a retailer with this sort of share can’t make sustainable profits.

Offshore tax avoidance

But the real killer of High Street retail, along with Osborne’s endless recession, has been the tax-avoidance that online retailers have benefited from by being based offshore, both generally by moving money around and specifically on VAT-avoidance. It’s astonishing that the Channel Islands VAT loophole, closed last year, was permitted for so long. Commercial businesses effectively took advantage of a rule designed to allow visitors not to pay VAT on personal items bought in the islands on their return to the UK.

The Labour government eventually recognised this, though didn’t actually close the loophole. Labour was initially dismissive, perhaps because of HMRC’s generally myopic view on corporate tax abuse, or perhaps because of New Labour’s cheerleading view that everything about the digital economy created innovation and wealth. More surprisingly, HMV was also dismissive. It was only after then Chief Executive Simon Fox moved on to Trinity Mirror that he acknowledged the problems VAT-avoidance had caused for HMV. And even if the Channel Islands VAT scheme has been closed, there are still EU loopholes.

HMV’s market share will probably keep some of the chain open, at least for a while. Its industry suppliers have already said they’ll help margins and improve credit terms, given the alternative is losing a significant share of sales. But I’m not betting on Elton John’s plan to play impromptu instore gigs.

Public goods

Looking at the bigger picture, it’s fairly clear now that a functioning and prosperous high street (downtown, in US parlance) is a type of public good. I mean that in the economics sense of the word, of a resource that benefits everyone. Effectively that’s what Mary Portas argued in her review (pdf), when she said,

our high streets are a really important part of building communities and pulling people together in a way that a supermarket or shopping mall, however convenient, however entertaining and however slick, just never can.

High streets, in summary, have social value as well as economic value. The combination of recession, online, financial management and negligent tax policies (along with narrow planning policies that have allowed the growth of out-of-town sites, despite their high external costs) has brought us to a position where the high street is close to collapse. It’s hard to over-estimate the scale of the public policy failure that this would represent. Like the rest of the sorry tale of HMV and its forebears, it would represent the destruction of assets that used to benefit the communities in which they were located because financiers and business leaders followed their money – and policy-makers didn’t stop them.

The picture at the top of this post was taken by Andrew Curry. It is published here under a Creative Commons licence: some rights reserved.