After buying HMV, Hilco faces the task of rebuilding the fallen entertainment retailer’s position on the high street and online.

After months of wrangling with suppliers and landlords, restructuring firm Hilco’s hard work paid off last week when it struck a £50m deal to purchase HMV out of administration.

The rescue was music to many people’s ears, judging by the number of enthusiastic tweets from HMV fans on the day the deal completed.

But goodwill alone won’t ensure HMV’s survival. While it might have shed its debt, the retailer still faces an uphill struggle to combat declining markets and fierce rivals including Amazon, Apple and the supermarkets.

So what is Hilco’s grand plan to turn around the entertainment specialist? The HMV website had a new message to greet customers last Friday, revealing a taste of what is to come. It says: “A new website and digital services, a rebooted Pure rewards scheme, and a fresh approach to our stores are all in the works.”

HMV has been bought by Hilco, which looks likely to focus on the retailer’s roots as a music and film specialist

HMV has been bought by Hilco, which looks likely to focus on the retailer’s roots as a music and film specialist

Hilco is keeping its cards close to its chest about details of the strategy, and declined to comment for this feature.

However, it looks clear that HMV will be returning to its roots as a music and film specialist, with a breadth of range to differentiate itself from the grocers, and the experiential store environment to offer something different to etailers.

HMV will also shift away from technology products to focus on its core offer. It is a smart move by Hilco. When HMV was trying to push into technology under former boss Simon Fox, it was going head-to-head with established players such as Dixons and high-quality stores including Apple. Considering that many electricals goods are extremely low-margin products, it never seemed like a viable strategy to revitalise the business.

So HMV will replace tablets with an “enhanced music and visual range”, according to Ian Topping, the former chief executive of furniture retailer Steinhoff in the UK, who has been parachuted in to lead the turnaround.

It is thought, however, that HMV will continue to sell headphones to capitalise on its market-leading position in the category. It might also continue to sell other small, music-related technology items.

Canadian lessons

Hilco will make the most of lessons learned from HMV Canada, which it has owned for almost two years and is “now trading strongly”, according to Hilco chief executive Paul McGowan, who is now also chairman of HMV.

He concedes that the UK will be more of a challenge because Canada still has a strong physical market in CDs and DVDs, and the competition here is fiercer. For instance, Amazon - largely blamed for HMV’s collapse in the UK - has a less mature business in Canada where the great distances between cities make it more logistically challenging.

However, there are schemes that can be imported from Canada. Sources close to Hilco have indicated that it could bring The Vault - a digital subscription-based music streaming service launched by HMV Canada in December - to the UK.

Physical advantage

Online clearly has to be part of the ‘new’ HMV, but the store experience is also likely to be near the top of the
to do list. The stores have lacked the level of fizz and excitement needed to entice entertainment lovers through the doors.

The retailer needs to bring entertainment to life, through more in-store gigs, signings, exclusive product launches and whatever else will differentiate it from rivals. Dan Wagner, chief executive and chairman of ecommerce provider mPowa and Powa Technologies, says it is “hugely important” that “HMV widens its perspective and creates a shopping experience that ticks all the right boxes in terms of interactivity and personalised service”.

He adds: “Consumers looking squarely at price will be tempted by the likes of Amazon and iTunes. The place where HMV has the advantage is through the added value it can give to shoppers through the marrying of its online business and its high street offering.

“Shopping no longer needs to take place in a linear format and so options should be considered to redesign store layouts, payment systems and in-store facilities to create a more modern shopping experience.”

The retailer’s Cambridge store is one that will remain open as part of the Hilco deal. Opened in August last year, it was HMV’s first stab at a multichannel store, and features a cafe, wi-fi, mobile recharging connection points and click-and-collect. How many of these elements are rolled out to the estate will give a good indication of how seriously the new management views multichannel.

With 141 stores - which are thought to represent about 70% of the turnover generated from HMV’s former 222-store network - suppliers will be happy they can generate enough volume to make it worthwhile supporting the reborn retailer. And with major stores including the Manchester flagship being brought back into the portfolio after initially being scheduled for closure, HMV has good coverage across the UK.

McGowan says: “Landlords and key suppliers have been supportive of our plans to maintain an entertainment retailer on the high street.”

But there will be questions about Hilco’s plans for the business because of the restructuring firm’s history in UK retail. It owned Borders and Habitat before putting both into administration, for instance, although Hilco would argue economic conditions made it impossible for those businesses to continue in their existing forms, and point out that Habitat was eventually sold to Home Retail.

What the public wants

Jon Copestake, retail analyst at The Economist Intelligence Unit, says the deal has “mixed implications” for HMV.

“On the one hand Hilco has a good track record with the HMV brand after a successful and well-managed turnaround of the Canadian business,” Copestake says.

“The fact that Hilco is backed by major music labels and film studios, who want a viable alternative to Amazon and Apple, indicates that HMV will remain on the high street. However, in the UK Hilco has been accused of asset stripping at Woolworths, Allied carpets, Habitat and Borders at the expense of thousands of jobs.”

But for the moment many are just pleased to see HMV survive. Peter Saville, partner at advisory and restructuring firm Zolfo Cooper, says the Hilco deal is “really positive news for the chain and the wider UK retail sector”. He observes: “Hilco understands the market well and is a seasoned high street veteran. The news that HMV is to continue trading will also be welcomed by suppliers as an over-reliance on online channels may be uncomfortable.

“The test now is with the consumer. Following the public’s outcry at the demise of HMV, consumers need to start shopping in the stores again in order to secure its future on Britain’s high streets.”

Topping says: “The reaction of the British public to the administration of HMV shows a strong desire for the business to continue to trade and we hope to play a constructive part in delivering that.”

Free of debt, with a more manageable cost base and a renewed sense of purpose, the hope is that HMV can get back on song and become a relevant part of the high street once more. But Hilco will be all too aware of the scale of the challenge that lies ahead.

HMV’s new boss

Ian Topping, who has been parachuted in as HMV chief executive to lead its turnaround, is more familiar with sofas than CDs after 20 years spent in the furniture business.

The former Steinhoff UK boss joined the South African furniture group, which operates fascias including Bensons for Beds and Harveys, in 2001 when it bought beds manufacturing firm Relyon Group, of which he was chief executive from 1993.

While Topping’s lack of experience in entertainment retail might raise a few eyebrows, he is no stranger to turnarounds. When Steinhoff bought furniture business Homestyle, for instance, it needed restructuring and, according to Topping, had “fat overheads, a bad warehouse and distribution platform and poor customer service”.

And, much like HMV, Homestyle had to be revived in a tough environment, as competitors in the sector including Land of Leather and ScS hit the buffers.

Topping had some tough decisions to make during Steinhoff UK’s transformation. He reduced trading space and headcount, and moved away from the competitive sofa market to focus on higher margin products with broader appeal.

He has already thrown his weight behind a similar refocus at HMV. He intends to ditch technology products, which the previous management team had identified as essential to a revival, to go back to its musical roots.

Helping Topping in his task is Hilco investment director Henry Foster.

Foster, who has been with Hilco for more than five years, is a chartered accountant by trade and previously worked at restructuring firm Kroll, which later rebranded to Zolfo Cooper.

Topping has an impressive academic background, with an MA in Engineering Science and Economics from Oxford University and an MBA from Manchester Business School.

He spent his early career working in the oil industry and management consultancy.

Outside work, Topping is a keen cyclist and three years ago biked from Harveys UK head office in Thurrock, Essex to its European head office in Westerstede, Germany, alongside Steinhoff founder Bruno Steinhoff.

And that kind of stamina will be needed if he is to get HMV on the right track.

  • Gemma Goldfingle, senior reporter

Evolving from physical to digital products

HMV

HMV

Under Hilco’s ownership HMV is to go back to its origins and focus on an improved music and visual range. It is not clear whether the retailer’s new chief executive Ian Topping is referring to physical product only, but even if a complementary digital offer is incorporated in store, CDs and DVDs will play a large role. Games have not been mentioned but it is likely the retailer will continue to sell them.

Focusing on what the retailer does best is an astute move - HMV can potentially capitalise on its position as a specialist with a deep range and knowledgeable staff. And while many have been quick to write off physical entertainment product, CDs, games and DVDs still made up 75% of the overall market in 2012. Digital sales of £1.03bn comprised the remainder.

However, while there is still a physical market to be served, it will not be there forever - at least not in any meaningful form. Sales of physical entertainment product declined 17.6% last year, and that trend does not look likely to ease.

If HMV is to have a sustainable business model, it has to come up with new revenue streams that can replace CDs and DVDs when they eventually die out.

Kantar Worldpanel consumer analyst Laurie Krohn says: “Although a large proportion of music sales still come from CDs, with £576m spent on them in the past year, HMV must ensure it establishes an attractive digital offer quickly.

ITunes is the dominant force in digital music and HMV will need to challenge this supremacy.”