Brand Health Check: HMV

With the rise of online retailers and digital downloads, HMV is struggling to fight its corner as a specialist.

Sir Edward Elgar may have been all the rage when he opened HMV's first store on London's Oxford Street in 1921, but these days special guests at its stores are more likely to be along the slightly less esoteric lines of the Sugababes or McFly.

Despite this, HMV is struggling to keep up with the times. Changes in musical tastes have moved almost as swiftly as the way in which music is sold.

HMV's inability to deal with new distribution channels led to a 5.5% decline in like-for-like sales in the five weeks to 7 January. This is in stark contrast with its main bricks-and-mortar rival Virgin Megastores, which posted a 3.2% rise over the same period, due to aggressive pricing.

One of the main problems for HMV is that the products it sells - CDs, video games and DVDs - are simple to sell over the internet, not least because they are small and easily posted.

Online rivals such as Amazon and Play.com have sprung up in their hundreds, offering the same goods at significant discounts, and hitting HMV hard. Its attempts to rectify this by revamping its online offer, with further investment to be made over the next three years, may be too little, too late.

A second major problem for HMV has been the explosion in the number of consumers downloading music digitally - often free of charge through illegal file-sharing. Since Napster burst onto the scene in 1999, sites allowing consumers to share CD-quality music without paying for it have left the industry struggling to get to grips with the problem.

A third challenge is that the big supermarkets are undercutting specialist retailers such as HMV on the top 100 chart CDs. HMV carries a bigger back catalogue than the supermarkets, but even here, online retailers can beat its stores in terms of range and availability.

Indeed, HMV chief executive Alan Giles admitted at Christmas that the chain had been pricing itself out of the market in this area and began slashing prices on back-catalogue titles.

We asked Richard Corbett, managing director of music search agency Ricall, whose clients include Sainsbury's and Asda, and Caroline Wilde, managing director of retail specialist the Retail Marketing Partnership, how HMV can adapt its business to hold on to its market share.

DIAGNOSIS 1 - RICHARD CORBETT MANAGING DIRECTOR, RICALL

The music industry is undergoing a revolution and no one really knows how it will stack up in five years' time. As such, it requires brave, positive action to stay ahead. But HMV's tactics have been highly cautious, and as risk-averse strategies go, it is pretty high risk.

Its poor results were predictable. Amazon has been around for a long time now, and the iPod has hardly attacked by stealth. HMV has only itself to blame for losing the initiative online and, with its inferior offering, has struggled to catch up. Equally, its heavy-handed buying tactics will have won it few friends at labels already being squeezed hard.

Online retailers hold all the cards in both format and experience; HMV stores offer little incentive to visit. When you can listen, read reviews and purchase from the comfort of your home, why bother? And that is before we get to downloads.

HMV needs to redefine itself, and fast. It must look beyond cheap CDs and DVDS, and become a destination, a place where you can interact and spend time with music, rather than just pay and go.

REMEDY

- Make the stores like music lounges, where you can meet friends and try before you buy.

- Add live in-store performances.

- Position the brand as the authoritative voice on what is hot in music, using the best bits of its heritage.

- Look at other revenue streams. Selling food and drink in bigger stores would keep people spending while they browse.

- Instil more passion into the tired-looking brand and stores, and enthuse the staff.

DIAGNOSIS 2 - CAROLINE WILDE MANAGING DIRECTOR, RETAIL MARKETING PARTNERSHIP

Now that it is so easy to buy online, download tracks, or pick up a cheap CD or DVD at the supermarket, HMV must differentiate its shopping experience.

It relies heavily on Christmas sales; a challenging time to deliver its core brand attributes of range, authority, knowledgeable advice and value for money. However, HMV's in-store environment has not moved on since the 80s and offers little to encourage browsing. Staff are well informed, but have few opportunities to communicate with customers.

Loyalty benefits are delivered mainly through the HMV credit card, potentially alienating a younger audience, who are offered a points scheme only on games.

HMV's website, meanwhile, lacks a sense of community or expertise, leaving it at risk of becoming just a transactional interface dependent on low pricing.

Cutting prices is unsustainable in the long term. HMV's big-format stores should instead offer an outstanding retail experience to counteract online rivals, and build relationships with customers by capitalising on its authority and expertise.

REMEDY

- Use discounting judiciously.

- Create in-store theatre through events, and improve the browsing environment, Barnes & Noble-style.

- Take loyalty benefits beyond the HMV card.

- Create an online community and harness the knowledge and enthusiasm of staff to enhance the brand.

- Embrace technology by offering exclusive downloads at dedicated in-store iPod/ MP3 stations.

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