Financial Uncertainty in the High Street

Financial Uncertainty in the High Street

As you’ll no doubt be aware, HMV Group PLC was placed into Administration last Tuesday on 15 January 2013. In times of financial uncertainty with Deloitte LLP appointed as administrators of the Company following intense speculation concerning the future of the company.

The administration of the company, whilst surprising to some, will come as no surprise to many people within the industry. Following recent examples of Comet, JJB Sports and Jessops who have all been placed into administration within the last year. Furthermore, the sustainability of HMV has long been questioned over the past few years. As a result of the emergence and resultant influence of e-commerce over the retail industry.

Forewarnings of HMV’s impending insolvency were present in the latest financial statements of the company for the year-end on 28 April 2012. It recorded that the Company generated Gross Sales of £923.2m, a fall of 12.1% from the previous financial year. In addition, latest accounts show HMV recorded a pre-tax loss of £38.9m, in stark contrast to its pre-tax profit of £1.4m in the prior year. Whilst the company’s net debt had decreased to £166.7m (2011: £170.1m) this had largely been attributed to funds received from the sale of ‘Waterstones’ and ‘HMV Canada’. To exacerbate matters, a poor Christmas trading period recording like-for-like sales falling 8.1% within the 5 weeks to the end of December. This worsened the company’s financial position leading to the subsequent appointment of administrators.

From these financial statements and the company’s recent trading figures it is evident, despite significant support from major banks including Lloyds TSB, Royal Bank of Scotland PLC and Santander UK PLC, that HMV’s current business model is no longer viable.

The potential loss of one of the UK’s most iconic retailers is a result of various factors. None more so than the emergence of internet shopping and notable competitors like Amazon who have used the growth of online retailing to its advantage; something which HMV have failed to do.

The failure of HMV to anticipate the arrival of the online consumer is perhaps their biggest downfall. It has allowed for progressive and entrepreneurial businesses like Amazon to establish a major share of the music retail sector. As a result of predatory pricing being implemented, in addition to a more expansive selection of choice and a more efficient method of shopping being provided to the customer, Amazon have been able to attain a major share of the music retail sector, a majority share which HMV used to enjoy. The dominance of the internet retailer is set to continue with research by Verdict Retail Research Group predicting the internet will account for £1 of every £8 spent within the UK this year alone.

As a result of business rates and substantial rental costs on leased premises, many major retailers are understandably currently unable to compete with online retailers on a price basis. With significantly lower fixed costs, online retailers have the ability to lower their profit margins in return for establishing a larger market share. It is therefore up to the remaining major high street retailers to look to the administration of HMV as an example. To be able to establish a feasible business model within the high street but also within the ever-changing online market.

With regard to the uncertain future of HMV and of its employees, it will be up to the Administrator to endeavour to establish whether an appropriate purchaser can be found. Also, to determine whether the business of one of the most renowned high street retailers in the UK will be able to proceed as a going concern.

Author: Dan Hurton

 

 

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