High street blues

“Apocalypse now,” tweeted one UK film distributor when earlier this month retailers HMV and Blockbuster went into administration within days of one another.

The problems at both companies were not shocking news. Music and film companies have been helping to prop up HMV for many months, and the company had issued a number of profit warnings and already closed 40 of its stores. Still, HMV’s 223 stores had been the last specialist CD and DVD chain standing on the high street.

Blockbuster faced online rental competition from the likes of Amazon, LoveFilm and Netflix. Administrators Deloitte announced plans to close 129 of the company’s 528 stores and to make 760 employees redundant.

The reason for high anxiety in the industry is obvious: not only are distributors losing two prominent retail chains to push their products, but also Christmas is boom time for DVD sales. Distributors had shipped millions of units into HMV stores. Those films were sold in huge numbers but, now, the distributors do not know if they will be paid.

“We still lost money with HMV because we shipped a lot of product in December,” comments Zygi Kamasa, CEO of Lionsgate UK, which had big sellers such as The Expendables 2, Magic Mike and Keith Lemon: The Film.

While these titles were all stocked by supermarkets, hundreds of thousands of units were also sold through HMV.

“Any unsold will come back to us so we own those,” Kamasa says, while worrying about revenues from already-sold merchandise. “We have been in meetings with HMV’s management, with the banks, with everybody. We’re on a list of creditors. Everybody has lost a lot of money. There are tens of millions of pounds they owe suppliers.”

It is, as yet, unclear how much and when creditors will be paid. The news on Jan 22 that retail restructuring group Hilco UK had acquired HMV’s reported $190m (£120m) debt - and said to be paying less to acquire it because of the administration - and that HMV would honour its gift vouchers gave cause for optimism that the company will continue trading in one form or another.

For a company the size of Lionsgate UK, HMV’s troubles do not have to spell disaster. But for smaller independents “this could be catastrophic news”, notes one industry insider.

Robert Beeson of arthouse distributor New Wave, which has also lost money through HMV’s problems, says: “Our stuff would never get into supermarkets. We need HMV or some successor to it. Otherwise there’s simply no shop at all where people can poke about. It’s all down to Amazon.”

The huge irony that distributors cannot help but note is that, at least in terms of market share and units sold, HMV is still successful.

“BVA [British Video Association] data shows that [HMV] has held its share of around 16% of sales volume over the last 10 years, while total market sales rose in the same period from 169 million units to 179 million units,” commented Lavinia Carey, director general at the BVA.

In the UK, the split for DVD by sales value is roughly 38% to supermarkets, 36% to internet and 19% to HMV.

The continuing importance of having a high-street presence is self-evident. Just a few days before HMV and Blockbuster went into administration, the BVA published figures underlining the continuing strength of the DVD market. In spite of all the predictions about sell-through DVD’s demise, “Physical discs took over 78% of all 2012 consumer expenditure, accounting for more than $2.9bn (£1.8bn) of the total $3.6bn (£2.3bn) video market,” said the BVA.

Blu-ray sales also grew in 2012, with the year’s share of top 10 titles growing to 29% compared to 24% in 2011.

Theatrical may be booming - and enjoyed a fourth quarter surge thanks to Skyfall, The Hobbit et al - but, as Mark Batey, chief executive of The Film Distributors’ Association observes, cinemagoing still only accounts for less than 4% of overall film consumption in the UK.

The speed at which the digital revolution is taking place, and impacting bottom lines, is still open to debate. The BVA’s Carey cites research which “showed 59% of people did not want to move into the digital world; 59% of people said they didn’t want to use digital services for video viewing”.

Others point to the continuing influence of the ‘50-quid man’. This is the affluent male consumer who might pop into HMV when his daughter is next door in Topshop or head into the store during his lunch hour. Soda Pictures managing director Ed Fletcher sees HMV as “a male refuge on the high street”. 50-quid man will browse and forage and eventually emerge from the store with the DVD he wanted and one or two more he bought on impulse.

Distributors all highlight the importance of impulse buys, which do not happen to the same extent when consumers are buying DVDs online.

Supermarkets continue to benefit from impulse buys but they carry limited amounts of stock with an emphasis on very mainstream fare. They certainly do not have the huge range of catalogue titles that appeals to 50-quid man.

“If you don’t have it in front of you and you weren’t thinking about it, you’re not prompted to buy,” says Carey of the mindset of the impulse buyer.

There is an obvious tension: the industry needs HMV, or another high street retailer, but investors do not appear to believe in the long-term viability of the HMV business model. Hilco, a company specialising in bringing companies out of administration that already owns HMV Canada, faces a tough challenge.

Philip Knatchbull, CEO of Curzon Artificial Eye, has confirmed the HMV Curzon in Wimbledon, London, will stay open whatever happens to HMV as a group (the distributor-exhibitor partnered with HMV in 2008 to bring digital cinema into community HMV stores starting with Wimbledon).

One reason distributors seem stoic in the face of HMV’s problems is that they have experienced this scenario before. When Woolworths and Zavvi - which had taken over Virgin Megastores - folded in 2008, there was similar doom-mongering about the imminent demise of the DVD market. In the event, partly thanks to HMV, the sell-through market survived.

Digital now accounts for almost 22% of the UK’s $3.6bn-plus video entertainment market - and that percentage will continue to rise sharply.

As the market for tablets and internet-enabled TVs grows, so will the market reach of Netflix, LoveFilm, Blinkbox, Curzon On Demand and all the other players offering video streaming services for movies.

At the same time, sell-through and rental DVD is not going to fade away quite yet.

“The majority of home entertainment sales are still the physical discs and I see this continuing for some time,” says Knatchbull. “The tipping point for VoD sales will happen only when the technology is properly sorted so that it’s as easy to watch a VoD purchase as it is a TV channel.” In the meantime, different ways of selling DVDs are being mulled over.

Last year Tesco, which already owns Blinkbox, joined with technology partner Tribeka to experiment with disc-manufacturing-on-demand kiosks at two Tesco Extra stores.

It may seem easy to blame the travails of HMV and Blockbuster on poor management that did not evolve with the times quickly enough. Look at the UK high street as a whole, though, and you will see retailers struggling and shuttering in every sector. The problem is exacerbated by the weakness of the UK economy as a whole.

Meanwhile, as one distributor notes, administration could be as much an opportunity as a misfortune: “HMV’s problem is that they’ve been managing the business round the debt. I don’t think that’s sustainable. The administration process gives a very good opportunity to rationalise the business and we’re all hopeful something will emerge. There is so much business there - that’s the thing! There’s a huge amount of money going through those stores.”