Unfortunately HMV recently announced that it had gone into administration. For those who keep an eye on the HMV’s news this has been a long time coming.
What is administration?
This is when an external team of financiers are called in by management to help ‘asset-strip’ or to find a potential buyer for a business that is unable to pay it’s debts. There are many legalities behind going into administration, but the main reason is that it gives the company protection from it’s creditors, for example now it has entered administration if you own a gift card with HMV you will not be able to redeem it, similarly if you have pre-ordered a product you are unlikely to get a refund. On the wider scale, it offer’s HMV protection from the millions of £’s of debt it is in, until a solution is found.
Why did HMV struggle?
HMV has had a rough time over the past decade. The advent of the iTunes store and online sales of music have seen HMV’s profits fall dramatically, from 2008 to 2009 profits fell from £89 million to £44 million (source). Around them Zavvi was lost to administrators and WHSmith’s stepped out of the CD/DVD sales section altogether to avoid a similar calamity, even with this happening HMV was unable to adapt a new business model to help fight the movement to online purchases.
What happens next?
Deloitte will be in charge of stripping HMV of it’s assets and selling them off, however there is still a little hope left for HMV as Deloitte will first look for a buyer of a firm; with Endless LLP (a private equity group) looking like a potential buyer (source).
A regret in 2006?
In 2006 HMV rejected a bid of 210p per share from Permira to takeover the business (source) a deal I’m sure management now regret, especially since they probably would have received a great deal of compensation had that deal gone through. Trading has been cancelled on the London Stock Exchange, where HMV now sits at 1.1p a share, showing a -44% fall in their share price this year alone.
Had this deal been struck the new management might have been able to turn HMV’s fortunes around, however hindsight cannot help with the now and at the moment HMV management should be focusing on finding a buyer or risk seeing HMV ‘stripped’ clean.
The end of the high-street?
Some are calling this the end of the high-street era; HMV was one of the last remaining ‘browsing’ outlets that was not in the clothing/accessory business. Game Group, Jessops and Comet are all recently examples of where Internet shops, such as Amazon, have completely out-competed the high-street store.
In order to avoid a similar fate high-street stores will need to adapt their business models and attract customers on something else apart from product alone