HMV Group – Diversification

HMV Group is essentially three retail chains: HMV, Waterstones and Fopp – a spin-off of HMV – that have not only had poor consumer confidence to deal with, but increasing competition from technological change. Simon Fox, the company’s CEO, has in response under-taken a strategic review of the company to increase competitiveness against major competitors – such as, Apple’s iTunes Store and Amazon’s book department. This has been through related-diversification, a strategy defined by Ansoff’s Matrix as one which branches the business out into other interests of its consumers. But, as a fundamentally risky strategy, can marketing alone save this declining business?

HMV is, unsurprisingly, the ‘core-business’ behind the group, and within HMV music is the ‘core-product’ sold in store. Despite also selling DVDs and video games, increasing volumes of digital downloads of music have naturally had an adverse effect on sales revenue, and consequently profit; hence, further diversification was needed: through live concert ticket sales. The group has done so by taking acquiring a majority stake in Mama Group, giving it control over the Hammersmith Apollo, among other venues. A key benefit of such external growth is that the high-degree of risk associated with diversification is reduced because the business can use the new skills, connections and reputation to establish themselves in the market. As marketing guru Seth Godin recently explained in his own blog, the best way to overcome a problem is to eliminate the constraints to success – HMV are no longer constrained by declining CD sales nor increasing piracy by becoming involved with live music. This – as well as selling high-value hardware, like premium headphones and special editions/box sets, that customers prefer to purchase physically – may account for a 16% increase in profits.

But at Waterstones, the outlook remains bleak, with little room for diversification that is needed to respond to increased market competition. Not only is Amazon able to offer cheaper books as a result of direct distribution channels, major technology giants are introducing e-readers; I, personally, do not think even the best marketing in the world can save Waterstones from an eventual disappearance from the high-street. ‘If you can’t be ’em, join ’em’ must be what Simon Fox was thinking when he decided to start selling e-readers in store. However, in the long-term is he really thinking ‘Waterstones has become a dead-dog’? While selling e-readers will boost sales revenue in the short-term, the overall decline of physical book sales will be catalysed by discouraging repeat custom that had previously been developed by great customer service.

Ultimately, diversification looks to be working for HMV but not for Waterstones. This leads me to predict a likely sale of the book retailer to a private equity firm, a management buy-out or a retrenchment strategy to be implemented in the next couple of years; HMV, are prepared for this: they now stock a wide range of books, including classic literature in addition to popular fiction. This, however, is where HMV need to be careful. By also introducing clothing, they may be loosing their focus and thus competitiveness – unless the diversification strategy is reviewed and monitored – HMV may lose its brand identity among customers, which emphaises the high nature of risk in diversifying one’s business. This is what happened to Woolworths…

© Joshua Blatchford 02/08/2010 author of Manifested Marketing

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