The end of the financial year marked the completion of our three-year strategy laid out in March 2007. During this time, the Group has delivered growth in profit before tax and exceptional items of over 50% and increased earnings per share by over 40%.
It is also pleasing that most of the strategic objectives that were laid out in March 2007 have been successfully achieved. The revitalisation of our stores, particularly HMV UK, has been a major highlight. We have evolved our product mix to compensate for rapid change in the entertainment markets, adding £166m of sales from new product categories, and outperformed the markets for music, visual and games. Across HMV and Waterstone’s, we have accumulated four million loyalty card-holders, ahead of our expectations, which demonstrates our customers’ affinity to our brands and better enables us to meet their preferences. We also reduced our costs by £30m per annum by realising the synergies that come from working more efficiently as a Group.
The one area of our business that was disappointing is Waterstone’s, where insufficient focus on our core strengths as a range bookseller was exacerbated by the challenge of restructuring our supply chain. However, we have identified clear opportunities over both the short and medium term to significantly improve the performance of Waterstone’s.
Following the transformation programme, the Group is on a much stronger financial footing than was the case three years ago. We are no longer a one-dimensional retailer facing rapidly changing product markets, as HMV stores have continued to evolve to respond quickly to the changing entertainment markets in which we operate. At the same time, we have accelerated the evolution of HMV as an entertainment brand by investing in high growth parts of the industry, namely live music and digital.
On 26 March 2010, we outlined a new, clearly focused strategic agenda for the Group, which will enable us to deliver further, sustainable growth over the medium and long term. This strategy is built around the three main pillars. These are as follows:
Continuing to evolve HMV’s product mix
Building on the significant success of the last three years, we intend to maintain sales within HMV, whilst progressively evolving the product mix through several new and existing strategies. We have clearly demonstrated that the HMV brand can successfully stretch into new related product areas to compensate for the broad-based changes taking place in our traditional markets. Our main focus over the last three years has been to build from a zero base a strong offer in technology products, which has grown to 6% of HMV UK’s sales, and we are confident that we will increase this to 12% by 2013 through space and range extension.
Within the music industry, value is increasingly shifting from recorded music to other sources of revenue, including the high-growth market of entertainment-inspired fashion and related merchandise, which fits strongly with both the HMV offer and customer base. HMV has made a good start in fashion and merchandise, driven largely by a range of band merchandise. A broader range of fashion is now being rolled-out to our stores, for which a team of buyers with fashion retailing expertise has been recruited. New in-store fit-out and display called The Studio is being rolled-out across our store estate, with completion by September 2010, which will help to drive our mix of these products from 3% at the end of the last financial year to 9% by 2013. A similar product mix evolution is taking place in HMV International.
Mobile handsets are increasingly important as entertainment devices and complement the technology offer in our stores. Orange concessions offering a range of handsets tailored for music, film and games, including the Apple i-Phone, are therefore being rolled-out across our stores.
Furthermore, we expect to maximise our position as the last remaining high street entertainment specialist by outperforming the markets for music, visual and games. This will be achieved by building on the loyalty of our most regular customers, offering product in the most compelling ways possible and establishing leadership and authority in new and emerging formats.
By focusing on these initiatives, as well as the continued tight management of costs and margins, we are targeting a net margin for HMV UK of c.5.0%–5.5% over the medium term.
Growing in Live and digital
The most significant development in HMV’s evolution as an entertainment brand over the last 12 months has been our entry into the fast-growing live music market, which in the UK is forecast to become one-third greater than the value of recorded music by 2012. Following a successful year as a joint venture partner with MAMA Group to own and operate live music venues, on 29 January 2010 we completed the acquisition of MAMA for £46.0m in cash.
The performance of these venues strengthened following the formation of our joint venture, with the two largest venues, the HMV Hammersmith Apollo and HMV Forum, enjoying record trading during 2009. During the last 12 months, we have successfully combined our live and retail assets to drive venue utilisation and product sales by leveraging HMV’s artist and supplier relationships. These relationships also enabled us to launch in February 2010 the Next Big Thing, a brand new music festival across all MAMA venues.
The acquisition of MAMA also includes some of the most valuable summer music festival brands in the UK and globally, which were not within our previous joint venture. Over half-a-million visitors attended these festivals in 2009, including the international brands Global Gathering and Godskitchen, and in the UK, Lovebox, The Great Escape and Escape into the Park.
We expect this new division of the Group to grow organically through increasing the utilisation, occupancy and related sales at existing venues, and by adding two or three new venues per year. A new classic rock festival, High Voltage, has been added for 2010. A significant opportunity also exists in the market for tickets, where we aim to leverage our venue tickets to build a business of scale, with an aspiration to sell three million tickets by 2012/13. In total, the Group is targeting EBIT of c.£15m from the activities of its Live division in 2012/13.
In September 2009, we acquired a 50% equity stake in 7digital, whose leading technology platform now powers HMV’s music download offer in the UK and Canada and an e-books store for Waterstone’s. 7digital is also a leading B2B provider of digital entertainment, with a client base that includes Spotify, BlackBerry, Samsung and numerous FMCG brands, which enables the Group to participate in the growth in digital entertainment beyond our own branded websites. This investment strategically positions the Group in an emerging part of the market with potential for long-term growth.
Turnaround at Waterstone’s
We have a clear strategy to turn around Waterstone’s by reinforcing our core strength as a range bookseller, and to maximise our position as the last remaining specialist bookseller on the UK high street.
The Waterstone’s front-of-store offer is being refocused to reflect better the local interests of our customers by reducing the number of centrally-selected discounted books and giving back this space to branches to mount their own promotional features. The customer experience generated by this is not easily replicated by the online or mass merchant competition, and so we expect our share of the book market to grow. A relaunch of the Waterstone’s brand, to re-engage our customers with this new agenda, took place in May 2010.
Sales of the deep range, those titles ranked beyond the 5,000 bestsellers, represent c.50% of the UK book market and continue to be a key driver of market growth. However, Waterstone’s underperformed in this segment of the market during 2009, as availabilities of these titles were adversely impacted by issues arising from the roll-out of the book hub. This was corrected during our final quarter, when a fully functioning book hub restored availabilities, enabling local branches to carry a range more suited to their local markets and to focus on bringing to life individual titles beyond the most highly publicised.
There are further opportunities for Waterstone’s to grow sales of non-book products, particularly stationery and e-book technology and related accessories, for which we are targeting a 10% sales mix by 2013, up from 6% in our last financial year. This includes the roll-out of Paperchase stationery concessions in an initial 20 stores, which we are confident can be achieved with no impact on book sales or range.
We have made an excellent start selling e-books from waterstones.com, with approaching one million e-book titles downloaded from our site. As publishers increase the range of e-books from the existing 30,000 titles, we expect this to continue to grow strongly.
With the efficiency gains latent in the book hub now being realised, Waterstone’s has a strong platform for which to deliver this turnaround agenda. The exit from the market at the end of 2009 of Borders UK, the last remaining national specialist competitor on the high street, is a further opportunity which we expect to contribute to improved net margins for Waterstone’s of 2%-3% in the short term, with a target of 3%-4% in the medium term.
In January 2010, Dominic Myers was appointed Managing Director of Waterstone’s, and I am pleased with the progress that has so far been made in this business as well as the positive reaction of our customers, suppliers and employees to the turnaround plans.
Outlook
Despite the significant changes we are pushing through our retail businesses, we are confident that by executing the strategies that have been laid out and having identified further operating cost opportunities, we can rebuild profits at Waterstone’s and deliver consistent underlying profits in HMV. Overlaid onto this will be our rapid growth in the new HMV Live division. By maintaining a clear focus on these objectives, we believe the Group is in a stronger position to deliver long-term, sustainable growth.