UK music and video retailers look for lifeline

A new report published this week by retail analysts Verdict Research, part of the Datamonitor Group, finds that music & video retailing is poised for a revival as consumers adopt HD DVD technology and retailers strengthen their downloading services. Though the market is set to shrink for the third year running in 2007 (by 2.9% to £4.0bn), the prospects for remaining specialists are brighter now that many weaker players have exited the market.

Music & Video market is past the worst of its problems. According to Nick Gladding, Lead Analyst at Verdict: "While piracy will continue and CD volumes will decline further, retailers generally are now better placed to cope with new market challenges".

In the past 12 months, the collapse of Music Zone and Fopp and the closures of many independent retailers have reduced the number of music & video stores operating on the high street.

While trading has also suffered at larger specialists, they are now adapting their business models to overcome market challenges. HMV is developing a more compelling in-store and online shopping experience, while Virgin, whose stores are now being rebranded Zavvi following the sale of the business to its management, should emerge a stronger retailer shorn of loss-making stores.

Expectations high for HD DVD

In the short term Verdict believes next generation DVD will help stabilise the music & video market. Though HD-DVD and Blu-ray are unlikely to cause a massive surge in sales to the extent DVD did when it first hit the mass market, they should provide a much-needed stimulus. "As hardware and software prices fall to mass market levels and more titles become available, sales will start to rise faster.

For many consumers that have bought an HD-ready TV over recent years, next generation DVD will be the first opportunity to test their new equipment's full abilities," Gladding comments.

Digital downloading set for further rapid growth: Legal digital downloading has really started to pick up momentum with sales increasing by 80.6% in 2006 and predicts Verdict, 45.5% in 2007, taking the annual total to £163m. Looking ahead, Verdict expects the pace of market growth to remain fast. Crucial to this will be the widespread introduction of DRM-free content (that allows users to make multiple copies of downloaded tracks) and greater price competition as new players such as Nokia and Amazon launch services. By 2012, downloads are set to reach £600m and account for 13.5% of the total music & video market (up from 4.1% today). While to date iTunes has enjoyed the majority of the digital downloading market to itself, its dominance will be challenged by these new entrants as well as enhanced services from the likes of HMV, Tesco and Woolworths.

Weak market conditions have made music & video less attractive to grocers.

Fallen from favour

Once grocers' dream non-food sector, characterised by fast market growth, homogeneous product and, arguably, complacent competition, the category has fallen from favour. The opportunity to grow sales is limited, price deflation has squeezed margins and the competition has raised its game considerably. While grocers continue to push the sector hard, the primary focus of their non-food effort will increasingly target faster growing categories like electricals and Verdict expects that trend to be reflected in reduced space allocation per store to music & video over the next few years. That said, Verdict still forecasts overall space to increase as grocers continue to roll out new stores. Tesco and Asda sales will also increase via their websites.

Longer term prospects for the market look brighter. The music & video market has had a rough ride of late, with some onlookers quick to write off its future prospects. While Verdict believes the market will not reach its previous peaks and acknowledges piracy is here to stay, the retail analysts argue that much of the turbulence of recent years is a result of a fundamental shift in the market model, away from physical media towards digital.

"Once the dust has settled, with new players in place and weaker operators shed, the market will emerge renewed and rejuvenated, better able to take on the challenges presented by the next generation of consumers," comments Gladding.