To understand Humphrey Kadaner's reinvention of music retailing, consider the latest twist on an old product: headphones.
In December, as he strolled through HMV stores in Hong Kong and Singapore, the president of HMV Canada was struck by the skyrocketing sales of headphones - and not just any headphones. Fur-lined ones. Lime green ones. Headphones, he realized, have become a fashion statement, and the accessories served to lure teens and twenty-somethings into those HMV stores as they looked for ways to personalize their portable music players.
Now Mr. Kadaner is betting on headphones as a way to draw young people back to his chain after they abandoned it to the digital world. In a bid to broaden his offerings beyond music, he's counting on transforming HMV into an entertainment retail hub. His efforts, including a rewards program that launches on Monday and an expansion into digital music later this month, are aimed at heading off double-digit annual sales declines in the traditional music industry.
"It was obvious to us that if we were going to remain viable, even getting to the point that we were the last viable national specialist retailer, that wasn't going to be enough for the long term," Mr. Kadaner said in his office, adorned with Bruce Springsteen posters as testament to his having attended 109 of the rocker's concerts.
"We're trying to be more than just music. It's one thing to say: 'I want to change the business.' It's a far bigger issue to say: 'Will your consumers be ready to go with you and can the brand stretch?"
For music retailers, stretching their brand is a matter of survival. HMV is the last major music chain left, after an array of retailers ranging from Tower Records to Virgin and Sam the Record Man have been forced to close. HMV is fighting the same forces: digital downloads as well as discounter Wal-Mart and big-box rivals Best Buy and Future Shop, which use CDs and DVDs as a loss leader.
Now Mr. Kadaner is battling the trends by branching out into technological gadgets, books and even fashions ($100 hoodies and backpacks), all tied to pop culture and entertainment. Next stop: live music. Already HMV's British parent has snapped up a company that owns concert venues, booking performers to help pitch products in its stores and provide exclusive rewards to customers (tickets to sold-out concerts and autographed DVDs, for instance).
The transformation is crucial as HMV feels the pain of a shifting industry. In the year to April 24, sales at its almost 130 Canadian stores (plus a handful of Asian outlets) dropped 8.9 per cent to roughly $380-million at outlets open a year or more. The parent's other music stores in Britain and Ireland, which began their diversification earlier, fared better: sales slipped 2.4 per cent in the same period. Mr. Kadaner's battle plan: bolster his non-music business to as much as 80 per cent of his overall sales within three years, from the current 61 per cent and 22 per cent in 2003 with Mr. Kadaner arrived at HMV.
But he faces steep challenges in an era in which consumers under 25 are hooked on free digital music downloads, said Kaan Yigit, president of consultancy Solutions Research Group.
"The competitive scenario, if you're mapping it out, is pretty dismal," said Mr. Yigit, 46, a once-avid HMV customer who rarely steps into music stores these days. "My eight-year-old probably will never visit HMV in his life … HMV is a couple of years late in the diversification game."
Mr. Kadaner is intent on playing catch up. By next month, he'll step up his offerings in such segments as fashions, tech goods, books and headphones that can generate profit margins that are at least double that of CDs and DVDs. Pumping up his headphone offerings is a priority after HMV's small Asian division tripled those sales by carrying more varieties. His stores will soon start to stock a $350 Dr. Dre jumbo-sized model, jeweled earring-shaped headphones and ones in fluorescent pink.
"I was surprised at how many different variations of headphones one can have," he said.
He's counting on a new loyalty scheme, with an annual $3 fee, to lift sales by 10 to 15 per cent in the coming years. Joining a burgeoning number of retailers turning to a rewards programs, he views it as a tool to keep tabs on what his best customers are buying in order to stock more of it. And while research has shown that young consumers aren't drawn to loyalty programs, he thinks he can cater to his 14-to-24-year-old clientele by allowing members to acquire hard-to-get items and collectibles.
Yet he isn't turning his back on the music world. Since November, he's been testing an HMV digital music site that will be rolled out on June 28. With prices at iTunes levels ($1.29 for a new song), he wants to draw young consumers with a debit card payment option unavailable at rival sites. He also plans to boost business by discounting CDs in the stores after a pilot of price markdowns resulted in sales lifts of as much as 50 per cent.
And he's determined to eventually tap into the growing live music market with a domestic acquisition or joint venture with a specialist in the field. By 2012, the British live music business will be one-third larger than its recorded counterpart, HMV predicts. Another benefit: while online music theft is rampant, "it's pretty hard to steal a live experience," Mr. Kadaner said.