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Report On Business HMV could face beginning of the end after years of sliding sales

People make their way past the HMV Megastore in Vancouver on Dec. 18, 2011.

Rafal Gerszak/The Globe and Mail

A victim of the rising digital world, HMV Canada Inc. may be close to playing its last song.

HMV could face the beginning of the end on Friday when an affiliated company – and a lender to HMV – asks the Ontario Superior Court to put the country's largest specialty music chain into receivership and close all of its more than 100 stores.

HMV, which owes almost $40-million to the firm, tried over the past month to get support from major labels and media studios to keep the chain going at least through 2017, according to documents filed with the court this week.

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"Unfortunately, the debtor has been unable to reach an agreement with the major suppliers on mutually beneficial terms that would allow the debtor to address its immediate cash flow needs," Christopher Emmott, a director of HUK 10 – the affiliated firm – says in an affidavit.

HMV has struggled for years amid growing pressures from low-cost rivals, ranging from bricks-and-mortar discounters to digital music and, in the past few years, music streaming, as sales of physical albums slid.

Over the past five years under new ownership, the chain worked to spin a new tune by expanding into DVDs and other entertainment-related products as well as its own digital offering. But the changes weren't enough to reverse the sagging financial results.

To add to its challenges, HMV grapples with many artists who don't produce their music on physical albums.

"It's hard for a chain to survive when you're only catering to certain types of artists," said Paul Tuch, director of Canadian operations at market researcher Nielsen Co. "It's certainly been a trend we've seen for several years now."

Sales of physical compact discs dropped 19 per cent to 12.3 million units in 2016 over the previous year, while audio on-demand streaming jumped 203 per cent to 22 billion streams, Nielsen data show. Digital album sales also fell 26 per cent to 8.2 million units in 2016 as consumers shifted increasingly to streaming music, Mr. Tuch said.

The trends hurt HMV, which has been losing money (on a before-interest-tax-depreciation-amortization basis) since 2013, according to the filings. And its annual sales slipped to $193-million at the end of last year from $266-million in 2012, they say.

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"As a result of the constant and significant shift in the way media is consumed by customers, especially in North America, the debtor has seen a consistent year-over-year decrease in the sale of physical media," Mr. Emmott said.

HMV is the last of the national specialty chains to survive the low-cost digital wars and other competitive blows, Mr. Tuch said. Other big chains have included Sam the Record Man, Music World and A&A.

In 2011, HMV Canada was snapped up from its ailing British-based parent HMV Group PLC for $3.2-million by the private equity arm of U.S.-based Hilco International Holdings LLC, which is also a liquidator. The Canadian chain stocked the stores with back-catalogue music and movies that weren't carried at a discount at rivals, while branching out beyond CDs and DVDs into higher-margin merchandise such as collectibles, clothing and headphones.

Suppliers and landlords were relieved at the time that Hilco was working to revive HMV rather than see it shut down. "We think there's a healthy five-plus years remaining in physical music," Randy Lennox, former chief executive officer of leading supplier Universal Music Canada, told The Globe and Mail in late 2012.

But HUK 10, which is an affiliate of HMV Canada and an "indirect" subsidiary of Hilco, is now intent to stop the music amid HMV's burgeoning troubles.

"These financial difficulties, combined with the further decrease in the debtor's sales expected over the coming years, means the current situation is not sustainable," Mr. Emmott said. HUK has received no cash payments from HMV Canada since November, 2014, he said.

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