Mark Ritson on branding: HMV Group faces brand equity test

On one side are the supermarkets, which by the end of the decade are likely to account for up to 20% of book, CD and DVD sales. The huge economies of scale and slick distribution systems of retailers such as Tesco and Sainsbury's ensure that no one can match them on pricing or availability.

During the 90s it was Waterstone's that enjoyed these distinct strategic advantages over local booksellers. Now the tables have been turned and it is experiencing all the disadvantages that come with being smaller and less well organised than the competition.

On the other side there is the continued growth of the internet. E-tailers already account for 12% of total British book sales and that figure is only likely to rise further.

Even more troubling is the gradual decline of music retailing in favour of downloads. HMV's CD sales dropped by almost 20% last year and with the iTunes store and other sites continuing to grow sales and diversify into movie downloads, the long-term future for traditional music and DVD stores is cloudy.

HMV is trapped between a rock and a hard place; and it does not get much rockier than iTunes or harder than Tesco.

In response, Waterstone's and HMV revamped their e-commerce strategies. After five years of sending customers to Amazon, for a small commission, Waterstone's has started its own online sales effort. HMV, meanwhile, has unveiled a digital-download site that allows customers to buy music without the need for proprietary software. The fates of Fox and the HMV Group depend on the success of these initiatives.

Fox is the first to admit that, with hindsight, HMV should have moved onto the internet more quickly. In his first interview as chief executive, he acknowledged that the company had been slow to develop its online presence. 'We have some catching up to do,' he said.

There are many reasons why HMV was so slow to respond. It's the classic story played out once again of a market leader, perhaps a little over-confident, failing to anticipate new competitors and seismic shifts in the structure of its market.

Keen to protect a cash-cow business, avoid any cannibalisation of its current sales and generally maintain the status quo, HMV was blinded to the encroaching threat of the internet. Now it must move quickly to extend its brand into a very different channel.

That is the big brand question for HMV: will its existing brand equity help or hinder its e-tailing ventures? If consumers perceive Waterstone's or HMV as physical stores that are ill-suited to the internet environment, visitors, sales and ultimately the future of the group will be in doubt.

Perhaps not surprisingly, Fox believes his brands will add value. He claims the 'stellar attributes' of both Waterstone's and HMV will enable them to 'successfully differentiate themselves and to compete effectively through a variety of complementary retail channels'.

It could go either way. Levi's, for example, has failed miserably over the past 10 years to apply its brand equity successfully in the general fashion category. Conversely, Kodak has enjoyed some retail success with its EasyShare digital camera thanks to its strong brand equity, which has proven valuable to consumers in a very different category.

30 SECONDS ON ... HMV GROUP

- HMV Group, which owns HMV and Waterstone's, operates more than 730 stores in eight countries - equating to a total floor space of 3.4m ft2.

- In the year to April 2006 HMV UK & Ireland recorded sales of £937.2m, while Waterstone's posted sales of £418.7m, giving the books retailer an operating profit of £20.9m.

- HMV Group has about 11,200 full-time employees worldwide.

- Music accounts for 41% of HMV's sales in the UK and Ireland, DVDs 44.6% and games software and hardware 10.2%.

- HMV is the market-leading retailer of music and DVDs in the UK and was named best retail chain at the 2006 Music Week Awards for an eighth consecutive year, multiple retail success of the year at the 2006 British Video Association Awards and most improved retailer in games at the 2006 MCV Industry Excellence Awards.

This article was first published on Marketing