The decline of traditional retail is a topic which has been discussed,
on and off, for around a decade now. It's a conversation which is
particularly relevant to videogames and other digital media, where
direct online distribution is possible, but online shopping has
affected almost every retail sector - even clothes and food, the
backbone of the high street.
In spite of this lengthy discussion, it's still something of a shock
to see two large retail chains, both of them very active in the
videogames sector, shutting down in the space of a couple of months.
Woolworths has been a fixture of towns around the UK for a century, and
in recent years has been a key outlet for videogames, especially at the
casual and family-oriented end of the market. Zavvi, the new name of
the Virgin Megastores chain, occupies some of the best retail property
in the UK and was determined to focus the core of its business around
videogames.
Now they're both gone, or are on the way out. With no buyers in sight
for either chain, both have suffered the fate of stock liquidations,
massive job losses and the sale of their individual retail locations.
After years of discussion and dire predictions regarding the future of
high street retail, should these closures be seen as support for those
arguments? Is this, as much of the commentary has indicated, a clear
sign that the high street is entering its latter days?
Too much weight can be placed on those conclusions, and it's important
to consider that there are special circumstances surrounding the
collapse of both Woolworths and Zavvi. In the case of Woolworths, the
company has been facing trouble for many years, and found little
succour in the buoyant economic conditions of the past decade.
Ironically, its low-cost, "cheap and cheerful" approach (many would
debate the use of the word "cheerful", in fact) might have resonated
better with consumers in a recession. It'll never have a chance to find
out, however.
Zavvi, meanwhile, has slid out of view protesting all the while that
it's a victim of circumstance. Its sales through 2008, the company
says, were healthy - but when Woolworths went down, it also spelled the
end for Entertainment UK, a distribution outfit which supplied Zavvi
with much of its stock. With tens of millions of pounds of debt
suddenly being called in and deep concerns over how to keep key items
(especially games) in stock over Christmas, Zavvi promptly ended up
being dragged down by the Woolworths disaster.
Just unlucky, then? Woolworths, caught short by the timing of the
economic cycle; Zavvi, a victim of pure circumstance, mere collateral
damage in Woolworths' implosion?
That's one interpretation, and it's one to which many in the high
street retail business have flocked. There's certainly an element of
truth here - but in dismissing these dramatic collapses as mere
circumstance, we risk blindly ignoring the important lessons and
indicators which they provide.
The fact is that very few corporate collapses are marked by graceful,
textbook descents as sales slide, profits fall, and the whole
operation is wound down by administrators. As managers (and eventually
administrators) attempt to rescue businesses facing difficulties, they
often take gambles which result in far more dramatic collapses.
Weakened businesses are also easy prey for hiccups in the economy of
any description, which can result in a seemingly sudden demise rather
than a slow decline.
In other words, yes - the collapses of Woolworths and Zavvi are
definitely the product of circumstance. However, there is an important
argument here which says that those circumstances could only sink these
large companies because there are bigger, underlying problems in play.
The harsh reality is that high street retailers are increasingly being
burned by trying to play in the same markets as successful online
stores. Online retail has squeezed profit margins significantly, even
to the extent that many online stores such as Amazon and Play can make
a profit at prices which would drive bricks-and-mortar stores into the
red. It's extremely telling that even in the depths of Zavvi's closing
down sale, the store had few bargains on offer which weren't already
cheaper online.
Moreover, with those profit margins so tightly reined in, bricks and
mortar enterprises find themselves more vulnerable than ever to the
kind of bumps in the road I mentioned a moment ago. They become heavily
reliant on day to day cashflow, which can be seriously impacted by
supply problems. In order to paper over those cracks, they need a
healthy credit relationship with the banks - and right now, one doesn't
utter the phrase "healthy credit relationship" within a mile of the
City of London without eliciting bitter laughter and angry stares.
It's also extremely telling that nobody actually wanted to step in and
buy Zavvi, let alone Woolworths. HMV has picked up a handful of stores
in order to extend its network around the UK, but even at that, some of
Zavvi's choicest retail locations - such as its enormous London store
on Oxford Street and the hugely prestigious Piccadilly Circus store,
formerly occupied by Tower Records - look set to leave the media retail
sector entirely. They're most likely to end up selling budget clothing
for the next few years.
If Zavvi's sales were growing and the company had a good plan going
forward, why didn't anyone buy them? In part, of course, it's down to
the fact that with the banks sitting in the corner sulking and refusing
to play, it's rather hard for the mergers and acquisitions game to
continue.
It doesn't help, however, that sentiment about the future of Zavvi's
entire market sector is almost entirely negative. It's not just that
you can buy CDs, DVDs and games more cheaply online - many in the
industry are still reeling from just how quickly digital distribution
is replacing CDs. Five years ago it was expected to take decades to
move consumers away from physical products; today, we're already past
the tipping point in some markets. Who can blame the business world for
looking nervously at the boxed movie and videogame markets and
wondering how long they'll be around for?
All of which, of course, causes us to cast a questioning eye in the
direction of the remaining retail giants of this sector - which in the
UK means Game and HMV. They're likely to enjoy something of an upwards
push from the demise of Woolworths and Zavvi, since there'll be less
high street competition - and it helps that their sector, the
relatively low-cost home entertainment market, is also likely to thrive
in an economic depression.
In the medium term, however, what future is there for these
businesses? If consumers increasingly go online - either for mail order
or digitally distributed product - what justification can there be for
the massive overheads involved in maintaining their enormous store
networks? Perhaps its telling that both firms are committing themselves
to second hand sales, much to the annoyance of the game publishing
industry - this, after all, is a USP which online simply can't
replicate.
In itself, that's a sobering vision of the future for the high street
- media stores simply filled with second hand product that was
originally bought online. Yet the bleak choices facing high street
media retailers in the next five years may be to resign themselves to
being second hand thrift stores, or to go the way of Zavvi. This
recession won't kill them - but the march of consumer buying habits and
preferences will leave them behind.
(www.gamesindustry.biz)
Mstation Games Review
Fri, 30 Jan 2009
