The textbook last hurrah of Musica

At its peak, Musica — a unit of Clicks Group — generated a turnover of nearly R1 billion a year. That’s a lot of CDs and DVDs!

The textbook last hurrah of Musica

Turnover at the entertainment chain peaked in the year to 31 August 2010 at R952-million. It closed all remaining stores at the end of last month, after announcing the decision in January.

A year ago, Musica was still a tidy business. In the six months to February 2020, before the onset of the Covid-19 pandemic, the stores reported a turnover of R333-million. On an annualised basis, that would equate to roughly R600-million (factoring in the impact of a traditionally stronger first half). In terms of turnover, it was still about 60% of its size at the peak.

By March 2020, just before the country entered a lockdown, the group still had 78 Musica stores. While its demise was “inevitable”, as admitted by the group in January, it was accelerated by the pandemic.

Musica relied on foot traffic to destination malls where its stores were located. In many of these centres, foot traffic plummeted to unheard-of levels during the lockdown as only essential retailers were able to trade. Recovery has been slow and, in some malls, has still not returned to normalised levels.

Managed decline

The pandemic did not kill Musica (it was already in a deliberate, managed decline), but it made the decision by the Clicks board simple.

Clicks bought Musica in 1992, and within a decade had effectively rolled out a world-class music retailer across the country. At that point in time, it had four large brands: three in South Africa — Clicks, Discom (which it later sold to Edcon), and Musica — as well as Priceline in Australia.

In 2006, it renamed four-CD Warehouse outlets (it had acquired the only store in 1997) to Musica Megastore. These were similar to the popular Virgin Megastores and sited in select locations (Rosebank, Sandton, V&A Waterfront, and Gateway).

Approximately two decades after it acquired the business (in 2010), trade at Musica peaked. On the R952-million in turnover, it reported gross profit of R318-million — equating to a gross profit margin of 33.4%. Operating profit was R53 million (an operating margin of 5.5%).

The segment equated to 10% of the group’s total retail turnover (and was about 11% of the size of Clicks). On an operating profit basis, it produced 8% of group retail profits. Even with the market entering a multi-year structural decline, this was still a big business.

Then came the downs…

Two years later, by the end of the 2012 financial year, turnover was down 8% from that peak, while profit before tax was down 18% to R43-million (it had rebounded from R31-million in the 2011 financial year). The group had realised in 2010 already that the store footprint of the chain needed to be cut.

By 2013, it had right-sized the Musica store base to 120.

At the time, then-CEO David Kneale said: “In our view, there will be a market, albeit declining, for the physical format for years to come, and our intent is to be the last man standing there. So, we are taking share in CD, we are taking share in DVD, but at the same time we are introducing more products such as headphones and speakers.”

In 2013, the group stopped disclosing separate revenue and profit figures for the Musica segment. The strategy from that point was simple: Each year the group would methodically close stores that were no longer profitable. Various factors went into this decision, including no doubt trading densities and the ability to service the market from another existing location.

As leases neared the end of their term, the group would decide whether or not the store still made financial sense. If it did in a certain market, it would either renegotiate the lease with the existing landlord (often moving to a smaller store in the centre) or it would find new premises in an alternate location serving a particular market.

Net decline

This meant it would sometimes open select new stores, but the number of stores being shut in a year would far exceed this, meaning a net decline.

By August 2019, it had 100 stores, and the shift to streaming for both music (Spotify, Apple Music) and visual entertainment (Netflix, Showmax, and the like), as well as the shift to digital downloads in gaming, was firmly underway. Through this decline, it gobbled up more and more market share in music, DVDs, and to some extent physical gaming.

Competitors such as Look & Listen failed (it filed for business rescue in 2014), and supermarket retailers who had played in the entertainment retail space exited over time.

Many forget that Musica actually entered the digital space: It launched an online music download store in 2004, which was fairly early by global standards (market leader, the iTunes Music Store launched in 2003). Eventually, Musica shut the store down.

Management had clearly figured out which way the market was headed then, but it must’ve known that success would require building out a platform (this was not about selling MP3 files).

By its very nature, the Internet enabled the global retail of digital goods. This meant Musica could simply not compete against the likes of iTunes.

By February 2020, Musica reported a gross profit of R113-million on the R333-million of turnover for the six months. That translates into a gross margin of 33.9%, slightly higher than the level at its peak. But the lack of scale had begun to hurt the business.

Clicks says it had R117-million in direct expenses for the six months. This translated into a R4-million operating loss. Across 12 months, Musica was likely to break even at best (the group may release this detail with its full-year numbers to August). Operations were already lean and there were not too many more costs Clicks could take out of the business.

Covid-19 and lockdown killed Musica, but it would’ve probably only lasted another year or two anyway. Perhaps the full story will be taught in business schools in time.

Source Link