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Can entertainment retailers sell digital products physically?


To merely look at recent headlines you could assume that high street entertainment retailing in the UK is in terminal decline, as two of the last big bricks and mortar players Game and HMV fight for survival.

In comparison online specialists such as Amazon go from strength to strength and seem to have none of the problems of demand seen by high street traders.

Although the combined value of sales for video, games and music last year was down four per cent compared to 2009, it still totalled over £5 billion and equated to 16 albums, videos or videogames bought per UK household.

What has changed drastically is the way we consume media, with digital formats seeing a 26.5 per cent yearly increase in 2011 whilst albums and DVD sales declined £290 million.

The added ease of buying physical products online or as part of your weekly shop at the supermarket, means specialists whose primary operations are offline are baring the brunt of this evolution, and to some there is only one outcome.

Andrew Wade, Associate Director of Retail Equity Research at Numis Securities, says of entertainment retail: “Really it comes down to: Are there enough people that need to go to a high street shop (for assisted purchase, immediate requirement, trade-in, or they enjoy browsing or are not price sensitive) to warrant the staff and rent bills, and still make a good economic return?

“The answer, particularly given the low margin in the category, seems to be no.”

Others are less pessimistic however and Kim Bayley, Director General of the Entertainment Retailers Association (ERA), argues that people should stop thinking about digital and physical products as being separate from one another.

She believes that more events, such as the in-store signings & performances - which are becoming more prevalent at independent record shops - digital download kiosks, manufacture-on-demand in-store and second-hand products can all help re-energise stores.

“All retailers are trying to build the link between physical and digital products and trying to educate customers about what technologies there are, how they can use those technologies and how that then feeds into buying more physical,” explains Bayley.

At the ERA’s yearly conference in 2010 its Chairman Paul Quirk argued that people should not give up on physical media goods, and was adamant that there was no reason why the digital only single Fireflies by Owl City, one of the year’s best sellers, could not be manufactured as a CD.

Bayley shares Quirk’s confidence in physical but says that CD manufacturing need not be essential to securing sales in-store.

“Retailers are trying to seize upon the digital demand, not by demanding that a record company makes a CD version of a song but that there is a convergence of physical and digital so that customers can buy a physical package for the digital product in-store.”

She points out that market figures seen by the ERA suggest that package and physical media will still represent around 70 per cent of the market in 2015, and points out that there is “a lot of confidence and love still for physical products”.

However Neil Saunders, Consulting Director of Verdict Research, thinks that although there will still be physical stores in five to ten years time, they will be the exception rather than the rule.

He recently argued that the launch of Apple’s iCloud was the final nail in the coffin for music stores and remains sceptical about continued demand for physical products.

Saunders said: “There has been a trend towards the digitalisation of categories like books, music and film for some time now and, if anything, this trend is now accelerating rather than slowing down.”

The space requirements for stores selling a large catalogue of goods obviously puts them at a disadvantage to online traders, with additional costs such as staff wages, rent and general shop upkeep.

“Socially, the next generation of shoppers is a true digital generation and will be far less concerned about physical products,” Saunders added.

“All in all, this means most stores will struggle to survive.”

This perhaps ignores the section of society, young and old, still uneasy with owning just digital products and solid products are certainly more aesthetically pleasing than a download.

And as Bayley argues, online shopping does not serve the gift and impulse market in the same way that high street stores do.

The growing trend for retailers like HMV to sell more hardware lines will be crucial to the future success of stores but the real key to survival appears to be whether retailers can sell online products in-store and a hope that people will retain an affection for products you can touch.

Published on Thursday 30 June by Editorial Assistant

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