Devastating sales slump hits EMI
Sunday 09 November 1997
"Sales have been disappointing," said Conrad Crawford, an assistant at the HMV store in London's Trocadero complex. It had sold 217 copies by midday on Thursday. At the nearby flagship branch of Tower Records, one assistant said: "It's pretty slow. We sold 150 on the first day, one tenth of the number achieved by the last Oasis album."
EMI admits sales have been slow. "That is the way sales build and we have seen that before. It will be much stronger over time," said Sharon Christians, EMI spokeswoman.
The company desperately needs good news from the proponents of girl power. Sales of their records accounted for an estimated 10 per cent of the company's profits last year. EMI's shares dropped farther than any other British blue chip during the October turbulence, shedding one-fifth of its value in two weeks.
"They're bombed out," commented one stockbroker. Ms Christians admitted: "The markets seem to be out to crucify us."
In the current climate, any sign that the Spice Girls are losing their attractiveness will cast a long pall over the company. Big album-sellers - those few acts that can sell over 6 million copies worldwide - are the big money-spinners for record companies, and they are becoming a rare commodity. A strong Spice Girls-lead Christmas could see EMI, the world's third largest record company, repeating last year's profits of pounds 340m, despite a strong pound. Around half of EMI's profits are earned during the festive season. "If Spiceworld becomes a record hit, then that rescues the fourth quarter," said Jeff Meys, analyst at ABN Amro Hoare Govett.
Replicating the success of the first Spice Girls' album, Spice, will be near-impossible. It has shipped 18 million copies around the world. Yet expectations for Spiceworld are high; 5.2 million copies of the album and 2.2 million copies of the single have been distributed around the world. But the single "Spice Up Your Life" only made a brief appearance at number one in the UK charts.
EMI needs a morale-boosting success. Chairman, Sir Colin Southgate, recently admitted: "It is no secret that 1996 and 1997 have been, and continue to be, challenging."
The company has been hit by the strong pound and weak markets. But when EMI demerged last year from Thorn, the rental group, it promised sure- fire success. Jim Fifield, the president of EMI Music who earns pounds 7m annually, said: "We have achieved exemplary growth in profit, year after year."
Sir Colin Southgate said: "We are in a strong position to continue our track record of impressive growth."
A strong pound sliced pounds 30m off last year's profits and the effect is likely to be greater this year. Meanwhile, worldwide demand for CDs, cassettes and records has fallen, dropping by 4 per cent in the first six months of 1997.
In Britain, after four boom years, the market fell by 6 per cent in the first half, mainly because of a dearth of big-selling albums. Especially worrying are the trends in the American market, the world's largest. The retail sector expanded rapidly, only to be followed by a crash; this brought down music chains such as Camelot and Musicland and left the recording companies with bad debts and unsold stock. Although retail sales recovered somewhat in the first half, shipments fell by 5 per cent because of falling demand from the mail-order sector, despite strong economic growth.
Within months of demerger, EMI's apparently stable growth markets had evaporated. "We did not expect to meet the economic conditions we did. But we have very strong positions in all markets and will bounce back," said Ms Christians.
Sir Colin Southgate cut the company's predictions for market growth. During the last decade, world retail sales of recorded music showed 11 per cent compound growth, fuelled by the compact disc. In the absence of a new medium, Sir Colin Southgate predicts sales will grow by 7 per cent compound during the next five years. On current trends, that could easily prove too optimistic. The problems created by weak demand have been exacerbated by changes to the music market. Picking international winners is becoming difficult. Everyone is looking for the modern-day equivalent of the Bee-Gees or the Beatles - pop music that can be sold a nd repackaged around the world. Since EMI released the Beatles anthology in November 1995, it has sold 26 million copies. This is a phenomenal achievement that the Spice Girls will have difficulty matching. Pop music is becoming increasingly parochial, national and fragmented, particularly American pop. "In the US there is a shortage of creative talent, producing music that is internationally popular," said Sir Colin. Language barriers mean the French and the Germans neither like country music nor identify with the rap songs of dispossessed Los Angeles youth. Moreover, the markets of the Far East are developing their own pop music, reducing demand for foreign music, r aising domestic costs and cutting profits. To counter market fragmentation, the companies rushed to sign established international names. EMI and its Virgin subsidiary have struck massive deals with the Rolling Stones and Janet Jackson whose four-album contract is rumored to be worth $85m (poun ds 52m). Yet few multi-million pound deals have resulted in blockbusters. The Rolling Stones' latest offering, Bridges to Babylon, is said to be selling reasonably well, while sales of Janet Jackson's recently released The Velvet Rope are disappointing. The flops hurt but the main problem is that the contracts mean that even a string of blockbusters would not have been profitable. "EMI must negotiate down some of its royalty payments," said Mark Beilby of UBS. It was hard for EMI to avoid such errors, simply because it needs to roster leading artists. By contrast, its problems in the US were avoidable. Its American market share has been sliding, falling from around 15 per cent to below 10 per cent. And EMI con tinued to back an expensive and fallible management team lead by Charles Koppelman. Mr Koppelman's contract was renewed shortly before he was fired along with the 20-strong staff. This, together with a write-down of bad debts in America, resulted in a pounds 117m provision. Ken Berry, head of Virgin International, was installed as head of American operations to cut costs, rationalise labels and discover talent able to become global stars. This is a tall order and will take time. Meanwhile, new technology poses a great, but hard to quantify threat to EMI's greatest assets - its music backlist and publishing rights. While the Internet should boost sales, it will ease and increase piracy,whi ch is already a significant problem. Doubtless, EMI will survive the threat posed by cyberspace pirates and resume growth, but its future now seems less bright. It will take more than a mega-hit from the Spice Girls to restore its reputation for high and unbroken growth.
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