PolyGram issues profits warning as music sales fall

PolyGram, the Dutch entertainment group which is controlled by the electronics giant Philips, issued a profits warning yesterday, blaming lower-than- expected music sales.

The record company, whose artists include Sting and U2, said it expected its full-year operating profits before structuring charges to be flat or slightly below last year's. The company said it would take a $90m (pounds 57m) charge in its 1996 accounts for the restructure of its music operations. The reorganisation will lead to 400 job losses world-wide.

PolyGram said it had been affected by sluggish conditions in world music markets. It has also experienced lower-than-expected sales of its current releases. There have also been reports of delays to certain releases which had been due later this year.

PolyGram plans to restructure its Motown operations and its classical music division.

One analyst said: "This is worse than expected. We already knew the music market was weak, and delays in releases can usually be traced to the recording artists.

"But if PolyGram is now talking about reorganising its European distribution and marketing activities and its classical music division, the problems within the company must outweigh the market problems."

PolyGram's warning caused shares in EMI Group to fall 23.5p to 1,256p, as the company is exposed to the same competitive pressures. EMI, which was demerged from Thorn-EMI during the summer, is due to report its interim figures on 19 November.

The large record companies are facing a raft of competitive problems at the moment. PolyGram's warning follows lower-than-expected third-quarter profits from Warner Brothers, the US entertainment group, earlier this month.

The growth of the CD market is slowing in developed countries as the penetration of compact disc players starts to plateau. The decline of the cassette tape market is also accelerating.

Music markets have softened in many countries world-wide, particularly in the US. Experts say that while the UK music industry has been buoyed by thesuccess of the Britpop scene, including artists such as Blur, Oasis and Pulp, no discernible trend has emerged this year in the US. Though America's share of the world market is gradually falling, it is still the most significant market, accounting for a third of world sales.

Record companies are pinning their hopes on the tiger economies of South- east Asia where music demand is growing rapidly. The record companies are banking on a good Christmas season. This accounts for 40 per cent of annual sales for some groups.

In February, PolyGram reported its eighth consecutive year of sales and profits growth but warned of a slower second half. It blamed a weaker- than- normal performance from the pop division and the absence of a hit film to match Four Weddings and A Funeral.