The Lowdown: HMV's master won't let the record get stuck

His company's shares have fallen, so Alan Giles must change his tune, as he tells Heather Tomlinson

Keeping up with trends in films, music and books is quite a job. Those who have their finger on the pulse of the latest boy bands are less likely to know what the suburban book groups are reading, or which recording of Mozart's Requiem is currently favoured.

It is lucky, then, that Alan Giles, the chief executive of HMV Group, the music retailer which also owns the bookselling chain Waterstone's, has delegated the task to his store managers.

Giles admits he is not well read, even though he has run Waterstone's since the early 1990s, when it was still part of WH Smith. As a physics graduate, perhaps he is more of a numbers man than a culture vulture? "I was one of very few science graduates at Waterstone's," he says. "It tends to limit your conversations about the short story as an art form."

He may not be a bookworm, but the jolly 48-year-old has achieved the beginning of a turnaround at the bookseller, which had faltered in the late 1990s following the liberalisation of book prices and the arrival of internet retailers such as Amazon.

"Waterstone's was slow in responding to the changes in the market, but we made up ground demonstrably last year," says Giles. "You only need to look at our Christmas trading to see that it outperformed the market." The business grew like-for-like sales by 5.6 per cent, a considerable improvement on the interim results, where sales were down. HMV stores also had a good Christmas.

"The high street is undoubtedly becoming more competitive," adds Giles. "During Christmas there was a greater distinction between businesses with good strategies and execution and those who are perhaps patchier."

In May last year, Giles led a flotation of HMV Group on the stock market. The proceeds helped reduce the debt that had burdened HMV since it was partly demerged from the record company EMI in the late 1990s and combined with WH Smith's Waterstone's.

The core HMV stores in the UK have consistently performed well, helping to bring HMV Group back to profit, despite problems with the smaller HMV store operations in Canada and Asia. But since the flotation, the group's shares have fallen from their high of 192p to last week's closing price of 125.5p.

Several factors are now weighing on investors' minds. One is the heavy fall in global music sales over the past two years. The problem is particularly acute in the US and in parts of Asia, compounded by illegal downloading of music from the internet, and organised criminal piracy of CDs.

Yet Giles believes there has been too great a focus on piracy. "Of course, we strongly support record labels and studios in their fight against it," he says. "But we don't think, by any means, it explains all the problems in the music industry.

"If you look at the US, labels have not really managed to get customers excited by music since the late 1990s, when the interest in urban and rap began to soften. They have not really succeeded in finding a new wave of artists to replace that. But in the UK, there has been and continues to be a steady stream of exciting new music acts."

Total sales in the UK have held up, thanks to acts like Robbie Williams, Radiohead and Atomic Kitten. Despite this, music sales at HMV stores, on a like-for-like basis, have fallen, even in this country. Giles blames the decline partly on the lack of display space for music, which is making way for the new growth market of DVDs. In the last year DVD sales grew 108 per cent at the stores, accounting for 22 per cent of overall sales. "We can envisage a time when DVD may become larger than the music business," he admits. "However, the bedrock of the HMV brand is music. We can be both great music retailers and video retailers."

Giles has implemented an "HMV blueprint" in the stores, based on knowledgeable sales assistants, good market information and promotional activity. Mainstream CDs are placed upfront, while expert sales staff are positioned by niche products elsewhere in the store.

This model is now being introduced at Waterstone's, as part of a recovery programme that also includes store refurbishments. Giles believes the more intellectual customer is not deterred by the "three for two" deals that greet them at the entrance. "Most will forgive us for high-impact merchandising at the front of the store, as long as we do an authoritative, credible job in areas that are important to them. The person who is looking at philosophy titles, in our experience, will happily walk past large piles of Trinny and Susannah [TV fashion gurus and authors of the Christmas best-seller What Not to Wear]."

But, at the same time, Giles has thrown out books that are gathering dust on the shelves. In the company's flotation he made a £15m provision to cover the cost of dumping 15 per cent of the stock. He is conscious of how some might interpret this: "Please don't think it's an end to finding obscure, minority books in Waterstone's. There's a difference between those that sell slowly and those that don't sell at all.

"There is no doubt that there is an overall trend in the book trade towards the mainstream," he continues. "We have reflected that in terms of broadening the choice of titles we have in the stores."

But the founder of the chain, Tim Waterstone, disagrees. He has been trying to buy back the company for some years, and was most recently rebuffed earlier this month. "The HMV model works for HMV, and splendidly," begins Waterstone. "It doesn't work for Waterstone's. Under the application of the HMV blueprint, Waterstone's, driven downwards into the middle market, has lost substantial market share to its rivals, its character, and about a third of its profits." Waterstone himself was chairman of the company during most of this time, but says he argued to keep its literary culture.

Giles is clearly a little fed up by Tim Waterstone's approaches. A good Christmas has helped him resist them, but the real test that his strategy is working will come with next year's results.