Why Thorn EMI must look sharp

Thorn EMI once had too many fingers in too many pies. Now it has too few, and even with its new acquisition, book store chain Dillons, the group will have to work hard to shake off its identity crisis.

SBHD: Thorn EMI once had too many fingers in too many pies. Now it has too few, and even with its new acquisition, book store chain Dillons, the group will have to work hard to shake off its identity crisis.

The unexploded IRA bomb found in a Dillons store last week could provide Thorn EMI with a taste of things to come as it seeks to integrate its new trophy Dillons into its HMV music retailing business.

Thorn EMI’s £36m buyout of the Dillons chain from the receiver last week surprised many watchers of the music, rentals and retailing giant.

Like an ageing teenager, Thorn EMI is facing an identity crisis. It has sloughed off its old ways, and is urgently seeking new ways of redefining itself.

The group once had too many fingers in too many pies. Now it has too few. It has sold off interests in everything from lighting to microchips, and film production to fire protection. The closure of the Rumbelows chain and the subsequent sale of most of its sites to German computer retailer and manufacturer Escom, should make Thorn EMI wary of new ventures on to the high street.

It now has a three-pronged strategy, with music providing two-thirds of last year’s £360m profits, rentals chipping in some £90m and retailing, in the shape of the HMV chain, contributing just £14.4 m.

The Dillons’ purchase goes only some way to defining the new kid on the block. Last July, the group put in place a review of the possibilities for expansion of its music, rental and retailing businesses.

It decided to extend its “flexible financing” strategy in the UK and build up its rental and rent-to-own business, where rent on electrical goods and furniture can be converted to ownership. In the UK it has imported its Rent-A-Center concept from the US, where the chain has 1,500 outlets, in the shape of Crazy George’s. This rent-to-own furniture concept, along with Radio Rentals, is taking on the UK’s consumer credit operators.

Where traditional consumer credit may take seven years to pay off, the Crazy George’s concept accelerates this to just three years, bringing forward enlarged profits more quickly.

With the growing pool of low-income consumers starved of access to credit, the rent-to-own concept could prove as successful in the UK as it is in the US.

The EMI music arm has also provided Thorn with healthy profits, and last year’s upsurge in music sales helped the group to a 20 per cent rise in profits.

Even before the Dillons buyout, observers believed that in the search for diversification, book publishing would be next on Thorn EMI’s menu.

Williams de Bre analyst Matthew Naylor says: “The music business provides Thorn EMI with a vertical link to HMV, and a horizontal link to music publishing.” Naylor adds that Dillons gives Thorn EMI a horizontal link to music retailing and a vertical link to a possible expansion into book publishing.

Observers were surprised to learn that Thorn EMI had made a number of approaches to Bill McGrath, the chief executive of Dillons parent Pentos. But these approaches were rebutted right up to the company being put into receivership last week.

An approach to Pentos three weeks ago “was not warmly welcomed” according to Thorn EMI. McGrath was still insistent that he could make a go of Dillons.

Dillons has provided some nasty suprises for McGrath since he was drafted in to rescue the company last year. Imaginative accounting practices by previous management revealed on closer inspection that Pentos was in a far more parlous state than McGrath had forseen.

Retail analyst Richard Ratner says: “They expected to find the odd skeleton in the cupboard, but a whole cemetery has come tumbling out.” Perhaps more spooks could be lurking for HMV chief executive Stuart McAllister, now provisionally in charge of Dillons.

Superficially, the Dillons deal looks sweet for Thorn EMI. But a number of factors could end up leaving a distinctly sour taste in Sir Colin’s mouth.

One strong point is that Thorn EMI will be able to pick the Dillons sites it wants, leaving leases on unwanted stores to revert to landlords. This avoids any need for big write-downs on the disposal of poorly-located stores.

Thorn High Street Properties is working with property teams from Dillons and HMV to draw up a blueprint of desirable stores. Thorn EMI has admitted that it could not even get its hands on a site list from Pentos until it had actually completed the deal.

One analyst estimates that up to 25 stores could be left with the receiver or converted into Radio Rentals stores. The stores are generally well-fitted out, so refurbishing costs should be minimal.

The analyst estimates the costs of installing modern EPoS systems across the remaining 130 or so stores could rise to up to £15m. Dillons may have to pay a further £20m for stock not yet sold.

But the big uncertainty for Thorn EMI is the future of the Net Book Agreement, which preserves artificially high book prices, protecting publishers’ margins as well as those of retailers. If the NBA dissolves, and it has been under heavy pressure to do so with Dillons’ management leading the attack, the book market could face price deflation.

Retailers operate best when there is healthy inflation, so “denetting” could backfire on Dillons. It will be forced to compete with food retailers such as Asda, who are already vying for pole position if the NBA collapses. It is a battle Dillons will find hard to win.

Thorn EMI plans to do for Dillons what it has done for HMV, and is examining ways of integrating the two. But Thorn EMI’s view that there are similarities between book retailing and music retailing appears simplistic.

Music retailing has no Net Book Agreement. And the world of books may not have that much to do with bands, CDs and black vinyl.

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