The Our Price music chain is about to go it alone. PPM Ventures, the venture capital arm of the Prudential, is considering spending 75m to fund an Our
Price management buyout from parent Virgin. But with the chain facing competition from supermarkets, entertainment megastores and shortly the Internet, observers question the prudence of PPM’s move.
Our Price refuses to name the mbo team, but it is thought to be led by the chain’s managing director Mike McGinley. Brian Waring, former retail marketing controller, has been handed the role of head of marketing and Neil Boote, previously Our Price marketing director becomes commercial director. The trio plans to relaunch the 229-strong chain, including piloting a new larger store in Edinburgh and boosting the ad spend through agency WCRS.
The Virgin Group bought WH Smith’s 75 per cent stake in Virgin Our Price in July and is now selling the Our Price side of the business. It is a strategy Virgin has used before: in 1995 it bought the MGM cinema chain and then a year later sold the smaller cinemas to ABC Cinemas, reducing its debt.
Our Price has suffered from a lack of investment in recent years. Clive Vaughan, research manager at Verdict Research, says: “WH Smith was using Our Price as cashflow to fund the expansion of Virgin. It ran Our Price down in favour of the Virgin superstores.”
Waring agrees: “Our Price has not received investment or attention. It has had unexploited potential over the past few years.”
Operating profits for the company for the year to May 1998 were 17m on sales of 500m – figures which show there is room for improvement.
There is a certain lack of clarity in the Our Price brand. The store’s merchandise is no cheaper than competitors, despite its name. Waring says: “We have a heritage of value for money and our aim is to bring offers and deals. But it’s not a high-margin business, so there is no flexibility on price.”
But observers cite the size of the stores as Our Price’s key weakness – they are not big enough to offer a wide range of music as well as other products such as computer games, consoles and videos. Yaron Mesh-oulam, development director of 20/20 Design & Strategy Consultants – which developed the retail concept for the Virgin Megastores – says: “The challenge for Our Price is not just to do music, which will be difficult given the size of its stores. The key is how does it compete in a market that is moving towards the ‘entertainment experience’.”
Meshoulam believes in the French model he calls “cultural retailing”, where you can buy music, software and books all in the same store. He says: “The market has moved from music to entertainment.” Borders’ recent entry to the UK market with a concept offering books, music and refreshments, is tapping this trend.
The greatest threat looming over Our Price and all its competitors is the Internet. And a retailers best weapon against home shopping is creating an entertaining in-store experience. This theme has been developed in the Virgin Megastores, but Our Price’s stores, with their size limitations will be hard-pushed to match this.
Amazon is a US Internet company which is investing in this area. Its business focuses on books, but it also offers CDs – usually at a discount. In the six months ending June 1998 the company’s revenues reached $203.4m (123.2m).
It has opened a UK Website for books, but British CD consumers have to order through the US Website. According to a spokeswoman, the CDs often work out cheaper when ordered from the US.
Vaughan says: “In the next five to ten years it will become common not to need a shop. You don’t go out to buy a four-inch shiny disc, you go out to buy music and before too long you will be able to get the latest Verve album downloaded onto your PC.”
Our Price is aware of the limitations it faces with its small stores. It is shortly opening a pilot store in Edinburgh, which is twice the size of the average Our Price store. Seeking bigger outlets across the country is part of the strategy, which is likely to result in the sale of some of the smaller units. Waring says: “Over time the estate will evolve. We are rethinking our current estate.”
But the small size of Our Price’s outlets is also one of its strengths. As one industry expert says: “Our Price has the opportunity to go into catchments which are too small for Virgin and HMV.” Even in these smaller towns, Our Price will face competition from Woolworths and WH Smith, but as the source adds: “Our Price is more authoritative. There is a large underlying consumer understanding that Our Price is a music shop.” The chain’s heritage is in supplying chart-topping music, rather than a wide range of more obscure titles. This has made it vulnerable to competition from supermarkets. But most observers think this threat has been exaggerated.
Vaughan says: “Supermarkets don’t have the skills to do music authoritatively. People are there for food shopping, they don’t want to spend two hours browsing for music.” His opinion is echoed by Waring: “Supermarkets offer convenience, but they are not specialists and don’t have knowledgeable staff. You don’t get the same in-store experience.”
Apart from opening larger stores, Our Price is planning to fend off competition from HMV and Virgin by improving its provision of non-mainstream music. It plans to widen its range. It will also order any product available in the UK. Waring says: “You don’t need 20,000 sq ft on the off chance that someone will want some obscure CD.”
The path Our Price should take is not clear. Its current mainstream positioning of supplying top-50 music to non-music connoisseurs does have strengths, particularly in smaller towns where there is no competition from megastores.
The chain is less awesome than some of its giant competitors, and although this means handing over young male consumers to rivals, it does maintain an unthreatening environment which has a broad appeal.
Waring says: “Virgin and HMV attract young males. Our Price is all-encompassing – it appeals to everyone. The ‘themey’ environment has a more narrow appeal.”
This may be the case, but the rise of home-shopping may mean that a “themey” environment is what it will take to drag consumers away from their armchairs.