Against a difficult economic environment, the Group delivered sales and profit growth, driven by good trading in our largest business, HMV UK & Ireland. The performance of both HMV International and Waterstone's was more adversely impacted by weak trading conditions, and key initiatives are underway to improve the operating effectiveness and financial performance of these businesses. I am pleased to report, below, that good progress continues to be made on the Group's three-year transformation plan, such that we have been able to take our first steps into a new, long-term strategy to extend HMV's brand and activities into live music and entertainment venues and ticketing. This is being funded by the proceeds from a successful 5% equity placing, which raised £24m. Combined with a new £220m bank facility to 2011, this provides for the maintenance of a strong and prudent balance sheet.
To date, we have delivered annual savings of £16m from the initiatives that were laid out in March 2007.
Waterstone's book hub, which simplifies our supply chain by consolidating orders from multiple publishers into one delivery per store, became operationally live in February with the take-on of fulfilment for waterstones.com and an initial tranche of stores. The migration of the balance of stores is expected to be complete in the first quarter of the new financial year.
In HMV UK & Ireland, games and technology suppliers were successfully transferred to a dedicated, centralised distribution centre, which is enhancing availability and service levels for these product categories.
Savings from consolidating the procurement of goods not for resale and the consolidation of HMV UK & Ireland and Waterstone's back office continue to be delivered as planned.
Our stores traded robustly this year, and we have continued to evolve the mix of products to take account of the structural changes taking place in our markets and to better reflect the entertainment-related interests of HMV customers.
Games and technology products now represent almost a quarter of HMV UK & Ireland's sales, up from 20% in the prior year, and in HMV Canada this category has increased to 12% from 7%. Our games business in the UK and rapidly growing credentials as a category specialist have been enhanced by the successful national roll-out of Re/Play, a pre-played games offer. This enables customers to trade-in software against new games titles or, uniquely among UK retailers, any of the products sold in our stores.
HMV UK & Ireland's evolving product mix – the beginning of the transformation plan to the end of year two
HMV has responded quickly to the opportunity to develop Blu-ray, the high definition video format, which has potential to provide value growth to the visual market. Blu-ray departments containing a wide range of software have been rolled out to all HMV stores, and on a number of this year's key titles Blu-ray's share of the visual category has exceeded 20%. In total, HMV UK & Ireland's visual sales volumes grew by 7% in a market that grew 2%.
The UK music market was more resilient than expected, with volume decline of approximately 3% last year, and HMV UK & Ireland outperformed the market with unit sales up 5.0%. Music is now 28% of HMV UK & Ireland's sales, down from over 30% in the prior year. In HMV International, music still accounts for 38% of sales and here our focus is on increasing the representation of games, technology and related products.
The HMV 'next generation' store format has been rolled out to a total 15 stores in the UK. This format contains improved display and merchandising for the new product categories and increased interactivity for our customers. A number of the key features and learning were rolled out as ‘quick wins' to all existing stores in HMV UK & Ireland, including merchandising of technology, clothing and other entertainment-related accessories and books, and further opportunities have been identified for roll out during the new financial year. We have also continued to fit out new stores in the ‘next generation' format, which this year included Liverpool One and London Westfield.
HMV's highly recognised brand and prime high street locations are also being further leveraged to offer customers related entertainment experiences. HMV UK & Ireland this year acquired the assets and recruited the key personnel of Gamerbase, the operator of a multi-player games concession in HMV Trocadero in London. Further such pay-to-play areas have since been opened in HMV stores in Manchester and Edinburgh, with additional locations planned for the new financial year. Furthermore, in partnership with Curzon Artificial Eye, operator of the Curzon cinema chain, a new multi-screen digital cinema is being piloted, commencing in autumn 2009, utilising non-trading space above the HMV Wimbledon store. Some additional cinemas may follow, depending upon the learning of the trial and further location analysis.
As the first step in a new partnership with Orange, the leading mobile phone operator's products and services will be sold in selected HMV UK stores during our new financial year, with a focus on music, games and video mobile handsets and services.
Following a successful two-region pilot, HMV UK's multi-channel loyalty card, purehmv, launched nationally after the end of the year. The scheme targets HMV's most loyal customers and enables them to redeem points accumulated from purchases made in-store or online against 'money-can't-buy' rewards.
Following the administration of the high street entertainment retailer Zavvi in early 2009, we have now acquired 25 of its stores in the UK and Republic of Ireland. These stores are located predominantly in towns and cities where there was no overlap with HMV and will deliver incremental profit. Our existing eight Fopp stores continued to trade well. These stores offer a tailored range of music, video and books from secondary retailing locations, and there is potential to increase Fopp's footprint in the new financial year.
Waterstone's multi-channel loyalty scheme, which launched in the prior year, had by the end of the period attracted 2.8 million members, exceeding our original three-year target for 1.5 million cardholders. A significant proportion of transactions in branches and online at waterstones.com are made through the card, enabling us to provide more targeted communication to our customers.
Our related product offer was enhanced by good sales of the Sony Reader, a portable electronic device on which to download and store books in digital format, which was launched in the UK exclusively through Waterstone's, and we are pleased with the associated download sales of ebooks from waterstones.com. We are also maximising Waterstone's customers' interest in knowledge-based games by merchandising Nintendo DS software and related hardware, and high-quality gift stationery ranges have now been rolled out to all stores. In total, Waterstone's related products increased to 4.6% of sales from 3.1% a year ago.
Eight former Books Etc stores in London were taken on and successfully rebranded as Waterstone's, thereby strengthening our representation in the capital. Waterstone's contribution to specialist bookselling was recognised by the industry, when it was named both High Street Retailer of the Year and Bookselling Company of the Year at the Bookseller Retail Awards. In addition, the successful brand campaign the Writer's Year was named Book Marketing Campaign of the Year.
The new book hub is changing the way Waterstone's operates for the long term, and a number of business benefits are being created. With the supply chain tasks removed from our stores, our booksellers are able to focus their skills and knowledge on customer service and sales. Enabling our stores to return books to the hub, rather than our suppliers, allows Waterstone's to recycle slower moving stock within the chain, thereby reducing returns and creating significant efficiencies for book publishers and us. Since relocating fulfilment for waterstones.com to the hub, our Internet sales have grown further and the number of titles available to our customers has increased.
The value in the music market has increasingly transferred to live performance. This is an area of strong interest to HMV's core customers and has the potential for powerful synergies with our current product offering.
In January 2009, the Group announced the beginning of a new strategy to enter the UK's approximately £1bn live music and ticketing market, by acquiring a 50% investment in Mean Fiddler Group, a new 50:50 joint venture with MAMA Group plc, the UK's second largest multiple live music venue operator.
The joint venture company contains 11 live venues, attracting around two million concert-goers each year. These include the 5,100-capacity Hammersmith Apollo, Edinburgh's Picture House and Forum in London, all of which were rebranded HMV during the year. The further venues are London's Heaven, Garage, Jazz Café, Borderline, G-A-Y and G-A-Y Late, Birmingham's Institute and Moshulu in Aberdeen.
The Group has invested an initial cash consideration of £20.0m (including fees), with a further adjustment of up to, plus or minus, £3.3m depending upon the profitability of the joint venture. MAMA Group's management expertise has been retained to operate the venues, and the joint venture will actively consider expansion where high-quality venues become available. We believe this is a low-risk entry strategy into the live music market, which is expected to provide synergies of approximately £1m per annum and be earnings neutral and cover the Group's cost of capital in its first full year of operation.
HMV UK & Ireland also entered into a separate ticketing arrangement with Seatem, a leading UK ticket agency, to sell tickets through our stores and online via hmv.com to events at the joint venture and other MAMA Group venues, as well as a wide range of other events and venues, including theatre tickets, music and entertainment performances and some sports. By the end of the year, dedicated hmvTickets counters had been rolled out to 25 stores.
Our entry into live music and ticketing provides significant new operational and brand synergies, which include:
An MP3 music downloads offer was launched via hmv.com, comprised of over four million tracks, priced from £0.69 for single track downloads and £6.99 for albums, which are now compatible with any digital music player, including the Apple iPod. In addition, the same music catalogue is now available to stream for a monthly subscription of £5.99. Further enhancements were made to hmv.com's search, site navigation and categorisation and, during the period, sales from the website increased by over 16% on the prior year.
waterstones.com is continuing to benefit from the multi-channel loyalty card, as well as fulfilment from the new book hub, and grew by over 60% on the prior year. The website also became the exclusive source for UK customers to download e-books for the Sony Reader, with an encouraging consumer response since the September 2008 launch.
We are working hard to maximise both the market share opportunity that has arisen from the withdrawal of competitors, and the investments that have been made over the last two years to improve performance.
Whilst we are cautious about the economic environment, at this very early stage in the year we are confident of our plans for the current financial year, as well as our new initiatives to deliver growth beyond the life of the current three-year transformation plan.
Chief Executive Officer
29 June 2009