A Fnac for expansion

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The French retail giant wants to get into London.

The future of record shops and bookshops seems pretty bleak when you look at the huge growth and popularity of the internet and supermarkets venturing into the sector.

In the UK, the big boys, such as HMV, Virgin and Borders, have struggled, while smaller chains, such as Music Zone, have disappeared altogether. In Europe, Fnac, the French books-to-music-to-electrical chain, has so far defied the competition and is expanding globally.

Property Week talked to Fnac about its plan to keep the music going in the face of global competition.

Fnac is owned by large conglomerate Pinault-Printemps-Redoute, which covers brands such as Gucci, Balenciaga, Alexander McQueen, Puma and CFAO, and which is also a distributor of automobiles and pharmaceutical products in Africa and the French territories.

Fnac sells books, CDs, DVDs, video games and technological products across its stores and its internet site, fnac.com. It prides itself on customer service, and says this service is the one thing that sets it apart from its competitors.

Denis Olivennes, chief executive officer of Fnac, says: ‘We are moving from a strategy based on our position as a retailer of cultural and technological products to undertake a new, more global initiative, in which the product is only one aspect among others.

‘It is up to us to anticipate the needs of our customers by offering them a solution – particularly a technological one – that gives them complete satisfaction. Fnac has been continually reinventing itself.’

Fnac has been trading in France for more than 50 years and now has around 71 stores in the country. Eric Angiboust, global development director at Fnac, says: ‘We have reached [maximum] exposure in France with the traditional Fnac model. We can attract the total population of the country within a one-hour drive of our traditional stores.

‘With our traditional concept stores, we invest a lot of money in architecture, the interior of the stores, the training of staff and the number of staff in each store. All this investment costs money, so we have to control margins. The turnover per sq m is usually double that of our competitors because of the high costs of our stores.’

New concept

Angiboust believes the catchment for a Fnac store is the same as Ikea’s. People travel a long way to visit a store. Because of the high costs and need for a strong and large catchment area, Fnac is now implementing a new concept in France so it can continue to expand in its home country in a more low-key way.

Angiboust says: ‘We have begun to implement another kind of store. This store will have lower investment costs and be in more suburban locations. The purpose of these stores is to go into smaller catchment areas so we can go into new territory. This gives us capacity to open more stores, and will allow us to have up to 30 more stores in France.’

Some critics have said this lower-cost store may lower the cache of the brand, but Fnac believes the concept will appeal to women in the suburbs buying for their family, compared with the more male-orientated urban stores.

Fnac has already opened three stores with this concept, and four more are planned by the end of the year.

Angiboust realises that France, like the UK, is a mature market in terms of retail competition.

In France, electrical competitors include Germany’s Media Markt, which has tried lots of concepts and is now trading across France. Fnac has defeated one new competitor. DSGi-owned PC City tried to make an entrance into the market, but then made a hasty retreat in May when it announced plans to pull out of the country and sell all of its French stores.

It is this tough competitiveness that retailers fear when entering a new country. Plans for Fnac’s expansion into the UK are constantly being considered, but as yet there are no immediate plans for it to open in the UK.

Angiboust says: ‘It’s a matter of timing.

For sure we want to be in London.’

Because the UK is a tough retail environment, with high rents and stiff competition from supermarkets and the internet, Fnac is looking further afield.

It’s a matter of timing. For sure we want to be in London

Eric Angiboust, Fnac

Angiboust last month returned from a trip to Brazil, where Fnac has opened seven stores.

Further expansion into Brazil is on the cards, but closer to home in Europe, the chain is now operating in Spain, Portugal, Italy, Belgium, Switzerland and two stores in Greece. The next countries on the list are in the Nordic region Austria, Norway and Sweden but this expansion will be limited to a few stores.

Fnac’s secret weapon is the early development of its internet site, fnac.com. While in the UK many retailers have suffered because they have not been able to compete with internet sales and have been slow to react to changes in consumer patterns, Fnac feels it has this covered.

Andrew Wade, retail analyst at Seymour Pierce, says: ‘If a retailer is selling commodities, they will always have to compete on price. If retailers can drive most of their sales online, whereas their stores are more about destination or showpiece to drive business, this could work.

‘Like HMV, whose new store refit means it is trying to be not just a shop but a place to hang out, this type of strategy could work. I think there will be a place for these music retailers on the high street, but it will be tough.’

Poised for revival

Verdict Research, the retail analyst and market research company, released its latest report on the UK music retail sector this month.

The report claims that music and video retailing is poised for a revival as ‘consumers adopt HD DVD technology and retailers strengthen their downloading services’.

It says the market is set to shrink for the third year running in 2007 by 2.9% to £4bn, but it claims the prospects for remaining specialists are brighter, now that many weaker players have exited the market.

Nick Gladding, lead analyst at Verdict, says: ‘While piracy will continue and CD volumes decline further, retailers generally are better placed to cope with new market challenges.’

Although in the last 12 months in the UK, the collapse of Music Zone and Fopp and the closure of many independent retailers should point to bad times ahead for the sector as a whole, Verdict argues that this loss of competition will make business better for those left.

Gladding says: ‘HMV is developing a more compelling in-store and online shopping experience, while Virgin, whose stores are now being rebranded Zavvi following the sale of the business to its management, should emerge a stronger retailer, shorn of loss-making stores.’

He adds: ‘As hardware and software prices fall to mass-market levels and more titles become available, sales will start to rise faster.’

Statistics show that by 2012, downloads in the UK are set to reach £600m and account for 13.5% of the total music and video market up from 4.1% today.

‘Longer-term prospects for the market look brighter,’ says Gladding. ‘The music and video market has had a rough ride of late, and some onlookers have been quick to write off its future prospects.

While Verdict believes the market will not reach its previous peaks and acknowledges that piracy is here to stay, the retail analysts argue that much of the recent turbulence is a result of a fundamental shift in the market model away from physical media towards digital.

For Fnac, internet sales have grown by 28% to €364m (£254m) in 2006, and it hopes to increase this, as well as concentrate on its store roll-out worldwide. Last year it reported a revenue of €4.5bn (£3.1bn) and an operating income of €170m (£118m).

Fnac is particularly proud of its new store in the centre of Paris, where it attracted Apple to open its only shop in France, on St Germain.

Fnac may not be looking at the UK yet, but when it does, the music and electrical market may have picked up enough to make it more of an attractive option.

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