High Street Blues

The harsh reality is that high street retailers are increasingly being burned by trying to play in the same markets as successful online stores. Online retail has squeezed profit margins significantly, even to the extent that many online stores such as Amazon and Play can make a profit at prices which would drive bricks-and-mortar stores into the red. It's extremely telling that even in the depths of Zavvi's closing down sale, the store had few bargains on offer which weren't already cheaper online.

Moreover, with those profit margins so tightly reined in, bricks and mortar enterprises find themselves more vulnerable than ever to the kind of bumps in the road I mentioned a moment ago. They become heavily reliant on day to day cashflow, which can be seriously impacted by supply problems. In order to paper over those cracks, they need a healthy credit relationship with the banks - and right now, one doesn't utter the phrase "healthy credit relationship" within a mile of the City of London without eliciting bitter laughter and angry stares.

It's also extremely telling that nobody actually wanted to step in and buy Zavvi, let alone Woolworths. HMV has picked up a handful of stores in order to extend its network around the UK, but even at that, some of Zavvi's choicest retail locations - such as its enormous London store on Oxford Street and the hugely prestigious Piccadilly Circus store, formerly occupied by Tower Records - look set to leave the media retail sector entirely. They're most likely to end up selling budget clothing for the next few years.

If Zavvi's sales were growing and the company had a good plan going forward, why didn't anyone buy them? In part, of course, it's down to the fact that with the banks sitting in the corner sulking and refusing to play, it's rather hard for the mergers and acquisitions game to continue.

It doesn't help, however, that sentiment about the future of Zavvi's entire market sector is almost entirely negative. It's not just that you can buy CDs, DVDs and games more cheaply online - many in the industry are still reeling from just how quickly digital distribution is replacing CDs. Five years ago it was expected to take decades to move consumers away from physical products; today, we're already past the tipping point in some markets. Who can blame the business world for looking nervously at the boxed movie and videogame markets and wondering how long they'll be around for?

All of which, of course, causes us to cast a questioning eye in the direction of the remaining retail giants of this sector - which in the UK means Game and HMV. They're likely to enjoy something of an upwards push from the demise of Woolworths and Zavvi, since there'll be less high street competition - and it helps that their sector, the relatively low-cost home entertainment market, is also likely to thrive in an economic depression.

In the medium term, however, what future is there for these businesses? If consumers increasingly go online - either for mail order or digitally distributed product - what justification can there be for the massive overheads involved in maintaining their enormous store networks? Perhaps its telling that both firms are committing themselves to second hand sales, much to the annoyance of the game publishing industry - this, after all, is a USP which online simply can't replicate.

In itself, that's a sobering vision of the future for the high street - media stores simply filled with second hand product that was originally bought online. Yet the bleak choices facing high street media retailers in the next five years may be to resign themselves to being second hand thrift stores, or to go the way of Zavvi. This recession won't kill them - but the march of consumer buying habits and preferences will leave them behind.