Is Virgin Megastore going bust?

Jan 7, 2013
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virginclosingAs confirmed Friday on France Inter, Virgin Stores will submit a request today to declare themselves insolvent.  As in the US with Chapter 11 status, there tends to be two possible outcomes of this: 1) restructuring or 2) full-out liquidation/bankruptcy.  Given how things have been going for Butler Capital owned Virgin Megastores in recent years, outcome #2 looks like a real possibility.  This  would lead to the liquidation of 26 outlets throughout France and the elimination 1k jobs.

They had to have seen it coming

The demise of Virgin Stores is, sadly, not really much of a shock to anyone.  As with other retailers whose business relied heavily on the CD and DVD sales such as Tower Records and Virgin in the States and HMV in the UK,  they’ve simply been undone by the increasing domination of e-commerce giants, the migration to digital music and video, and the seemingly unstoppable phenomenon of illegal downloading/piracy.  Since 2008, Virgin Megastores has been in a downward spiral, having amassed €22 million in debt and, as a result, are quite a bit behind in their rent, social charge payments, and payments to other suppliers. They’ve even been forced to draft a plan to close their hallmark store on the Champs Elysees, which sparked a strike involving dozen of employees just prior to the Christmas holiday.

Although Virgin Stores do have an online store, they haven’t been able to replicate their past retail successes online.  According to the SNEP (Syndicat National de l’édition Phonographique), sales of CDs reached their pinnacle in France ten years ago reaching sales of 150 million units and 95% of total music sales.  After that point, sales started to trail off, dropping most sharply since 2005 (a 50% decline). In addition, CDs now only make up 49% of total music sales.  In the late 90s and early 2000s, it was pretty clear that digital and e-commerce would ultimately have a profound impact on the entertainment industry.  Virgin (pre-Butler Capital) had plenty of time to prepare itself for the consequences of these changes, but obviously naively assumed that they could somehow buck the trend.  As private equity firms generally attempt to do, Butler Capital has been trying to turn things around since taking over in 2008, but by that point it was clearly too late.

Is FNAC next?

The French media is already starting to question if PPR’s FNAC is next in-line.  They’ve also had a lot of trouble recently, including years of losses and a restructuring plan which will include €80 million in cost savings and elimination of 500 jobs. In addition, with 16% share of France’s book market, the recent fast growth of e-books here will also make things very difficult for FNAC in the future. Although FNAC is more diversified than Virgin which should help, there’s certainly no guarantee that they’ll weather the storm.  With 11k employees, their demise would pose a much bigger problem for France.