Entertainment Division

Positioning

The Entertainment division, which comprises Musica and CD Wherehouse, is the largest retailer of music and related entertainment merchandise in the country. The division has expanded beyond its traditional core music business to a broader range of entertainment products, including DVDs (music and movies), gaming (including computer games), lifestyle accessories (clothing, figurines, novelty goods) and online entertainment. Musica aims to be the "first choice popular entertainment experience" while CD Wherehouse is positioned as "the destination experience for people obsessed with music and movies".

Review of the year

The Entertainment division showed a strong comeback after a disappointing performance in 2004 to record sales growth of 21.7% to R662 million. Comparable store sales growth was 21.1%.

The strategy adopted by Musica some three years ago to diversify its income stream in anticipation of the slowdown in CD sales continues to reap rewards. The entertainment merchandise categories have shown strong growth, with DVD sales up 92%, gaming 160% and lifestyle up 45%. Non-CD categories now account for 39% of the division's total sales (2004: 29%).

Musica's pricing strategy has proved a success, not only driving increased sales volumes but also increasing customer traffic into stores which has benefited sales of other products.

Sales growth year-on-year was expected to slow down after the anniversary of the introduction of the top 20 CD pricing strategy in April 2004. While sales growth was softer in the second half, the brand continued to perform well.

Musica's margin declined slightly over the previous year in line with the change in the business model from a high margin to a lower margin/high volume model. The margin was impacted by the CD pricing strategy and the increasing proportion of turnover generated from lower margin DVDs and gaming.

Shrinkage showed a slight improvement and expense growth of 12.9% was maintained well below turnover growth.

The strong overall operating and trading performance is reflected in a 45.1% increase in operating profit to R27.6 million.

Owing to the strong growth in the DVD market, Musica opened its first specialist DVD store in Canal Walk in Cape Town in November 2004. Based on customer response, a further stand-alone DVD store was opened in Tygervalley in October 2005. The performance of these stores will determine the extent to which the concept is extended.

A further 18 stores were converted to the urban format which has a strong focus on local ethnic music. The 38% growth in local music was generated mainly from Musica's urban stores.

Financial highlights and statistics

Strategy

Following the success of the past year, the Entertainment division plans to continue with its aggressive pricing strategy as well as capitalise on the potential growth in the DVD, gaming and lifestyle markets. The target is to increase sales of these non-CD categories to 49% of total sales for the 2006 financial year.

The division continues to seek creative solutions to remain at the leading edge of the entertainment industry and is exploring opportunities to take advantage of the continued growth in the cellular phone market. The technology offering will also be enhanced, including the digital downloading of music via the Musica website.

Musica plans to open a further eight new stores and convert 10 existing stores to the urban format.

Prospects

The Entertainment division has proved its ability to adapt to changes in the broader music and entertainment sector, and is expected to show continued growth in sales and profitability. The performance is dependent on repeating the strong festive season sales of the past year while the challenge remains to increase volumes and bolster the merchandise mix with higher margin products.