Virgin Ent. Plans Expansion

LONDON-In the wake of record financial results, Virgin Entertainment Group (VEG) is gearing up for a year of expansion with a string of store openings and the imminent launch of its online retail business, which will see it go head to head with market leaders Amazon.com and CDnow.
The opening of 14 new Virgin Megastores across three continents during 1998 helped VEG chalk up earnings before interest, tax, depreciation, and amortization (EBIDA) of 39 million pounds ($63.2 million) for the year that ended Jan. 31-a rise of 34% over 1997-98-according to figures released April 26.
VEG chief executive Simon Burke says, "We're especially pleased with these results because we didn't have particularly fantastic market conditions. It wasn't as though markets were really buoyant anywhere, and we just got carried along on a wave of good figures-we did really have to work to make this happen ourselves."
The results were achieved despite "flat" profits at the U.K. Virgin Cinemas operation, which opened four new sites during the period. The company is, however, continuing strong investment in the U.K. cinema business and is in the process of launching Virgin Cinemas Japan (Billboard, May 1), where its first multiplex opened April 23.
The VEG figures exclude loss-making businesses discontinued in 1997 and the Virgin-owned Our Price music retail chain, which the company is seeking to dispose of through a management buyout.
Regarding Our Price, Burke says, "We're making steady progress. Despite all the "on again/off again' reports in the press, we have been consistently in dialogue with buyers for this business since Christmas, and we are progressing the sale of the business. It is still going ahead, it's still a management buyout, and we are still in discussion with potential buyers."
The Virgin Megastores retail operation saw a massive rise in its EBITDA of 77% in the year to Jan. 31, with sales rising 13% over 1997 to 561 million pounds ($909 million). According to the company, this reflected "significantly improved trading in the U.K. and Japan" along with an improved performance in continental Europe and increased profitability in the U.S. (BillboardBulletin, April 27).
The 14 new Megastores added during the year included U.S. outlets in New York, Chicago, and New Orleans; U.K. sites in Brighton and Bristol; and flagship stores in Rennes (France) and Osaka (Japan).
Burke offers a simple explanation for the healthy figures achieved in an ailing market: "Some of it was just putting right the problems of [past] years, to be honest-focusing the business on making money. Our turnaround in continental Europe was a big part of that. In the U.S., where we've got fantastic stores, the previous management team had not really been focused on making money out of them. They do good business, so there was no reason why we shouldn't have been making money out of them."
Despite that 77% rise in profits, Burke insists that "there's a long way to go. We've still got a lot to do to make the retail business as profitable as it should be."
MAJOR ONLINE MOVES SET
In addition to the ongoing expansion of its brick-and-mortar business, Virgin is making major moves on the E-commerce front this year.
Burke says he is "very excited" about the imminent launch of the first Virgin Megastores On-Line Web site, which is due to go live later this month in the U.S. "We're running a test site at the moment," he says, "and we've still got a few teething problems, but it'll be ready for the launch."
Burke says he sees the major competitors for the Web site as Amazon.com and CDnow, rather than the new online services being launched by other brick-and-mortar retailers, such as HMV and Tower.
"In two weeks' time, we'll launch the U.S. site, and that will be accessible to customers around the world, but focused primarily on the U.S. market," he says. "Then in July, we'll be adding the U.K. catalog to it, then shortly after that the continental European catalog-mainly French-and finally, just before Christmas, we'll be adding the Japanese catalog. By the end of this year, you'll have access to all the major music catalogs of the world on one site."
CDnow and Amazon are clearly the main competitors, Burke says, "and we're positioning this to be better than them in major respects. That includes the range of product, which will be about 25% better even before we start adding the international catalogs. Basically, they just offer the catalog of [distributor] Valley, who handles their fulfillment. Valley has a big catalog, but what we've done is add on all the stuff that we sell in the stores, which it didn't have on its database-and Valley is distributing that exclusively for us."
The executive is bullish about VEG's ability to repeat its 1998-99 success over the next 12 months.
"Our plan is to continue consolidating the position in retail around the world," Burke says. "You can expect another pretty significant increase in profit next year as we really bed in all the gains that we've made. We'd like to see Our Price sold this year, so that the U.K. business is purely a Virgin Megastores business, and we have plans to open about the same number of stores again around the world as we opened this year."
VEG will be particularly active in France, Burke notes. For years, VEG was unwilling and unable to invest much there in new stores because it was losing money, he says. This year, VEG is opening three large stores there, "which should mean a 25% increase in the size of our business there."
"We're opening in Lyon, which is the second-biggest city in France; in Strasbourg, which is a huge music market because of the university there; and we're opening a kind of experimental site in Dunkirk, alongside an AMP cinema," Burke says. "It'll be interesting to see how the two trade together in a location which is slightly out of town."
A couple of big sites are lined up in Japan, Burke says, and VEG is opening another two cinemas there.
"All these cinemas also incorporate music stores," he adds, "and the one we opened at Fukuoka last week has done phenomenally well selling music product-much better than we expected, and much better than we've been doing in the U.K."