Musica harmonises in the background

When Thomo Malatsi, owner of niche music store Mello Music, opened his store in Maboneng, Johannesburg, four years ago, he didn't anticipate how much of a blow the digital revolution would be to him.

"Business is tough," said Malatsi. "The music industry took a knock when the downloads started coming in and smartphones started running our lives.

"But we understand that consumers like to get things easy. They like going out, they like to be seen and they like to be associated with certain brands, so we've created a lifestyle feel to the music," he said.

His shop specialises in the local and international jazz, soul and R&B genres, occasionally hosts live sessions with local artists, and creates a platform for independent musicians to showcase their music.

He also brings in music from around the world, with imported CDs and DVDs going for as much as R1,000.

Despite the evident slowdown in CD and DVD sales "you have to adapt", Malatsi said. "Things are moving fast and you have to try stay abreast of contemporary trends to bring in younger consumers. We still have a long way to go, but you have to try and entice them."

And this has been precisely the hurdle Mello Music's listed competitor, the Clicks Group, which owns Musica, has struggled to get over.

About 10 years ago, Musica made up around 8.1% of the retailer's revenue, according to Bloomberg data. By 2012, it had slid to about 4.9% and since then Clicks has stopped reporting separately on the brand's contribution.

Musica has the second-largest footprint in the company, with 115 stores. But its contribution to the group's performance is unclear, often being described as "marginal".

Last week, after presenting the group's interim results, Clicks CEO David Kneale said: "We don't talk about all of the categories, we talk about the categories that have really driven the results of the businesses."

So, for the health and beauty segment in the group, same-store sales grew by 8.4%

However, Kneale was prepared to admit that Musica had had a tough time over the past year, citing cyclical CD sales that depended on releases by big artists, such as British singer Adele, "as there wasn't a comparable artist this year, but that will come back".

Adele's most recent album, the Grammy-winning 25, was launched in November 2015.

Although CD sales have disappointed, Kneale said sales on catalogue products had held up well.

The purchase of expensive merchandise, which includes speakers and headphones, grew by 10% in the period.

"So we are very pleased with that," Kneale said.

Musica has grabbed about 60% of market share, while its peers, such as Look & Listen and Reliable Music Warehouse, have been forced to close shop.

Victor Dima, an equity analyst at Dubai-based Arqaam Capital, said that for the Clicks Group, Musica was a legacy business.

"The like-for-like sales are negative and the revenue is declining in Musica by 7% year on year ... this part of the business will continue to shrink.

"But I definitely see that Clicks will take some form of action on the business, because Clicks is focused on the return on capital and not profitability," said Dima.

"It's a legacy segment and it's a market share thing more than anything else. Over time we will see a smaller contribution by this business to Clicks."

Dima added, however, that it was hard to say what and when Clicks would decide about Musica .

"But as long as they see good returns or the financial performance of the segment in line with their benchmark", he said, it shouldn't be expected that the Musica business would be discontinued.

According to the International Federation of the Phonographic Industry's global music report, digital channels accounted for 50% of revenues for the industry around the world.

Last year, South Africa's streaming revenue increased by 334.2%.

Dima said: "There are many things [Clicks] could do, in terms of shrinking segments and negative financial impact on returns, and they would probably be doing a good job on that, but I don't think that Musica is a problem."

Which is probably why, according to Kneale, investors didn't ask him a single question about Musica when he attended the Merrill Lynch investor conference at Sun City in March.

But perhaps investors should be asking about the ways in which Musica could capitalise on the changing dynamics of the industry - just "as long as they can control the costs", said Dima.

tshandup@sundaytimes.co.za