Happily ever after for Waterstone’s?

If it were a novel it would be found in the thriller section: full of twists and turns, the saga of HMV’s sale of Waterstone’s reached a climax last week as it found a protagonist in Russian oligarch and book-lover Alexander Mamut. He hopes to write a new chapter in the bookseller’s history after buying it for £53m.

There was a collective sigh of relief from staff, publishers and authors on the news. But there is no happy ending just yet, because the underlying issues that have plagued Waterstone’s in recent years have not gone away - the impact of supermarket discounting and Amazon’s dominance in a market in which traditional book sales are declining while ebooks sales grow.

Waterstone’s has suffered falling sales and profits, posting an operating profit of £2.8m in the year to April 24, 2010, compared with £10m the previous year.

Although profits are expected to have bounced back in the financial year just ended, the big question remains - in the age of the Kindle and supermarket incursion into the category, can there be a future for a 300-strong chain of high street bookshops?

The man tasked with turning around the fortunes of Waterstone’s insists the answer is yes. James Daunt, founder of the successful and highly regarded London independent book retailerDaunt Books, has been parachuted in by Mamut to lead the bookseller under his ownership.

Daunt was a surprise but largely welcome appointment. It is understood there will be no role for Tim Waterstone, founder of the chain that bears his name, contrary to reports in the lead-up to the deal.

Business overhaul

Daunt, who is to conduct a “comprehensive review of the business and operations” of Waterstone’s, acknowledges the scale of the challenge. “The big question is, do people want to buy books from bookshops?” he says. Unsurprisingly, Daunt answers in the affirmative, but he acknowledges bookshops must earn the privilege of luring book lovers through their doors.

He says there are three things that make a bookshop work. “Make sure it is full of really good books and that they are well presented,” he says. “Make sure there is a nice ambience, and that you have really good staff.”

Although Daunt has yet to get under the skin of Waterstone’s, he has a broad plan for how to restore the chain’s status as king of bookselling on the high street again.

“I’m a serious bookseller and I’ve been doing it for a good many years,” he says. “I’ve got a vision of what bookselling should be and the task is to ensure that happens.”

So what is this vision? Localism - something initiated by current Waterstone’s managing director Dominic Myers, who will return to the bookseller’s present parent HMV when the deal completes - is at the heart of it.

The strategy is beginning to bear fruit and Daunt wants to continue along similar lines. “Bookshops need to reflect their customers, the local demographic,” he explains. “We need to deliver bookshops in tune with individual communities.”

Daunt says his eponymous shop in Cheapside, London “couldn’t be further away” from his Hampstead shop, in terms of its offering. “One is buggies and babies and the other is people in suits,” he says.

But he is wary of trying to replicate the model of Daunt Books - which has seven stores - at 300-store Waterstone’s. “It all sounds very nice to say in theory, but we need to understand how this will work within the Waterstone’s structure. Quite clearly if you run seven shops you’d be somewhat arrogant to turn around and say you can do [the same across] 300 shops.”

He adds: “I need to get in there and understand the business. There are elements that need to be tweaked, to put it at its kindest.”

Waterstone’s supply chain will be near the top of the assessment list, including its distribution facility ‘The Hub’, which caused supply headaches for the retailer when it opened.

The growing digital side of bookselling will form part of Waterstone’s future, says Daunt. Amazon.com is now shifting more Kindle ebooks than paperbacks and hardbacks combined. Its UK arm is selling twice as many ebooks as hardbacks.

Going digital

Peel Hunt analyst John Stevenson describes this moment as a “tipping point” for books, in terms of digitalisation. “This is where we were with music five years ago. It’s not unusual to download books anymore.”

That means Waterstone’s, which already sells ebooks and e-readers online, has to be increasingly competitive in this arena. But Stevenson fears the web war may already have been won by etail giant Amazon. “Waterstone’s won’t win back the web - that opportunity has gone. The price differential between Waterstone’s and Amazon is massive,” he says.

However, Stevenson believes there are ways that Waterstone’s can carve out its own place in the market. “It needs to create a sense of theatre, do something different,” he says. “Waterstone’s needs to create a local bookshop feel.”

Stevenson says one way of convincing people to shop online with Waterstone’s rather than Amazon is by leveraging its customer base with an online loyalty card, for instance.

Daunt says the focus on localism and a renewed effort online “ought to work”. He adds: “Bookshops should be the cultural fabric of this country.”

Overall, observers think the new ownership should be good for the business. “It will put the focus back onto books,” explains Stevenson, who says Waterstone’s had been neglected as HMV tried to sort out its music business.

“If all of us had our time again we would have pursued digital many years before we did”

Philip Downer, former boss of Borders UK

Changing stance

Verdict senior retail analyst Matt Piner believes that while Waterstone’s should step back from its discounting stance as it returns to its specialist credentials, “price will still have to be at the heart of everything they do”.

Philip Downer, former boss of now defunct book chain Borders UK, says chasing market share would be foolish. “We saw in the Gerry Johnson [former Waterstone’s boss] years that there was a very marked commercialisation in the front of store. It was pitching itself against supermarkets and WHSmith.

“Myers has done a very good job in changing that and Daunt’s appointment is a big marker - [the new owners] are saying these things really don’t matter now.”

Despite the collapse of Borders UK in 2009, Downer believes there is “definitely a place for a national chain” that focuses on localism. “You have got to tailor specialist retail to local customers’ needs,” he argues.

He agrees Waterstone’s must put the online opportunity front-of-mind. “If all of us had our time again we would have pursued digital many, many years before we did,” he says.

Downer highlights a conundrum for Waterstone’s. He says it has to target the AB1 demographic but points out that those are the people flocking to buy ebooks.

And as more and more people choose to download books, where does that leave Waterstone’s store estate?

Stevenson says Waterstone’s “needs a much tighter store base” and that it should consider offloading up to half its estate. “As more gadgets come out to read ebooks on, it will get very difficult to justify an extensive retail chain and the costs that come with it,” says Stevenson.

Piner believes Waterstone’s may “cut its losses and come out of weaker stores”. But store closures are not at the forefront of Daunt’s mind. He wants to get to grips with the business before thinking about any portfolio rationalisation.

He says it would be “disappointing” if stores were closed, but concedes that it is possible that over the years Waterstone’s shops were opened in locations that “never worked”. However, he maintains: “I hope we can make the shops better [rather than close them].”

There’s no denying the scale of the task that lies ahead for Daunt. Stevenson says: “It’s a very big challenge. There are certain areas of retail you wouldn’t like to be betting on in three to five years and unfortunately this is one of them.”

However, book lovers, publishers and Waterstone’s staff will hope that under a new owner, who seems committed to investing, and an expert bookseller leading the business, the Waterstone’s story will have a happy ending.