Where next for Waterstone’s?

Retailers’ Christmas trading statements have in most cases made good reading. After the grind of 2009 and despite uncertainty to come, many store groups achieved a fairy tale ending to the year.

But bookseller Waterstone’s update was a business horror story worthy of Stephen King. The famous bookseller’s total sales slid 8.6% in the peak five weeks and plunged 8.5% like-for-like.

The gruesome tale of Christmas woe led to the immediate replacement of Waterstone’s managing director Gerry Johnson. He was succeeded by Dominic Myers, formerly parent HMV’s group development director, who must now write a new and happier sequel for Waterstone’s.

The bookseller’s Christmas showing was a sad episode, but also the latest in a series of depressing chapters. Waterstone’s festive sales decline was broadly the same as that of the whole high street books market.

The rise of online bookselling and the grocers’ growing muscle, especially in sales of best-sellers, has been reshaping the sector for a decade. And last November Borders, Waterstone’s last remaining specialist competitor, plunged into administration.

The scale of change alone is a stark illustration of why Waterstone’s needs to find a new narrative to sustain it.

But Waterstone’s has also suffered self-inflicted wounds, which meant that, despite its last man standing status, action was needed.

When Waterstone’s burst onto the scene in 1982, it made big waves.

Over the years it wrote the textbook on bookselling, hungrily snapping up rivals such as Dillons and Ottakar’s.

However, there has been criticism for years that the bookseller failed to move with the times and undermined the ethos that made the chain successful in the first pace.

There were complaints that it had become bland. Its 313 shops all look much the same and a similar offer is replicated in each, while managers’ knowledge of local readers is underexploited according to critics.

The retailer has, it is argued, weakened its specialist credentials and made a rod for its own back with a sea of three-for-two offers and the promotion of the most popular titles, such as celebrity autobiographies - which, ironically, failed to meet sales expectations last Christmas.

There was also criticism that Johnson, who previously worked for Booker, played a role personally in Waterstone’s difficulties by behaving “like a grocer” rather than a bookseller.

Hub of the problem

The opening last September of a distribution “book hub” was seen by Johnson’s critics as evidence of an overly centralised, command-and-control business. That the hub was hit by teething problems and cost more than planned added grist to the sceptics’ mill. There were murmurs of deep unhappiness among the retailer’s frontline staff, whose voice had always been powerful in the world of bookselling in which publishers and store employees are frequently united in their love of the product.

All this happened while HMV’s eponymous entertainment business, the long-term future of which was in question just a few years ago, was successfully reinvented. The contrast between it and Waterstone’s was stark.

HMV group chief executive Simon Fox insisted last week that there is a successful future for Waterstone’s and some of the likely changes flagged up indicate he accepts some of the charges laid against the chain.

“I passionately believe there’s room on the high street for a specialist book chain,” he affirmed. “It’s about building our credentials as a deep range, specialist bookseller.”

A review of Waterstone’s by Myers is already under way and Fox said it would cover issues such as tailoring store offers to local markets, more effective management of promotions and the acceleration of digital initiatives.

That is likely to mean a move away from shops having “the same, very wide front-of-store offer”, less emphasis on populist titles such as celebrity biographies and “looking at the full promotional offer”, including three-for-two deals.

The point is to reconnect with readers, who were overlooked as projects such as the hub took precedence. Fox, who concedes he must shoulder some of the responsibility for Waterstone’s problems, candidly admits: “One of the issues was that the supply chain project consumed a huge amount of time and resource. It was absolutely necessary but it took longer than we’d hoped. We’ve been focused on the mechanics, not the customer proposition.”

But others agree with Fox’s analysis that Waterstone’s can overcome its predicament and should have an assured future on the high street, even in the digital era.

One retail director with experience of the books sector says: “In every product category there’s space for a single specialist retailer of some scale to compete with the internet and the grocers.”

But for that to be the case, he believes that the development of local offer is vital and staff must be empowered. He observes: “Waterstone’s made one shoe fit all and you can’t do that. A bookshop for me is very much a local destination - it can’t be the same, it can’t be sterile.

“You need the right product, but you also have to create the environment that’s conducive to selling, and to have people serving who are passionate about what they’re selling. That level of customer service will always put the internet and supermarkets to shame.

“The key is to get people through the door and then expose them to the back catalogue.”

About half of Waterstone’s sales are not the biggest sellers, but are titles ranked 5,000 and below in the charts - illustrative of how big a part local tastes and the character of the local customer base might play.

“The supermarkets focus on the top 100 titles. You won’t know about the backlist unless you’re told about it,” says the former bookseller.

Similarly, Waterstone’s has the opportunity - now on a unique scale as the only big bookseller remaining - to make more of in-store events such as signings, readings and similar author events. The retailer held 12,000 such events last year and observers think they could play an even more important role in future.

Verdict senior analyst Malcolm Pinkerton also thinks Waterstone’s should be able to maintain a high street position with an offer distinct from that available online. He says: “People see buying books as a pleasurable experience. Waterstone’s needs to move away from mass appeal and offer something more tailored to local communities.”

A victim of success?

To an extent, Waterstone’s is a victim of its original success. Much of the press coverage of its Christmas performance had a nostalgic tone recalling its 1980s heyday, without always recognising that it is impossible to turn back the clock and that the old days - including restrictive pricing - are gone for good.

Waterstone’s today needs to find new ways of generating the excitement it did in the past. “They need to think outside the box,” Pinkerton says, and better marry the online and stores operations to bring complementary benefits.

Fox too is looking to the future, not the past, in order to recover the glory days. “It’s not about going back to how bookselling was 20 years ago,” he insists. The controversial hub and an enhanced online arm will be key to Waterstone’s in future.

He sees the hub, rather than as an instrument of homogenisation and central control, as a fast-track to localisation. Instead of stores having to deal with a multitude of suppliers and deliveries, the hub will streamline the process.

“The hub will be an essential part of how we run Waterstone’s,” Fox says. The former bookselling director concurs, as long as the hub is a servant rather than master of the stores. “It makes absolute economic sense,” he says.

Online, says Fox, must also be part of Waterstone’s offer. “The percentage of books consumed digitally will grow. We need a really credible presence,” he says. Last year’s acquisition of digital media company 7digital is expected to help, while Waterstone’s has also enthusiastically promoted e-readers. Over Christmas, 80,000 e-books were downloaded from Waterstones.com.

But a bigger online presence will not replace the chain. Fox says: “Online does not offer the experience of browsing in an inspirational bookshop.”

The review of Waterstone’s will not only take in its positioning and store offer. Costs and shop numbers will also feature.

Fox was keen to downplay the idea that there will be a swathe of closures. “At this stage that’s not what we think,” he said. “We think we’ve got about the right number of stores.”

However, next month, HMV will open a store in a former Borders unit at Wallsend, Tyne and Wear, that will, for the first time, co-locate Waterstone’s with the eponymous entertainment business. That could be a sign of things to come, although HMV says there are no plans for more at present.

Pinkerton notes: “They certainly need to think about merging with HMV stores and becoming a true entertainment retailer. It would make sense.”

Because Waterstone’s has seemed like the ugly duckling within the HMV Group, there has been speculation that the business could end up being sold. “I’m sure they’ve discussed that,” says one industry source.

HMV will hold an update for City investors on March 26, by which time Fox, Myers and their team should have developed the plot for the next instalment in the Waterstone’s story.

Fox is determined to reinvigorate Waterstone’s. “It would be a tragedy if this country didn’t have a chain of specialist bookshops,” he says. The challenge as he describes it, is to”make a specialist chain relevant in a Google world”.

The former bookseller believes Waterstone’s still has enough going for it to be assured of a profitable future. “The strength of equity in the brand is so strong,” he says. “There’s a proposition there that can make someone money.”

Assuming Waterstone’s promise can be fulfilled, the bookseller may yet be destined for a happy ending.