Britain's book retailers are caught between an invasion of big, brash US booksellers and supermarkets charging rock bottom prices. This is a story destined for an unhappy ending.
It is a rainy, midsummer morning and Bob DiRomualdo, chairman of the US bookseller, Borders, is in London to oversee the opening of the group's first UK store on London's Oxford Street. There are just 24 hours to go before the official opening and the place is still a mess. There are shopfitters everywhere, hammering at pieces of shelving.
The air is filled with the sound of drilling and the carpet is littered with debris. On the ground floor a group of new recruits is being taught how to use the tills by one of Borders' American staff. Upstairs another batch is struggling to learn the finer points of making a latte or mocha in the third-floor coffee shop. DiRomualdo, over for the week from Borders' head office in Ann Arbor, Michigan, is looking a little concerned but is not letting on: 'Don't worry,' he says, 'it is always like this with a new opening.'
But this is no ordinary new opening. This is the first US book superstore to open in Britain - the first in a new wave that some experts say could grab up to 20% of the previously sleepy UK book market. Rivals are fighting back. Waterstone's opened its first book superstore in Glasgow last November and is planning several more, including one just yards from the Borders store on Oxford Street. Borders will have five within a year, with openings planned in Brighton, Glasgow, Leeds and London's Charing Cross Road. WH Smith is considering a megastore format to keep up. And there are rumours that Barnes & Noble, another US books giant, is still keen on crossing the Atlantic and has been considering buying the old Simpson's store on Piccadilly. If that happens it could trigger a savage price war that only the larger players will survive.
'The entry of one of the big American booksellers is bound to stimulate change,' says Beverley Hodson, managing director of WH Smith Retail. 'Everyone is looking at their businesses and wondering what the impact might be. These stores could potentially change what consumers expect from booksellers just as Virgin and HMV did in the music sector with their megastore formats. At the moment books are sold in a fairly pedestrian way in this country. That could be about to change.'
A look at the new Borders store gives us a glimpse of our bookselling future. A former Littlewoods store built on four storeys, the shop stocks 150,000 book titles with the price of best sellers cut by 30%. In the music division there are 50,000 CDs and 150 'listening posts' where customers can choose from up to 800 CDs at any time. The ground floor newspapers and magazines section is a revelation with more than 2,000 journals and periodicals; everything from Crafty Carper to Modern Ferret. Shooting titles take a whole shelf, including a weighty quarterly tome called the Double Gun Journal which retails at a thumping £9.80. There are at least five titles on caravanning.
On the second floor, past walls decorated in pastel shades of lilac, orange and green, there is the expansive children's section with its 'intergalactic' indigo carpet featuring designs of Saturn and Jupiter and low-slung racking at a toddler's height. And then there are the store's opening hours. The Oxford Street shop will trade from 8am to 11pm Monday to Saturday and from noon until 6pm on Sundays.
Welcome to the changing face of British bookselling. Forget the musty, hushed atmosphere of the back-street independent book shop. This is the book business US-style. It is bright, brash and above all, big. 'These stores are adult playgrounds for the mind,' DiRomualdo says. 'You can come and browse and they are great places to bring the kids. This style of bookstore - with a large area and a large assortment - has captured a large share of the book market in the US. We believe the concept can travel.'
Given the rush into the superstore arena, rivals clearly believe it too. But the rise of the book superstore and the US invasion is only one of several key developments that are triggering a retail revolution in this mature market. An early catalyst was the collapse in 1995 of the old Net Book Agreement (NBA), which had enabled publishers to fix the price at which their books were sold. This has encouraged new entrants such as Tesco and Asda into the market, though they are concentrating on discounting best sellers. Another trend is the shift towards 'lifestyle retailing' with stores groups placing more emphasis on armchair areas for browsing, coffee shops, author readings and computer terminals offering internet access so shoppers can order hard-to-find items online. A third is the growth of internet bookselling, spearheaded by companies like Amazon.com in Seattle. Their lower cost bases and ability to charge rock bottom prices on huge ranges have got the traditional retailers rattled.
The dawn of this new era has led to a frenzy of dealmaking as the major players jockey for supremacy. Borders snapped up the Books etc chain for £40 million just weeks ahead of its stock market flotation. WH Smith has sold Waterstone's for £300 million and bought John Menzies for £65 million.
Waterstone's has effectively taken over Dillons and is now part of a new operation, HMV Media Group, chaired by Tim Waterstone, the chain's original founder. That followed Waterstone's audacious and ultimately unsuccessful £1 billion break-up bid for Smith's a year ago. And there has been a spate of internet deals as traditional retailers try to keep a grip on a changing market.
The irony is that all this corporate action and multi-million pound investment has been taking place against the backdrop of a book market that has been going nowhere. Figures produced by Verdict, the retail consultant, show that in 1997 UK book sales grew by just 3% in real terms to £1.8 billion, excluding sales to universities and libraries. In the two years before that sales actually fell.
However, according to Clive Vaughan, head of research at Verdict, there are signs of life. 'The market was declining in real terms in the mid-1990s under the old NBA as prices were rising. Now there is more discounting and people are buying more books.' He says the NBA's demise has led to new entrants and more diversity with a growing trend towards high street theatre. Bookselling is suddenly sexy.
The collapse of the NBA has certainly accelerated the consolidation of the market. According to Verdict's figures, the share of the book market accounted for by major chains such as Waterstone's and Smith's has grown from 28% to 34% between 1993 and 1997. The supermarkets have increased their share from 2% to 7% in the same period. It is the independents that have lost out. Their combined share has shrunk from 26% to 22% in the last four years. However, according to the Booksellers' Association, the demise of the NBA has not led to wholesale closures of smaller book shops. There are currently just under 3,300 members of the association, the industry's trade body. Just over 1,700 of these are smaller, independent shops, a fall of 150 over the previous year. The association said only a handful of these listed the growing power of the supermarkets and the big chains as a major problem.
Within a relatively flat market the major players have been gradually carving out their niches. Waterstone's, led by the double act of Tim Waterstone as chairman and Alan Giles as chief executive, is targeting the upper end of the mass market. With its matt-black racking and red and gold carpet, Waterstone's stores look almost like a posh jeweller's shop, and the highbrow image is sustained by a workforce of whom 85% are university-educated.
WH Smith remains the popular destination for the middle-aged, middle-market book buyer who likes more choice than a supermarket can offer but is daunted by the scale on offer at specialists.
Books etc, founded in 1981 by father and son team, Philip and Richard Joseph, is similar to Waterstone's though with a slightly more modern feel. Following the Borders takeover, the standard-sized stores will continue to trade under the Books etc name with the superstores operating under the Borders fascia.
Ottakar's is another new success story. Founded just 10 years ago by James Heneage, a former army officer, who named the company after his favourite Tintin book, King Ottakar's Sceptre, it targets smaller towns and cities where it can compete against Smith's and smaller independents rather than take on Waterstone's and Books etc. It is also starting to open superstores and has held talks with Barnes & Noble about a possible joint venture in the UK.
If the NBA's demise kick-started some changes in the book market, the real catalyst has been the fear of a US invasion. Giles, the bustling chief executive of Waterstone's who was a front runner for the chief executive job at WH Smith which went to Richard Handover last year, is well placed to comment. He believes the trend towards US-style superstores represents the cycles of the market starting to repeat themselves. Walking around the Piccadilly Circus branch, which has recently been converted from the Dillons format, he says: 'With the superstores I think we are seeing a re-run of what happened in the 1980s when Tim Waterstone started opening much larger stores than had previously been seen.' He believes innovations like superstores and lifestyle retailing, are a positive step because they can help grow the market. 'Unlike most consumer markets I don't believe the book market is of a fixed size. Because 50% of book buying is on impulse, sales can be created if the environment is right.'
Waterstone, perhaps the industry's central entrepreneur, also believes the superstores are the way forward. With his sticky-out ears and excitable, rapid-fire delivery, he sometimes resembles a small boy with a new toy.
Which in a way he is. A former WH Smith executive who was sacked as head of its travel retail business, he set up Waterstone's in 1982, sold it to Smith's in 1991 for personal profit of £9.7 million and has now got it back. Once described by one City bank as 'generally left of field ... and unequipped to run a large company,' he is clearly enjoying being back in the driving-seat. Self-confidence is not in short supply: 'I am loving it, absolutely loving it. Working together with Alan I want to finish off what we started 15 years ago. Part of the job is superstores. We want to get 15-20 of those, and Borders coming in has made us even more keen to crack on.'
Superstores also have the support of publishers for the simple reason that they can stock more titles. Tim Hely-Hutchinson, chief executive of Hodder Headline, says: 'Ever since the fall of the NBA there have been many more book store openings and the superstores, we feel, are a belated and welcome development. There are a million books in print and 100,000 new titles published every year. But the old, standard-sized book shops of 4,000 square feet - are just not big enough to stock the range. They might only be able to stock 50,000. With a 20,000-30,000 square foot superstore you can get a back list of books and stock specialist titles more easily.'
WH Smith is also becoming more aggressive. It is devoting 6% more space to books and stocking more titles (typically 40,000). The focus is on particular sectors such as fiction, sport, travel, cooking and biography where it aims to match the specialists in range and price. A megastore format of more than 40,000 square feet is under consideration and the group's 20 largest stores (of 25,000 square feet) are being given a makeover to inject more of a lifestyle element. Armchairs will be introduced for browsing and more will be made of cross-selling opportunities, say, with a book, video and computer game of a new popular film such as a Jurassic Park or Titanic. 'We want to raise the game with these stores,' Hodson says. 'We know we have lost ground in books but we intend to rebuild that. Smith's did have a kind of old-fashioned, little England approach but it is changing. We have to realise that we are selling magic in covers.'
The emphasis on theatre and entertainment in high-street bookshops is likely to become more important as competition increases from new channels such as the internet. According to Jupiter Communications, a New York-based consultancy, internet book sales this year are expected to be only $216 million worldwide but will grow to $800 million in a few years.
Companies like Amazon.com have enjoyed exponential growth by using their lower costs bases to offer low prices on huge ranges. Founded in 1995 by Jeff Bezos, a former hedge fund manager from New York, Amazon now claims to be 'Earth's largest book store' with more than three million titles on offer. Customers simply choose a title, type in their address and credit card number and then sit back and wait for delivery. For those prepared to wait, or for buyers seeking more obscure titles, it is proving hugely popular and an industry benchmark on how to sell online.
Amazon now has three million customers worldwide and is targeted to hit sales of $350 million this year. Fuelled by Wall Street's appetite for internet stocks, Amazon's share price has ballooned in the past few months.
In mid-August, the value of the company stood at $6 billion, more than Borders and Barnes & Noble combined. With 41% of the equity, Jeff Bezos is worth a staggering $2.4 billion. This valuation is all the more incredible given that the group has yet to post a profit. Last year it lost $27.6 million on sales of $148 million.
But the threat from the so-called 'virtual retailers' is getting closer to home. In April, Amazon paid $55 million for three European internet businesses as part of its strategy to attack the European book market. The trio of deals included Bookpages.co.uk, a British internet bookseller. It was Amazon's first foray into the UK, which will enable it to fulfil orders much more quickly and cheaply. UK booksellers were not slow to react. In June WH Smith paid £9.4 million for the Internet Bookshop, a three-year-old internet bookseller that offers 1.4 million titles with the price of best sellers discounted by up to 40%. Smith's move followed an announcement from Waterstone's that it would increase the number of books offered on its site from 90,000 to more than a million.
Hodson at WH Smith does not see the internet just as a threat. 'I think it will be a complementary channel. Both will co-exist with the other. For example in the summer Smith's was running a cross-promotion of the new Tom Clancy book. It published the first two chapters on its web site and linked this to a promotion of the title in its stores. Over at Waterstone's Giles believes the internet will force retailers to inject more pizzazz into their stores. 'We have to spend more time and effort into making the stores a really attractive destination in their own right with author readings and musical evenings. It will be good fun.'
It might not be fun for everyone, however. At the bottom of the market it seems likely that the supermarkets will continue to gain ground, though, according to Verdict, their combined share may peak at 10%. At the top end the specialists like Waterstone's and Borders/ Books etc will also grow share as they add more space, though there is a risk of the market becoming over-supplied. Smaller chains such as Ottakar's should prosper but may ultimately succumb to a takeover. The biggest losers are likely to be the smaller independents. Also in danger is WH Smith which could be squeezed between the supermarkets and the specialists.
For book lovers the prospects look bright indeed. There will be more choice and better stores with improved services. But for retailers life could become uncomfortable if the increased capital expenditure fails to grow the market. The game might not prove big enough for all those who want to play.
Nigel Cope is associate City editor at The Independent.
THE STORY SO FAR ... BUT SOME OF THE MAIN CHARACTERS MAY HAVE TO BE KILLED
Sales profit share
Chain Branches (£m) (£m) %*
Waterstone's 184 200 20 20
WH Smith** 547 837 50 17.9
(inc John Menzies)
Book Club Mail order n/a n/a 6.4
Associates via book clubs
Ottakar's 49 38.6 2.2 2.1
Books etc 25 31.5 2.2 2.1
(owned by Borders)
* Supplied by Verdict Research **Figures for WH Smith Retail Group,
including the newspaper, magazine and stationery businesses.
AFTER 200 YEARS WH SMITH IS DRAGGING ITSELF INTO THE NEXT CENTURY
Few retailers have succeeded in building such a dominant position in their markets as WH Smith achieved in books. Prior to the sale of the Waterstone's chain earlier this year, Smith's controlled more than 25% of the UK book market, more than three times the share of its nearest competitor. Only Boots in health and beauty and Sears in shoes have achieved similar power, though the latter's influence has recently been unravelled.
Even following the Waterstone's deal, Smith's remains number two in the market with a name synonymous with book retailing for the middle-market book buyer.
Smith's powerful position has been developed over more than 200 years of trading. The business was founded in 1792 by Henry Walton Smith as a newspaper vendor in London's Mayfair. It was his son, William Henry Smith, who changed the name to the one we know today. It wasn't until 1848 that Smith's first ventured into the book business when it opened a bookstall in Euston station in London. But it proved to be the start of a booming business. By the end of the century Smith's had 1,240 such stalls, which enjoyed huge success selling 'yellowback' fiction to travellers on the burgeoning railway network.
Smith's developed its own bookbinding works in 1904, started travelling bookshops in the second world war and in 1966 co-founded Book Club Associates which is still the UK's largest book club operator. For years Smith's had little competition apart from small independents. But during the 1980s the game began to change. Tim Waterstone broke new ground with his specialist bookshops which had bigger ranges and plush interiors. At Pentos Group, Terry Maher was rapidly expanding the Dillons concept. Later, the major supermarkets moved in.
With its family-dominated, old-school-tie approach to management, Smith's failed to notice that the world had moved on. Dubbed WH Smug because of its self-satisfied, patrician ways, the business began to stumble. Managers came and went and the family was gradually removed from the board, but still the slide continued. When Bill Cockburn dramatically quit as chief executive last year after a whirlwind 18 months in charge, one City analyst remarked: 'They need more than a replacement. They need a miracle worker.'
Now, with Richard Handover as chief executive and the core WH Smith chain under a former Boots executive, Beverley Hodson, Smith's is trying to drag itself into the next century. As shops are refurbished more space is being devoted to books. The displays are being improved and the ranges tweaked so that Smith's is as good as any specialist on its chosen areas like cookery, sport and travel.
Smith's still has tremendous influence over publishers. So much so that when Hodson first arrived at the company she spoke of asking publishers to put the promotional blurb on the front of books rather than the back so they would be more visible. In markets such as best sellers, Smith's still has huge market share.
But for all the changes some still forsee danger in the next chapter of the Smith's story. Clive Vaughan at Verdict, the retail consultants, believes Smith's is vulnerable to the squeeze between the supermarkets and the specialists. And the jury is out on the wisdom of of its decision to sell Waterstone's to its main competitor. The chief executive of one rival book chain describes it as a 'brilliant deal' that will allow management to focus its attention on the main business. Vaughan at Verdict has a more gloomy prognosis. 'It seems a strange move to sell one of your businesses to your major competitor. The jury is out on whether or not it was a good idea.'.