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INDIGO AFFILIATE WINS CANADIAN BOOKSTORE WAR

By Susan Thorne

Canadian bookstore Chapters has been taken over by Trilogy, a firm affiliated with its rival, Indigo.

A colorful retail rivalry is ending in Canada with the merger of book superstore chains Chapters and Indigo Books.

For the past four years, the book sector has been animated, dominated by these two Toronto-based companies, which jointly own nearly all large-format book outlets in the country. Headed by hard-hitting, Harvard-educated Larry Stevenson, CEO of Chapters, and retail-oriented Heather Reisman, Indigo’s founder, president and CEO, the booksellers have competed for market share with deep discounts, customer loyalty programs and an ever-increasing number of giant bookstores.

The rivalry has culminated in the acquisition of Chapters through a hostile takeover by Trilogy, a Toronto private venture headed by Reisman and her husband, financier Gerald Schwartz. Trilogy succeeded with a C$121 million offer for outstanding Chapters shares, topping a previous bid by Future Shop, the Toronto-based national electronics retail chain. Because of the size of the combined operation, the merger must be reviewed by the Federal Competition Tribunal, a process expected to last several months. In the meantime, the retail community is speculating about the results of this consolidation and the financial health of the two bookstore players.

Chapters unrolled its large-format bookstore concept (13,000- to 59,000-square-foot stores stocking 100,000 to 150,000 titles) throughout Canada starting in 1995, and initially appeared to be unstoppable. The company dominated the book retail landscape with 77 large-format Chapters stores operating by the end of last year as well as 231 Coles and SmithBooks stores across the country. As a Canadian player, Chapters enjoys protection from U.S. competition because of federal culture legislation prohibiting a controlling foreign interest in book retailers in Canada; the only national competitor is the much smaller Indigo, a 15-store chain concentrated in eastern Canada, which started up in 1997.

Chapters appeared to be making the most of its strong position until recently: Its superstore division’s revenue totaled C$91.3 million for the fiscal year ending April 1, 2000, a 12% increase over the previous year, and results for December 2000 showed a year-over-year jump in revenue of 13% to C$77.3 million. Chapters Online, launched in September 1999, ranked as the No. 1 Canadian-based Internet retail operation in sales volume in September 2000, according to Ipsos-Reid, a business/financial consulting firm. Stevenson also pursued vertical integration by establishing Chapters’ own publicly traded book wholesale company, Pegasus, which put pressure on Canadian publishers’ prices.

But the Internet and wholesale operations proved to be money-losers, and problems became public last November, when 18% of the Chapters Online workforce (73 employees) was laid off. Publishers’ resistance to Pegasus limited its success, and same-store superstore sales were also on the decline in 2000 as Chapters continued to open additional units.

Following an earlier Trilogy ownership bid for Chapters last November, Chapters announced plans to combine its online and retail operations and cease being a wholesaler. Even the retail store concept was being tweaked in the second half of 2000 to add a higher proportion of giftware and home items, bringing Chapters closer to Indigo’s merchandise mix.

Indigo, which declined to be interviewed for this article, is a private retailer whose financial status is undisclosed, although it is widely rumored to be operating in the red. Reisman, who is heading the merged company, has gone on record with her intention to retain both the Chapters and Indigo store banners, but she clearly expects to realize savings through rationalization. Austerity measures have already commenced: In February, she announced cuts to staff at both Pegasus (35%) and Chapters Online (24%). Industry observers such as retail analyst Richard Talbot of Talbot Consultants, Toronto, also expect Trilogy to close between 10 and 20 of the large-format bookstores. Both Chapters and Indigo have Main Street, power center and some mall locations, and Talbot identifies Ste. Catherine Street in Montréal; the Yonge-Eglinton area in Toronto; and Burlington, Ontario, as probable closure targets because Indigo and Chapters stores are located in close proximity there. Calgary, which has seven Chapters and two Indigo stores, also seems likely to lose stores. It is not yet known whether the Starbucks coffeeshops at all Chapters outlets will be replaced with Indigo’s in-house coffee bar concept.

Adjustments to the number of stores will not solve Chapters’ problems, however, according to Tom Leung, a partner with the retail consulting firm Thomas Consultants, Vancouver, who sees serious limitations for the U.S.-style book superstore concept in Canada.

“There is a smaller population base and lower density here in Canada. Even in a downtown area, the population is more spread out than in big U.S. cities,” he noted. “With a store like Chapters, you are emulating the same size [as U.S. large-format book retailers], but you don’t necessarily have the same numbers to fuel this.”

The new owner of Indigo and Chapters has announced its intention to keep both banners.

Consequently, the overhead per square foot is simply too high, and Leung recommends radical reduction in store area, even in suburban locations. Around 80% of book purchases at Chapters are best-sellers, he estimates, while 40% of store space is devoted to non-best-sellers.

“You could actually take away 50% of store space and not suffer much in terms of sales,” he said. A large urban region could have a flagship “mother store” offering a wide merchandise selection, plus smaller satellite units. This would preserve the integrity of the brand, which includes large selection, while reducing overhead, Leung proposed.

The stop-and-browse ambience of book superstores is also counterproductive, he opined. By giving customers places to sit down and read, “they [big bookstores] inadvertently create a library mentality, which doesn’t translate into sales.” Leung maintains that shoppers are psychologically more predisposed to buy when there is hustle and bustle generating a sense of excitement in the store, “not a relaxed atmosphere.”

Cathy Legate, president of Duthie Books, a profitable, 3,000-square-foot independent bookstore in the Kitsilano district of Vancouver, sees no quick fix for the high overhead of megastores.

“The big box doesn’t work,” she said. “You need huge staff, long opening hours and a huge stock.”

Even Internet selling is time-consuming when customers make special requests, she noted.

Duthie and some other independent retailers say they will benefit from the cessation of the Chapters-Indigo competition.

“This situation will be better,” Legate said, noting that Duthie’s sales are increasing, and customers are complaining of poor selection and inexperienced staff at Chapters.

“Once the two companies are combined, she [Heather Reisman] will stop discounting, and I don’t think customers will keep going to Chapters without discounts.”

Talbot said he sees other competitive challenges for the book superstore.

“When the big boxes first came in, there was a ‘wow’ factor and some sales increase, but bookselling is not a growth industry, and it’s pretty flat now,” he said.

“There’s increasing competition from department stores, Wal-Mart, big supermarkets, warehouse clubs like Costco and online retail categories.”

One major threat is Amazon.com, which is moving a distribution center to Canada and offering more benefits to Canadian customers.

“Between all those, they’re going to keep the new company honest,” Talbot concluded.

 

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