SPECIAL REPORT

Mega-bookstores, megabucks

Heather Reisman's new Indigo chain is taking aim at the industry giant

JENNIFER WELLS November 3 1997
SPECIAL REPORT

Mega-bookstores, megabucks

Heather Reisman's new Indigo chain is taking aim at the industry giant

JENNIFER WELLS November 3 1997

Mega-bookstores, megabucks

Heather Reisman's new Indigo chain is taking aim at the industry giant

JENNIFER WELLS

SPECIAL REPORT

Heather Reisman is sitting in her café, which sits within her bookstore, Indigo, in Burlington, Ont. The place is an 1,800-square-metre shopping aphrodisiac—damasked armchairs here, ecru wicker ones there, fashionably worn area rugs scattered about There is a faux mantlepiece in the section where home decorating books are sold; stainless steel bowls and wire whisks beside Umberto Menghi’s Italian culinary delights. The café sells caramel latte, espresso macchiato and the requisite arugula on grilled foccacia. There are listening posts for CD sampling, and a nice bit of jazz trumpet is popping on the store stereo. Over in the children’s section, strips of white muslin waft cloud-like above an indigo floor. If St. Peter were looking for a place to pick up the latest Oprah recommendation, surely this would be the heavenly emporium of choice. Forget about it. Reisman cuts straight to the chase. This is not a time for soft phrases, for weaving pretty verbal tapestries about her business vision. “There’s total domination in the book industry,” Reisman says flatly of the $2-billion retail pie. “And the vast majority of consumers would be unaware of that dominance.”

She is talking about Chapters Inc., the Toronto-based bookstore chain, son of a merger 2V2 years ago between SmithBooks and Coles, the company that brought the superstore concept to Canadian book retailing. Chapters has 24 superstores in the country today, has plans to open another 17 next year, and is aiming for a total of 75 by the millennium. Two months ago, the company raised $32 million from investors, some of that aimed at speeding up the bookstore expansion. Chapters CEO Larry Stevenson, who steered the merger and the company’s birth, says he thinks there is room for at least 125, perhaps as many as 150. “I would say they’re 50 per cent today,” Reisman says of Chapters’ market share. “Based on the current structure, the current trajectory, they could easily be at 70 per cent.”

1 difficult to read that behavior as a desire to have £ total dominance, to block another superstore

Is it war? An absurd notion, says Reisman. “We’re a startup,” she says. “We have three stores opening this year. To cast us as being in a book war with Chapters is ludicrous. At best it’s David and Goliath, and we don’t even have our slingshot fully made yet.”

But whoever said war was a battle between equals? There has been nothing but acrimony between the two companies, from Reisman’s attempts to partner with the U.S. book giant Borders Group Inc. in Canada, which was vetoed by the federal government in early 1996, to the bickering over an Ontario site that Chapters said Indigo was trying to steal, to lawsuits flung between the two parties. An example: last spring, Indigo was, says Reisman, negotiating on a store location in Calgary when Chapters, which already had a store nearby, jumped in and closed a deal ahead of Reisman. “That puts them within three kilometres of themselves,” she says. Chap1 ters now has three superstores in Calgary, with

0 two more on the way next year. “It would not be

with potential significance from operating as g long as possible.” Indigo certainly has been f blocked in Calgary. The carpet-bombing tactic £ deployed by Stevenson, an ex-military man, rais-

es the notion of a ruthless war of attrition. Would ° he sacrifice a store to knock out a competitor?

I Reisman wouldn’t put anything past her nemesis, as she struggles to find sites in Vancouver and Montreal. In Winnipeg, Chapters is going into the St. Vital Centre in the south end; Indigo is going into upscale Polo Park. “Having learned that we were at Polo Park, they decided they would go up the street from us [with a second location],” says Reisman. “That is the environment that exists. They demonstrate a philosophy which is, We want it all.’ ”

In Toronto, both Chapters and Indigo are moving to Yonge and Eglinton, an uptown neighborhood awash in university grads, the target demographic for the book trade. In two weeks’ time, Reisman will open her limestone-fronted store there. Chapters will eventually open its outlet two blocks to the north, in what is now a Chev-Olds car dealership. ‘We went in, boom, they couldn’t wait to go up the street,” says Reisman. Sniffs Stevenson: ‘We had the opportunity to go into the site they’ve gone into. We chose not to.”

Larry Stevenson is marching the aisles in a downtown Toronto Chapters. He’s looking for a chair. Any chair will do. TEe fact that most of them are occupied by slumping readers, who appear to have settled in for the duration, is testament to the appeal of the superstore concept.

With lightning speed, Stevenson, a management consultant turned private investor, has remade Canadian book retailing as practised by chain stores. There is nothing revolutionary in the approach. After all, the best of the book independents have long brought consumers such features as cafés, and a far broader range of titles than the traditional bookstore chains. In the United States, such companies as Borders and Barnes & Noble, Inc. have been littering the landscape with superstores for seven years. It was only a matter of time before big boxes for books would land in Canada.

At the time of the merger, Chapters ran more than 400 traditional stores under the Coles, SmithBooks, The Book Company and Classic Books banners. About 90 of these outlets have since closed; a further 25 will be shut down next year. On average, these stores are 225 square metres—roughly the size of a suburban house.

The new Chapters version is nothing less than 1,600 square metres and can head into the stratosphere at 3,800 square metres. They aren’t just bookstores but “destination points,” most with a built-in Starbucks coffee bar, wide aisles, comfy chairs. Oh, and a 30-per-cent discount on their best-seller list, the come-on to buyers that, combined with the size of the stores, puts Chapters in the “category killer” camp. The first two Chapters superstores opened last fall, gaining “a beautiful first-mover advantage,” in the words of Patricia Baker, a retail analyst with Midland Walwyn Capital Inc. in Montreal. “Chapters pulled off what many people had talked about and analyzed for years, namely the rationalization of the book industry in Canada,” says Larry Klar, vicepresident of Canadian General Capital, which represents the equity interests of the Ontario Hydro and Hospitals of Ontario pension funds, which in turn backed Stevenson’s entrepreneurial plan.

Unlike the U.S. experience, where Barnes & Noble, Books-A-Million, the Borders Group and Crown Books have been slugging it out, Stevenson has been able to go about his business unimpeded by national competition. For one brief moment, it looked as though competition might arrive in the form of Borders itself, the Ann Arbor, Mich.-based book monster that aimed to open a Canadian arm with Reisman as chairwoman. There was much carping about the American threat, about the potential for Borders to circumvent Canadian book publishers by filling their shelves with American print runs. Some in the business now say that was a red herring, that Canadian law already protects the turf of domestic book publishers. “Had Borders Canada been allowed to go ahead, with the two companies unfolding as it should have happened without very bizarre intervention, there would have been a lot better balance,” says Reisman. Instead, Borders was shut out. Chapters,

(below)one of his meanwhile, sold 20 per cent of itself to none other than Barnes & Noble, the largest bookToronto locations: sener jn the United States, with revenues last

aggressive year of $3.4 billion. It bothers Stevenson that when

Rivals accuse Chapters of trying to corner the market

stories are written about that equity stake as a passive investment, the word passive is often placed in quotation marks. “They have less rights than any 20-per-cent investor I can think of,” he says of his U.S. partner. “They don’t sit on the board, they don’t have any involvement in our operations.” Barnes & Noble does, however, send corporate observers to board meetings. Barnes’s chief operating officer, Steve Riggio, often attends; his brother, Leonard, is the company’s chief executive officer. The Riggios are Barnes & Noble.

Stevenson maintains that the partnership was merely meant to help Chapters stand against big competition, particularly the Borders threat. “Our view was, this will be a very unattractive investment for us if there are three big companies,” he says. “We can handle one other one. But wouldn’t it be nice to have an ally?”

Nice? Passive? “The words passive and Barnes & Noble do not appear in the same sentence,” says one of the country’s biggest publishers. The combination, he says, is oxymoronic. He won’t go on the record. Chapters, after all, accounts for 40 per cent of his business—typical of the industry. One would not want to rile one’s biggest customer. “What I react to is that with 20 per cent they actually run it,” says Stevenson of his minority partner. “That does not mean that when the rules change, if and when they do, that Barnes & Noble might change their mind as to what they want to do. I don’t have a lot of doubt that in their mind this is kind of a neat, good financial investment and potentially in the future a strategic investment.”

This is a view held by many in the cozy, though not necessarily friendly, book biz. “Count on it! Count on it!” says Steven Budnarchuk, who, with his wife, Sharon, owns and operates the Audreys Books in downtown Edmonton. “In the long term, I can’t see that there’s any plan other than to dress this chain up for sale.” (One Chapters has opened in Edmonton, a second is scheduled to open this week, and the company is rumored to have signed a lease on a third location.)

Stevenson, who says he owns close to 10 per cent of Chapters, tries to belittle the influence of his company. He spins his market share as being closer to 18 per cent, though he does allow that when non-specialty retailers like Wal-Mart are knocked out of the mix, Chapters has at least twice that. Even before you discount books sold through other channels, such as medical texts, that’s an awfully big piece of cake.

The Canadian government endorsed the Chapters package, with a small caveat. At the time of the SmithBooksColes merger, the federal competition bureau announced that it would monitor the company’s activities for three years. That period ends in April. No one in the industry is expecting any fireworks.

Concrete countermeasures have been taken by some independent retailers. Holly and Paul McNally in Winnipeg, for example, closed two of their four stores, then remade one of the remaining locations into a 1,900-square-metre superstore before Chapters, or Indigo for that matter, had even scouted locations. The McNallys had studied the U.S. market. “Not a week went by when I wasn’t reading about the death of a bookseller,” Holly McNally, the company’s president, says of the slaughter caused by the big-box stores there. The couple took a seven-hour drive to Minneapolis. “It was not a pretty sight,” she says. At three o’clock on a Saturday afternoon, the empty local bookstore was closing up shop for the day. The multilevel Barnes & Noble up the street “was all alit until 11 o’clock at night, full of people.”

In Winnipeg, the first-mover advantage was there for the McNallys’ taking. “If you tick off the things that are required to create a destination store,” says Paul McNally, “there’s none of them that aren’t available to an independent. There’s no reason to leave that story to unfold only in the hands of national chains.” He cites title count, ambiance, amenities and “events” as obvious superstore attractions that can be exploited just as successfully by the independents. So the McNallys did the wide-aisles-and-comfortable-chairs thing, put in a 270-square-metre children’s bookstore within a bookstore, offered a 25-per-cent discount on a select list of titles, added a fullservice restaurant instead of some rinky-dink coffee bar. “If you look at Barnes & Noble, they stole the whole idea of the independent book store, and I know more about independent bookstores than somebody who’s trying to steal the idea,” says Paul McNally. Soon, there will be competition. ‘We’ve been in this market for 16 years. I don’t think that the mere arrival of another store is going to lay us waste,” he says. “I think it’s first come, and in this market we were first here.”

John Dooie, a Winnipeg businessman who rescued the venerable Mary Scorer Books there 13 years ago, took an entirely different decision. He sold his Saskatoon store to the manager, and closed the last of the three Winnipeg stores in September. The chain was profitable, but only marginally so. Its 390-square-metre store on Graham Avenue once seemed a good size, “but now the magic number seems to be 2,250,” says Dooie. “Our number 1 competitor, McNally Robinson, decided to plow ahead. We could have handled that. But Chapters is coming in with two stores and Indigo’s coming in and, hell, it just isn’t worth the effort. Somewhere in the future we were going to get absolutely killed.”

Others, such as Celia Duthie of Duthie’s Books in Vancouver, chose the superstore route, banking on the loyalty of customers who will balk at the homogenized feel of a chain. Ian Hawkins, one of three partners who own the Sandpiper stores in Calgary, says it was partly because they could see the competition coming that the company moved one of its stores to a 1,000-square-metre location in an old warehouse last fall. But the store never had a chance. Construction delays pushed the move back until mid-October, very late for booksellers who rely on the fall season to make or break a year. Through the Christmas season, some determined shoppers braved the construction site, passing through a polyethylene shroud, a plywood door, and into a store where the heat wasn’t always work-

ing. “It was 10°,” says Hawkins. Calgarians stayed away in droves.

On Oct. 17, three months behind in rent, with no financial saviors in site, Hawkins and his partners sought bankruptcy protection for their superstore. Publishers had tried to be lenient with terms, he says, but a couple of recent retail closures had strained their generosity. And, he says, “There’s too much stock sitting on Chapters’ shelves right now. They won’t sell a lot of what’s there. A lot of it is going to go back. Publishers are nervous.” Sandpiper had hoped that Indigo might buy them out. The company talked with Indigo senior vice-president Dan Mozersky over the past two months. The store, said Indigo, was not big enough.

Other retailers are starting to suffer directly as a result of Chapters moving in. At The Bookshelf in Guelph, Ont., owners Barb and Doug Minett added a second floor, a cinema, a bar and rooftop terrace nine years ago, long before Larry Stevenson entered the book business. Yet as devotional as Bookshelf regulars are, the Minetts’ sales have drooped since Chapters opened in Guelph in August. With a population of 93,000, the city initially seemed too small a target for a big box like Chapters. But Guelph is home to a university, and graduates abound. So the Minetts are down in business. “If you’re not up, you’re in trouble, right?” says Barb Minett. Expenses go up, there are wage raises to consider. “My God, our bank charges went up 17 per cent this year,” she says. “So when you’re down, it’s a bit scary.”

The same month Chapters arrived, the Minetts started discounting, 30 per cent on selected titles, many of them best-sellers. Can they swallow that? ‘We felt we had to,” says Barb Minett. The company will soon launch its own Web site in partnership with Sympatico, one of Canada’s largest Internet service providers.

No one is predicting dire outcomes for the Minetts, or the McNallys or Celia Duthie. In fact, each of the three combatants-to-be in the Winnipeg market is confident of the McNallys’ staying power, including the McNallys. Stevenson acknowledges the couples’ “welldeserved advantage,” which is “they’re not from Toronto.” But is there room for three? “I think there’s room for two,” says Holly McNally. “The third is debatable.”

What no one disputes is that Chapters is contributing to the notion that buying books is trendy. “It’s tapping into some Zeitgeist of the moment, but a large moment,” says Reisman. It has certainly sounded a wake-up call for the small players. In Edmonton, Audrey’s is trying to fill custom orders faster, and will launch a loyalty rewards program in a month’s time. “And right now, things are on the upswing,” Budnarchuk says. The economy is hot in spots, and there is a stellar list of Canadian literary offerings. It’s the longer term that has Budnarchuk worried. “I have real concerns that this kind of unprecedented monopoly will be harmful to the consumer down the road,” he says.

Harmful how? The independents point out that Chapters has 11 buyers in Toronto and just four reps “in the regions.” That, they say, will inevitably lead to the homogenization of book offerings. Publicity-shy publishers talk of the troubles that come when one buyer accounts for as much as half of their business: of retail support for a book rising, or falling, on the basis of one buyer’s say-so. Chapters has followed the American practice of introducing slotting fees, a charge levied for the positioning of a book on the shelf. On the one hand, that’s just business, and Chapters, which went public a year ago, has to answer to its shareholders. But publishing reps are nervous about getting squeezed, though they will not say so on the record.

Reisman, however, has nothing to lose by challenging the concept of overwhelming domination in the marketplace. “Mr. Publisher,” she says, appropriating Chapters’ voice, “if you won’t give me this much money for that end aisle, not only will you not be in the store, but you won’t be in any other store.” And while some independents have done a stellar job of making individual stores shine more brightly than Chapters in their markets, those examples are few. Absent a nationwide competitor to Chapters, “Where is the incentive to get better?” asks a publisher. He recalls that famous line of Lilly Tomlin as Ernestine the telephone operator: ‘We don’t care. We don’t have to. We’re the phone company.”

Heather Reisman is moving firmly through her Indigo showplace. All in black, head to toe, she is looldng very “hip” in this “hangout,” which are words she uses to describe the superstore trend and the environments they create. Her staff in their chinos and denim shirts, their black Indigo-logoed vests, cruise the Fictional Woods region, the music department in the store’s midships, the Wrapture department with its high-end gift packaging. The place is done to a T. It could be Holt Renfrew. Or Saks. It is certainly an achievement. Now, there is enormous pressure to pull off the same trick another dozen times, to prove to the industry that Indigo is a national player in a game that now is ruled by Larry Stevenson. □