The Tome Front

The sedate world of book publishing is being turned on its head. Not just in terms of the $1.4bn (864m) deal struck last week by the German group Bertelsmann to buy Random House but also on the retail side.

Mergers, takeovers and new US entrants are changing the UK market. Some observers describe it as a “revolution”. But even those less struck by hyperbole see the retail changes as mirroring the consolidation in the publishing houses themselves.

Within the next 12 months, the impact of two of the largest US book retailers will also start to be felt in the 2.7bn UK market – which, according to Mintel, has grown 15 per cent from 2.3bn in 1992 to 2.7bn last year.

Giant US retailer Borders has bought the UK chain Books Etc and will open a 39,000 sq ft books superstore in London’s Oxford Street this summer. At the same time, Barnes & Noble, the largest book retailer in the US with over 1,000 stores and 1997 sales of 1.5bn, has had talks with Ottakar’s about creating joint venture operations.

The talks have broken down, but sources close to them think that Barnes & Noble will enter the UK market, either on its own or with a partner, next year. The UK market has been made more attractive to the US groups by the performance of specialist bookstores which have opened and taken significant share from the established players.

Waterstone’s opened in 1982 and now holds a 12 per cent share of the market, second only to WH Smith which has been operating for more than 200 years. Books Etc opened in 1981 and has a 2.1 per cent share, while Ottakar’s has built a 2.1 per cent share in ten years.

The drive is for bigger stores as reflected in the Borders move and also the 28,000 sq ft Glasgow store which Waterstone’s opened last September. The arrival of the US retailers and the trend towards bigger stores is contributing to merger activity among domestic players.

EMI bought Waterstone’s last month for 300m, and now owns both it and Dillons which it runs through newly-created HMV Media Group. Together, the two stores have 20 per cent of the market, with Waterstone’s contributing 12 per cent alone.

WH Smith remains market leader, with just over 13 per cent of the UK book retailing market, despite its sale of Waterstone’s. But opinion is divided on whether its recent purchase of newsagent John Menzies, which holds 4.6 per cent of the retail market, is evidence that it is still in trouble or that it has turned the corner.

James Heneage, managing director of Ottakar’s which has 47 stores in the UK and plans a stock market flotation next month, sees it as a wise focusing of WH Smith’s business. “It was the smartest move the WH Smith’s board ever made, says Heneage. “Menzies dovetails very well with its core business. A successful WH Smith is very good for the book trade as a whole.”

But Clive Vaughan, Verdict Research’s retail analyst, is staggered that WH Smith sold off Waterstone’s to EMI and bought John Menzies. “It is a case of fighting yesterday’s battles. It makes no sense to sell off a great business like Waterstone’s and buy a casualty like Menzies. The only rationale I can see behind it is that the WH Smith board saw the opportunity to acquire an age-old rival and couldn’t resist going for it.

“It would have made more sense to use WH Smith buying power to force down wholesale prices from publishers and make Waterstone’s work even harder for the group. That is the strategy EMI will use now that it has both Dillons and Waterstone’s in its portfolio.”

Another senior book retailer suggests the deal will cause problems for EMI. “There was a feeling in the Eighties, when Dillons and Waterstone’s were growing, that the economics of bookstores meant that they couldn’t afford prime sites in cities.

“The industry doesn’t believe that anymore. Improved methods of distribution mean that we can carry more stock in store, and selling higher volumes means that we can afford prime city sites. Unfortunately, many of the Dillons and Waterstone’s stores are too small and in the wrong place. EMI is going to have to resite many of these stores and that will be immensely costly.”

Heneage believes the UK retail market is about to witness massive change. “I would say that this is the most dynamic the book retailing sector has been in its history. The things we are seeing happen now, and the sort of things that are being planned over the next 18 months to two years, are nothing short of a revolution in this market.”

The most tangible signs of that revolution will be seen in the Borders book store now being built. At 39,000 sq ft it will be about ten times as big as the average Waterstone’s or Dillons.

The store will carry 100,000 book titles (there were only 101,504 titles published in the UK last year), and although it is primarily a bookseller, it will also stock a large range of music CDs, as well as magazines and papers. There will be an area set aside for both daytime and evening readings and other events.

Borders will have something else in its armoury. Vaughan says: “Its strategy will be the same as most US retailers when they come to this country. It will open big sites and will come in at lower price points to establish an early presence in the market.

“The market will polarise. At one end there will be the big specialist stores which carry large stocks and offer great range. At the other, there will be the supermarkets who will simply cream off the bestseller lists. Everybody in between will be squeezed, and that means players like WH Smith,” says Vaughan.

The view of various observers is that WH Smith will face the same problems with selling books as it does in other areas of its business – people spend relatively little on any of its product ranges. The abolition of the Net Book Agreement in 1995, which prevented discounting, was expected to lead to wholesale price cutting and closure of smaller retailers. But because consumers are unwilling to travel to find cheaper books it has not had the dramatic impact forecast.

But at the lower end of the market, supermarkets have taken some of bestseller share. In the past five years, grocers have built their share of this market from two to seven per cent. Analysts expect their share of the market to settle at about ten per cent – 280m.

Shirley Noakes, WH Smith business unit director on books and news, says the company sold Waterstone’s because the “philosophies” of both booksellers were so diverse that it became difficult to manage them in one company. She is relaxed about being sandwiched between the megastore retailers and the supermarkets. “It’s a very viable position being in the middle. We don’t offer the range that Waterstone’s does, but we edit our selection to offer choice across a wide variety of price points.”

She adds that although 100,000 titles are printed in the UK a year, three per cent of them bring in 50 per cent of book retailing revenues. These are the biggest popular fiction titles but also include non-fiction titles like cookery, antique titles and other self-help titles.

The book retailing market will continue to grow, and so will the size of the sites and the range of extra services they offer. Those retailers like WH Smith, which can’t offer this kind of scale and service, will find themselves getting squeezed. In the future, retailing size will matter.

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