By Philip Downer

When entertainment and record shop group HMV sold Waterstone’s to Alexander Mamut last month, the big surprise wasn’t the buyer, or the price -– it was the appointment of James Daunt as Managing Director of the newly independent business.

Waterstone's MD James Daunt has a truly difficult task ahead

Daunt has made his name as the owner of Daunt Books, a small chain of shops in some of London’s most exclusive neighborhoods –- Notting Hill, Hampstead, Chelsea. The flagship store in Marylebone is one of the world’s great bookshops, combining the feel of an Edwardian library with the title choice and presentation of expert booksellers. Daunt Books is stable, profitable and much-admired.  But its founder’s early experience at JP Morgan must have asserted itself; although Daunt has been scathing about Waterstone’s and multiple retail in the past, the opportunity to reinvent British bookselling’s last chain standing was too tempting to pass up.

Daunt doesn’t take over at Waterstone’s until next month, and –- aside from restating his commitment to the printed book -– he’s kept his strategy under wraps so far. But there will be plenty waiting in his in-tray:

1. Waterstone’s is already mid-way through a recovery plan. Outgoing MD Dominic Myers was working to a very different brief to James Daunt, and with just a year or so in post before the “For Sale” sign was hoisted, he’s only been able to realize a part of his vision. But Myers has refocused the chain on specialist bookselling, whilst recognizing that the physical book sector is inevitably and unarrestably shrinking. Waterstone’s is a better place to buy books today than it was two years ago, and its staff are more focused and motivated than before. Equally important, its profitability is more robust, though innovations like the development of the Paper Shop stationery concept -– a critical element of margin maintenance –- may not survive the change of direction. There are baby/bathwater risks if a Year Zero approach is taken.
2. Daunt will have to move fast to sign-off Waterstone’s holiday campaign for Christmas 2011.  Every December is critical in retail, but Waterstone’s must achieve cut-through this year, in the face of Amazon’s Kindle annualizing for the first time, and the likelihood of more aggressive promotional activity at high street and travel multiple WH Smith.  Daunt dislikes multi-buy offers and heavy price reductions, but he recognizes that discounting and promotions are an inevitable requirement for a national chain (unlike at Daunt Books, where everything is full price).  He’ll have to engage closely with all of his key suppliers, and ensure that the publishing community properly understands the support that will be required to secure Waterstone’s future.
3. Waterstone’s still has too many shops –- around 300. These include many different formats -– city center flagships, mall stores, small high street shops and academic stores; they also embrace a multitude of acquisitions, mergers and one-off buys, with the DNA of brands from Dillons through Ottakars to Books etc visible in different locations. The store base needs to shrink, and the offer better unified, so that there is clarity around what Waterstone’s stands for. If the specialist bookselling market continues to get smaller, will it become more elitist, or will Waterstone’s still have an offer that works for the general shopper? How many locations will be sustainable in a market where 25%+ of physical book sales are online, and –- potentially –- a further 25%+ of the total market has switched from physical to digital? Better to carry out surgery on a healthy body now, than wait until it has become too weak to operate on.
4. Historically, specialist book chains competed with a multitude of different routes to market –- other specialist chains, high street/department store players, supermarkets, book clubs and other direct sellers. Now most of that competition has faded and the supermarkets’ share has flattened out; everyone is benchmarked against Amazon. With an estimated 80% of both online fulfillment and e-book selling in the UK, Amazon has achieved a high degree of market domination, and its logistical efficiency and razor-sharp pricing are almost impossible to compete with directly. Amazon’s profitability is unknown, and indeed moot; and Amazon owns the Kindle, which has swiftly become a generic trademark, synonymous with eBooks and readers. Retailers like Waterstone’s have tacitly acknowledged this, and limited their investment (i.e. losses) in online bookselling. However, Waterstone’s must secure an online niche and an e-book solution, in order to remain a serious player. One option being discussed in industry circles is an alliance with Barnes & Noble and the introduction of the Nook to the UK -– indeed, a future in which Nook technology and marketing is linked to major bricks and mortar booksellers across the world is one that this author would pursue vigorously.

This is enough to keep anyone very busy, but Daunt will also have to manage hyperbolic industry expectations, and demonstrate that he can adapt and apply his bookselling magic outside the city-state of London. Many Waterstone’s shops are in areas of rising unemployment, poor education or limited aspiration. Does Waterstone’s retreat to an elite fastness, and surrender its national presence, or can the model be adapted sufficiently to deliver quality -– and profitability -– across the country? The smart money is on a big swing to localism -– Daunt Books pays its staff well, and expects them to understand their books and their customers, maximizing sales and store visits through the appropriateness of the local offer. Adapting a six-store trick across hundreds of shops would be an extraordinary feat, but no one will enjoy a better honeymoon opportunity than the new Managing Director of Waterstone’s.

Philip Downer is a retail operator, consultant, and former CEO of Borders UK. He writes about books and retailing at his blog Front of Store.

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