What price Waterstone’s?

The months of speculation are over, and the search for “strategic options” – ie the Waterstone’s sale process – is under way.

Although Tim Waterstone/Alexander Mamut the only interested party to excite the media, there will be other players doing the arithmetic and making their choices.  The challenge – as book chain buyers before them have found – is putting a realistic price on a business in a sector that is subject to such profound change.

A broad £50m-70m price tag is being spoken of, but this feels heavy as a straightforward P/E calculation, let alone as an assessment of the business’s future.

Dominic Myers has done a good job in his first 15 months heading the company, but he has been sounding strategic alarms over the past couple of weeks.  He stated, unarguably, that there is too much distribution capacity in the book trade.  Hub-haters jumped all over this, but the volume of publisher and distributor warehousing is exceptional for a product that doesn’t deteriorate (compared to eg foodstuffs), and that is rapidly losing its attraction for the consumer.  The publishers are still structured to service a broad, diverse range of national and local booksellers; cutting out rep calls has saved payroll costs, but doesn’t address their structural over-sophistication.

Myers has also pointed to the unsustainable nature of the academic trade (and his comments have drawn broad support from John Smith and Blackwell).  As with the distribution/Hub argument, there was an attempt to put a parochial spin on the argument – “that Dominic, just trying to renegotiate his terms in public”, but any dispassionate observer can see that the creaky academic publishing model is coming to an end.

These are two snapshots of the “broader challenges” (ahem) facing anybody endeavouring to sell books out of retail premises to an increasingly uninterested public.  To value a business like Waterstone’s requires more than locking a bunch of young accountants in a room for two weeks and stuffing them with pizza while they grind through due diligence.  A buyer requires a first class crystal ball.

Valuing the business on current sales and earnings is a starting point, but any buyer will have to land at Waterstone’s with their strategy fully formed.

  • How many stores are sustainable for the foreseeable future – say, for three years?
  • How many stores have lease-ends coming up?  Are there any that you wouldn’t let go, if the opportunity arose?
  • What will be the cost of taking the business down to a credible size?  Will a CVA be required to get rid of unwanted leases?
  • What level of infrastructure will be required to service a smaller business?  Will the chain still be “national”?
  • Do you exit academic altogether?
  • Jobs will be lost – how many?  And how will those who remain be encouraged and incentivised to restart Waterstone’s as a new entity?
  • What is the role of digital in the new model?  No business can ever match Amazon’s, Apple’s or Google’s ability to invest in any sector that they wish to focus on, so how can a digital presence provide a genuine alternative to the big players, and how will customers be persuaded to switch from the default provider and build their loyalty?
  • Waterstone’s has a unique cultural position in the UK.  Furniture chains can come and go, and a brief mention in the financial pages (“150 shops will shut and 1200 jobs will be lost”) is all the public sees – whereas one high-profile closure or strategic shift at Waterstone’s will keep the business, arts and comment pages busy for weeks.  How will the new owner manage this involuntary time in the spotlight?
  • Finally, most important of all – after the surgery, how will you grow the business?  There are 18 months to kitchen-sink the bad news, then the newly formed Waterstone’s has to start growing again.

To summarise, what will the “final” shape of the business be, and how many people, buildings and facilities will have to be shed in order to reach that position?  What will that cost, and what will be the earnings and growth prospects of the new small business?

Books aren’t going to go away, but for many years, commerce in books (as opposed to their impact on minds and society) was peripheral.  I’m re-reading Keep the Aspidistra Flying, reminded that for most of their history, bookselling was a small, specialist business, conducted off-pitch between cognescenti.  No one supports broader access to good books more than I – but is that dream over, crowded out by other media and by a new set of aspirations?

There are, of course, other broader ramifications for the worlds of publishing and literature.

  • Bookshops were big society long before Big Society.  Who will step forward to sponsor the literary festivals, the reading groups and the competitions if they aren’t a long-term part of the Waterstone’s mix?
  • What will be the knock-on effect of a significant fall in store numbers?  If blanket Waterstone’s coverage cannot be assured, how viable does specialist or literary publishing become?  Bookshop numbers (indies as well as chains) are falling as a result of losing large chunks of their trade to Amazon, the supermarkets and now eBooks.  But 35-40% of the trade for physical books still goes through specialist bricks and mortar stores, and a much higher proportion of sales of literary fiction, history, biography etc.  When does the loss of stores become critical for serious publishing?  When Borders shut down, I posited that around half of our sales – say, 2% of the market – would simply go away, and this came to pass as the loss of stores removed customers’ opportunity to browse, and their interests shifted to other spending (or, in this climate, to not spending at all).

All of the indicators from HMV suggest that they are looking for a quick, clean sale process.  I hope – for the sake of everyone in Waterstone’s, and for all those whose lives and livelihood will be affected by their restructuring – that this proves to be the case.  More to the point, I hope they get sold once and sold well, and are able to combine a realistic strategic vision with the cash they will need to ride out their necessary surgery.

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One Comment on “What price Waterstone’s?”

  1. On that question of “When does the loss of stores become critical for serious publishing?”, take a look at Mike Shatzkin’s post last July, if you haven’t already. He has since updated predictions as new numbers have come in in subsequent posts. The numbers are US numbers but the logic travels, I’d think?