Swann Song: Changes at WH Smith

The Bookseller has published a column I’ve written in response to WH Smith’s prelims announcement last week, which delivered the double whammy of £100m+ profits, and the upcoming departure of Kate Swann as Group CEO.  I’ve reproduced it below.

When the WHS announcement was made last week, two sets of instinctive responses crashed into each other.  The City reporters raised the roof for Queen Kate, during whose reign earnings-per-share have been driven to ever higher peaks, thanks to a combination of margin enhancement, cost-cutting and share buybacks.  And the naysayers pointed out that, yet again, sales were down – even in the go-go Travel division, like-for-likes keep falling.  Oh, and BTW, the store environment is pretty poor.

I try to take a slightly more nuanced (or reflective) view.  Swann has delivered extraordinary numbers through torrid times, but has she left her heir apparent, Steve Clarke (who is promising more of the same), with a sustainable model?

WH Smith has made every decision with its shareholders’ interests paramount – and that’s as it should be, am I right?  However, it is hard to escape the conclusion that those decisions have been predicated on short-to-medium term returns, rather than the sort of long-term investment that leading retailers make.  WHS is still a bricks-and-mortar company (notwithstanding a long-standing but rarely promoted transactional site, and the slightly more forward-looking Funky Pigeon online offer), trading in categories –  printed books, newspapers and magazines – that are in long-term decline.  Its overseas Travel expansion plans are broad-based – but winners need to be idenified from a pot-pourri of investments across several continents.

Retail Week has just dropped through the door, complete with a profile of Steve Clarke.  In the meantime, here’s The Bookseller piece:

Physical book sales: changes 2008-10, just prior to the eBook upheaval

This graph shows unit book sales through all significant retail channels, across three years of financial crisis and sector changes.  It speaks volumes:

Confessions first: I cut and pasted the graph from the Nosy Crow blog, who in turn credited it to Book Marketing Ltd’s Books and Consumers report.  It’s a simple graph, showing rises and falls where you’d expect to see them.  It’s useful to apply some maths to the graph:

In the three years covered by the table, total unit sales fell by 7m.  Chain bookshops and indies each lost over a quarter of their volumes, whereas internet-only retailers increased theirs by over one third.  Supermarkets were pretty flat, and bargain books were (I assume) boosted by the recession and the turnaround at The Works.

Here are the same stats expressed as percentages of the total market.  You’ll recall the Competition Commission enquiry of 2006, when Waterstone’s acquired Ottakars, and had to demonstrate market share of no more than 25%.  At the end of 2010, the whole chain sector was worth just 30% of the market – and that was before the closure of BBS, and Waterstone’s estate-trimming, started to take effect.

Judging from the terminology, Waterstone’s and WH Smith’s online sales are included in their chain totals.  Given that assumption, will 2011 be the year when Amazon’s physical book sales exceed those of all the chains added together?  And, by extension, will 2012 see Amazon beating the combination of chains plus indies?

And as the headline says, this is the 3rd August 1914 picture, immediately prior to eBooks arriving on market, en masse…

British Bookshops & WH Smith

The story so far:  In mid-January,  British Bookshops & Stationers appointed Zolfo Cooper as administrators, following a disappointing Christmas.  Zolfo laid off head office staff, instituted Sale activity in all stores, and sought expressions of interest in the business.

Yesterday:  WH Smith announced that they had acquired 22 BBS stores, and the BBS intellectual property, for £1.05m.  Staff transfer to WHS, stock remains with Zolfo for disposal.

For WH Smith, this is a smart deal, allowing them to take on small stores in attractive but relatively inexpensive catchments.  Those stores can slot seamlessly into the WHS network, requiring little additional central overhead, and benefitting from WHS’s distribution network and trading terms.

Some of the stores, however, are in locations where WHS is already represented – for instance, in Dorking, WHS and BBS are practically next door to each other.  Although WHS has acquired the IP, it is difficult to see the rationale for them to maintain a secondary brand.  How many brands do you need to sell books, news/mags, stationery, gifts and art products?  If I were in Smiths’ shoes, I would have acquired the IP, in order to take it out of circulation, not to build upon it.

The only strategic flyer I might consider could be the parallel development of a value chain, along the lines of The Works, but that seems a jump too far – WHS already targets the value market through its high street promotions.  Plus, WHS has progressively divested itself of all the non-core, differently branded businesses built up in the Hornby/Field era, and no point under Kate Swann have they indicated an interest in doing anything other than driving the core brand.

What makes this deal interesting – unless it was just too good to refuse – is that the sales and location growth in recent years has all taken place in the Travel division.  The core sectors (air, rail) have been maximised, and new sectors (motorway, hospital, workplace) brought on stream.

But High Street, meanwhile, has languished – turning the screws on margin and costs has satisfied the City, but – with the exception of new developments, eg Westfield – High Street has just chugged along.  BBS was a credible threat – a core low price message that was stronger than Smith’s, and all the range you needed sold out of significantly smaller (=cheaper) premises than the heritage WHS estate.  As it turned out, the business was unsustainable in the current climate, but it created the first alternative to WHS since Menzies retired from the fray.

So…  WHS/BBS – good deal, integrate the stores, job done; or a new strategic indicator?  Given that it’s hard to see, in this spectacularly turbulent market, how those margins and costs can keep on giving, the High Street estate will require some fresh thinking.  I’ll be watching this space with keen interest.

Finally, notwithstanding all the deal hyperbole (actually, WHS doesn’t do hyperbole), 29 BBS stores are unspoken for at the time of writing.  The chances of them staying in business as bookstores do not look great, but for everyone’s sake, let’s hope their status is resolved soon.