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CEO Heather Reisman changed Indigo?s business model from just a seller of books to a 'cultural department store' that sells such items as reading lamps and decorative dishes. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)
CEO Heather Reisman changed Indigo?s business model from just a seller of books to a 'cultural department store' that sells such items as reading lamps and decorative dishes. (Kevin Van Paassen/Kevin Van Paassen/The Globe and Mail)

Indigo's Heather Reisman faces digital reckoning Add to ...

Heather Reisman is, as usual, clutching a new book in her hand. But this one isn't just another bestseller to tout as one of "Heather's Picks" on the shelves at Indigo Books & Music Inc. It's a book that may hold a blueprint to the chain's survival.

In her quest to reinvent her stores, Ms. Reisman is finding inspiration in the latest work by Howard Schultz, entitled Onward. In it, the Starbucks founder serves up a candid account of his shakeup of the flagging café chain, which lost its direction several years ago - and, in the process, lost some of its cachet with coffee drinkers.

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Starting in 2008, Mr. Schultz tore apart the business plan. Reinstalling himself as CEO, he closed 900 underperforming stores, fired thousands of employees, added new products and slowed dramatically the hunt for new locations. It worked: The customers eventually came back, and last year Starbucks enjoyed a sales boost of nearly 10 per cent, while more than doubling its profit.

Indigo has now arrived at its Starbucks moment, and Ms. Reisman knows it. The wave of digital adoption that swept through music and video retailing, decimating them, is now hitting book sellers, forcing them to redefine their business model. The writing is on the wall: In the U.S., Borders Group Inc., the second-largest book chain, is closing hundreds of stores and letting go thousands of employees after filing for bankruptcy protection in February; Barnes & Noble Inc., the world's top book retailer, has been searching for a suitor since last summer - unsuccessfully so far.

That the electronic revolution would hit the book business was inevitable, but it is coming faster than almost anyone expected, spurred on by the proliferation of devices that carry books, such as Amazon.com's Kindle and Apple Inc.'s iPad. In 2009, Ms. Reisman predicted that low-margin digital book sales would erode 15 per cent of her traditional book business within five years. Now she's predicting it will be 40 per cent.

Indigo, by virtue of its dominant market share in Canada - it has about half the book retailing business - remains healthier than its U.S. counterparts. But sales growth is sluggish and its 62-year-old founder is worried. Like Mr. Schultz, she is setting in motion a new plan.

"In the book industry, when you are in a situation where you know that 40 per cent of your business is going to go digital - you need to change," Ms. Reisman, chief executive officer at Indigo, said in an interview in her office, which she recently cleared of decorative penguin figures and other mementos in a nod to her company's transformation in the digital age.

Her road map for the country's largest book seller takes a detour from physical books. Indigo, like many book retailers worldwide, has a toehold in the digital books business, with a majority stake in Kobo. But in the stores, Ms. Reisman, who had a head start in envisaging Indigo as a "cultural department store," is betting more than ever on other categories. Indigo is stepping up its offerings of tableware, toys and tote bags - even putting comfy chairs back in the stores, in the hope of stemming the tide of consumers abandoning the retailer for Web-based alternatives.

Industry data signal that she has no choice. U.S. e-book sales, which stood at less than $1-billion (U.S.) in 2010, will nearly triple to $2.8-billion by 2015, according to Forrester Research estimates. For book retailers, which are quickly stocking up on non-book products, it means an annual 1.1 per cent drop in revenue over that period, says IBISWorld, another market researcher.

That may seem small, but it means a big hit to the bottom line in a business that already operates on microscopic profit margin. This year, U.S. book sellers' profits before tax will plummet to 1.3 per cent of revenue from 3.5 per cent in 2006, IBISWorld analyst Mary Gotaas projects. Margins are being pinched not only by stiff competition but also by heavy digital investments.

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