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Indigo's Heather ReismanPeter Power/The Globe and Mail

When Heather Reisman made her 2001 industry-transforming acquisition of Canada's largest bookseller, her challenge was to stem losses at Chapters and Indigo stores by paring costs and getting the right books onto shelves.

Now, Indigo Books & Music Inc. is in the black, although suffering along with other retailers. But Ms. Reisman faces what could be a bigger threat in the form of Kindle and other electronic reading devices - e-readers - that are quickly catching on among book buyers, especially in the United States.

Earlier this year, Indigo's chief executive officer responded with the retailer's own digital reading service called Shortcovers, which can be used on smart phones and other devices.

But that won't be enough for Indigo to head off what Ms. Reisman figures will be a 15-per-cent erosion in its book sales in the next five years, lost to the digital world.

"All content wants to be digital, whether it's music or newspapers or books or blogs," Ms. Reisman says. "Our business will be affected, as well as all other content businesses."

To respond, Indigo is becoming a bigger destination for children, teenagers and their parents, stocking more toys, teen-oriented books and products, and more customized merchandise to appeal to various markets.

Ms. Reisman is also adding armchairs and bean bags to keep customers lingering in the stores longer, and purchasing more. (Several years ago, she replaced comfortable sofas with hard chairs, because the couches were messy.) It's essential that Ms. Reisman move quickly in the rapidly changing sector. In the United States, where the market is more competitive, booksellers are suffering sharp declines in store traffic and sales, squeezed by recession-weary consumers who are turning more to e-readers.

E-readers make up just 2 per cent of U.S. book sales, but that's up so far this year from less than 1 per cent of the $24.3-billion (U.S.) of sales in 2008, according to the Association of American Publishers.

Borders Group Inc. , the second-largest U.S. bookseller, is under pressure from its investors to reverse its flagging fortunes; Barnes & Noble Inc. , the top chain which is faring a bit better, is preparing for the digital age with the recent acquisition of a leading e-books retailer and plans to launch a new e-bookstore this year.

The chains are keeping an eye on Inc. and its increasingly popular Kindle e-reader - which is not yet sold in Canada - and Google Inc. and its aggressive foray into the electronic book world.

"For the legacy booksellers that own lots of real estate, this is the beginning of a very difficult decline for their industry," says Sarah Rotman Epps, an analyst at Forrester Research in Cambridge, Mass. "We've seen how in other industries owning bricks-and-mortar stores becomes a liability rather than an asset."

Indigo is in a much stronger position in Canada, where it is by far the largest traditional book player. Still, Ms. Reisman knows she can't stand still.

She started by wooing children and their parents with toys about four years ago, after her research showed that 40 per cent of Indigo customers were adults with kids. Parents wanted educational and stimulating toys, not video games or battery-powered cars. (The chain promptly dropped in-store DVD monitors playing Dora the Explore r, after parents gave them a thumbs-down in a test run.) Ms. Reisman worried initially that the toys might cannibalize Indigo's book sales, but in fact the stores with toys enjoy stronger book sales than those without, says chief merchant Joel Silver. Customers tend to stay longer in outlets with toys, and wander over to the books.

The toy business is getting such a bounce that it will be expanded to all 90 superstores in the next two or three years, from about 15 today, Ms. Reisman says. By then, Indigo intends to become the country's second-largest toy specialty retailer, after Toys "R" Us.

Beyond children, Ms. Reisman is chasing the teen crowd.

"We always thought that teens have a lot to do that doesn't include reading books," she says.

"Well, it turns out teens love to be in our stores. Our teen business has been on fire."

She's cashing in on publishers' recent push to produce books catering to teens such as the Twilight teen-vampire series, which get a buzz and become part of youth culture.

Indigo is trying to keep teenagers coming back by putting bean bag chairs close to the teen sections and touting "mother-and-daughter reads." Other initiatives, such as a test later this year of a photo studio that will allow customers to custom-design their own books, are also designed to draw teens to Indigo.

The efforts are paying off. Teen sales have jumped more than 200 per cent over the past five years, Mr. Silver says.

Other products are being customized to local customers' tastes. About 30 per cent of Indigo's book offerings are chosen for their local appeal, he says. Heavy investments in supply-chain technology have allowed staff to track closely shifting customer demand.

"We want customers to feel that every single store is idiosyncratically merchandised to them," Ms. Reisman says, adding: "The books that are bought in the downtown area are not bought out in the suburbs."

And she's expanding her already significant gift section with forays into the eco-world, along with a completely new lifestyle chain of stores called Pistachio, which sell nothing but environmentally friendly paper and beauty products.

Gross profit margins of some gift items, such as stationery, can be up to 20 per cent more than those of books. In August, Pistachio and Indigo will roll out green back-to-school gear. "All regular things you buy at Grand & Toy, priced like Grand & Toy," Ms. Reisman says.

With the expansion into non-book segments, it may look like there are fewer books on Indigo shelves. But there are more titles than ever, as a more efficient supply chain allows the stores to stock just 10 of each title, compared with 40 five years ago, she says. Shelves are now replenished every two days, while in the past, restocking was erratic.

"Books are not disappearing in any way, shape or form," Ms. Reisman says. "Our job is to make sure our assortment in our stores is so compelling that people continue to come."