Waterstone's looks to a local future

Its new Russian owner has deep pockets and a passion for books, but will that be enough? Nick Clark reports

The received wisdom is that the digital age is bad news for the humble high street book store.

But one wealthy investor is betting that a culture overhaul of the largest chain in the UK will bring book lovers flocking back, whether sales of e-books soar or not.

HMV yesterday announced the sale of Waterstone's Group, the chain it bought more than a decade ago, in a deal worth £53m. The buyer was A&NN Group, an investment operation owned by the Russian billionaire Alexander Mamut who, according to people close to him, has a "passion for books". He has a publishing house in Russia as well as a range of business interests including finance, the internet and retail.

Mr Mamut hailed the "exciting" opportunity to reinvigorate Waterstone's, and believes the correct strategy is to remodel it as "a regional and local community orientated bookseller". To do this, he has called on someone who shares his passion for books and has strong experience in creating stores just the way the Russian imagined.

Waterstone's new managing director is James Daunt, the former JP Morgan investment banker who set up Daunt Books in 1990. He is preparing to launch a comprehensive review of the business and present a plan to take the 296-strong chain forward.

While he was reluctant to pre-judge the results of the review, the drive towards turning Waterstone's back into a local store will underlie its transformation. Mr Daunt said: "All book shops are different. The good ones are those that reflect their book-reading public. In Daunt Books' stores there are some common themes but each is different, selling different books." He pointed to the Hatchards store in London's Piccadilly – owned by Waterstone's – as an example of what a good book shop can be.

He said three factors were crucial in establishing a successful bookshop. "First of all you need good books, the right ones and enough of them. You need to establish a good ambience and finally you need really good staff."

Benedict Evans, an analyst at Enders Analysis, backed Mr Daunt's appointment, saying: "He is a great bookseller and Waterstone's has not been a great bookshop in many years." But he warned that the new managing director could struggle to translate his independent chain's success to the largest player in the UK. "You can't turn all 296 into a Daunt-style store," he said

This leads to the question whether Waterstone's is simply too large. "The current number of stores is almost certainly too high," Mr Evans said. "Would 200 be sustainable, or even 100? I don't know, but certainly it will have to be lower than the current levels."

Waterstone's was set up in 1982 by Tim Waterstone. The first shop was on Old Brompton Road in London. It was hailed as revitalising demand for books, especially in provincial towns, as an alternative to WH Smith. Just over a decade later that rival chain bought it. In 1998 it changed hands again as HMV bought the group in a deal worth £300m. Mr Waterstone has repeatedly tried to buy back the chain he founded. An attempt in 2006 collapsed after the two sides failed to agree terms. He was also believed to be involved in the deal with Mr Mamut, although the Russian said yesterday Mr Waterstone would not be involved in the new management team.

Somewhere along the way Waterstone's began to struggle as it tried to diversify its operations. "One of the mis-steps Waterstone's made was that it tried to shore up its revenues with ancillary products that ended up diluting its attractiveness as a bookstore," Mr Evans said. "The plan will be to strip it back, although the execution will be hard."

"There is a scale issue for bookshops. The market will get smaller. In the US, Barnes & Noble benefited from being the last man standing, but that effect wore off as the market declined," he said. Waterstone's became UK's last major book chain following Borders' collapse last year.

The takeover comes as the industry is in great flux, with the rise of Amazon ande-books above all.

While Waterstone's does have a digital operation, in partnership with Sony, selling over a million e-books during its last financial year. Yet it has been dismissed as "poorly executed" by industry experts. Mr Daunt is certain the chain will have an electronic strategy, although it is too early to outline what it will be. "We are in the business of selling reading," he said.

Mr Evans said: "While the market for e-books is growing very fast, the question is how far will it go?"

Despite these challenges, Mr Evans believes there is still a strong need for bookshops on the high street. He said: "Buying books is a leisure activity. It's not just about price and selection and it's more than having a warehouse and a cash register. There is a long-term future in book retailing."

As he prepares for the task ahead, Mr Daunt agreed: "With commitment and investment, Waterstone's should have a glorious and a long future."