How Indigo plans to become the world’s first “cultural department store”

IndigoHomeThe lineup outside Yorkdale Shopping Centre’s Indigo store is a writhing mass of Madisons and McKennas. The store isn’t open yet—at 8:20 on a Saturday morning in May, nothing at the Toronto mall is—but hundreds of girls and their parents have been here since 5 a.m., each hoping for a prize as magical as one of Willy Wonka’s golden tickets: a pass to get into the opening of Indigo’s new American Girl doll boutique.

McKenna Roach, 6, dragged herself from bed at 4 a.m. so she could be among the first to buy one of the $125 dolls. She is hoping for the version called McKenna (American Girl’s 2012 Girl of the Year), naturally, but she knows she is vying for a piece of one of North America’s hottest toy properties. Already well schooled in the rules of supply and demand, she is prepared to take what she can get.

At 9 a.m. a cheer rings through the crowd as the first group of ticket holders moves up the escalator toward the second-floor boutique. They aren’t getting in yet, but they’re close enough to see it.

Heather Reisman needs crowds like this. Desperately. The CEO of Indigo, the Toronto-based retail chain that built its business selling books, has been working frenetically to shore up plummeting sales: The company’s revenues have dropped for three consecutive years, with the most recent fiscal year ending in a $31-million net loss on revenues of $868 million. When she launched the company in 1996, Reisman called books the “heart and soul” of the business. But times have changed, and while books may be the heart and soul of the chains, they’re no longer the bread and butter.

To bolster sales, Reisman has been working to reinvent Indigo, which operates 92 superstores and 131 small-format stores under the Indigo banner, as well as Chapters, Coles, Indigospirit, SmithBooks and The Book Company. Over the past several years, the company has been quietly introducing stationery and gift items, but in the last year, Reisman has begun moving far more quickly to fill the stores with non-book items, expand its toy department and introduce exclusive lines like American Girl. (The chain opened its third doll boutique at Ottawa’s Rideau Street Chapters this month and plans to roll out up to 15 in total across the country.) Customers can still pop in to thumb through the latest Donna Tartt or Stephen King novel, but these days Indigo shoppers are just as likely to pick up a faux-fur-covered hot water bottle, some seasonal dinnerware or a cheerful print to hang in their family room, to name just a few of the new, affordably aspirational houseware items the retailer now offers. Reisman has taken to referring to Indigo as the world’s first “cultural department store,” a name that helpfully underscores the Oprah-esque lifestyle the chain has begun pushing: safe, tasteful, stylish—and, of course, well read.

At its annual general meeting in June, Reisman divided the company’s history into three distinct eras: T1 was Indigo’s initial, book-focused phase, which began when it opened; T2, a five-year transition phase, beginning around 2010, that saw the chain move into e-reading and the digital world; and T3, which marks the start of a “whole new Indigo.” T3 is now arriving, she said, and Indigo is heading into “true takeoff mode.” If it soars, Reisman will have transformed her flagging bookstores into a new commercial niche that some industry observers call a retailing first. What people who scoff at the candles and throws miss is that Reisman doesn’t really sell books. She sells taste.

The cash-strapped chain is facing some mighty headwinds. Indigo closed three high-profile stores in Toronto this spring, including the city’s iconic World’s Biggest Bookstore, which it had inherited when it purchased rival Chapters in 2001. Those that remain are devoting fewer square feet to books and more to the company’s eclectic mix of lifestyle offerings. Books still represent two-thirds of Indigo’s revenues, but sales have been trending downward over the past few years (unit sales were down by more than 3% in 2013, although they saw a small, unexplained uptick last quarter), as retailers across Canada experience what Reisman described as “meaningful sales declines.”

Dig into Indigo’s recent financial statements, and there are also signs that the transformation Reisman initiated five years ago is beginning to pay off. Revenues from general merchandise have risen by about $33 million over the past year. With the help of a certain sizzling-hot toy property and the chain’s steady move into a dizzying array of non-book items, same-store sales were up 8.3% at the company’s superstores during the first quarter of this fiscal year. (Things are going less smoothly at the small-format stores, such as Coles, where it may be difficult to squeeze in a whole department store. Same-store sales were up just 1.9%, following a 5% overall decline the year before.) Although Indigo won’t say what its target books to non-books product ratio is, it’s clear they haven’t reached it yet.

The T3 rollout isn’t just about inventory selection. The chain is also experimenting with new store layouts and features at a pair of test stores in London, Ont., and Calgary’s Signal Hill neighbourhood (see sidebar), though Reisman won’t say when changes will be carried out across the country.

Publishers don’t much like the changes, though privately, some concede that Indigo needed to do something to fight back against online behemoth Amazon. Reisman acknowledged at the annual meeting that some customers initially complained when the chain began introducing items like candles into the blend. “They asked us, ‘What are you doing to our bookstores?’” But ultimately, she says, response has been positive—the broader assortment reflects what most of the customer base wants. “Are books going away? No,” she said in an interview with Canadian Business. “Books will always be a significant part of the mix, but just what the mix is…. We move where the customer is.”

In fact, Indigo has never really been exclusively about books. The chain, which used to be called Indigo, Books, Music & More, always sold a decent selection of CDs, as well as paper products and a small array of tasteful tchotchkes. It even made an early stab at diversification in 2000, when it bought Cruickshank’s, a Toronto-based garden mail-order business. That acquisition quickly fizzled, and many in the industry wondered what a bookstore was doing selling tulip bulbs and trowels. So what’s different now? And why do many think the company just might succeed this time?

Back in the 1990s, when mega-retailers like Borders and Barnes & Noble were launching superstores across the United States, the concept was simple: Take a massive space and fill it with tens of thousands of books. Purchasing power and economies of scale would allow you to undercut the competition many times over. But things have changed, and cavernous retail outlets with single product lines are disappearing. Many smart retailers are beginning to act more like department stores—or even mini-malls. While 10 years ago, a 1,800-square-foot in-store doll boutique might have seemed an incongruous addition to a bookstore, the shop-within-a-shop model has become a popular (and profitable) retail trend that allows one brand to leverage the appeal of another. Chains like Macy’s, Holt Renfrew, Hudson’s Bay and Urban Outfitters have all moved to feature branded in-store boutiques: Urban Outfitter’s new Herald Square in Manhattan is a “lifestyle centre” that comprises dozens of stores-within-stores, as well as a coffee shop and a full-service beauty salon. Indigo has taken the same approach with its in-house IndigoTech outlets, which it began rolling out last summer, and while the company won’t reveal the terms of its agreements with Apple (one of its tech suppliers) or American Girl, marketing experts say the partnerships offer multiple benefits. One of those advantages could be cost savings. Every partnership is structured differently, but a popular model is to rent or sublet floor space to another retailer. “They’ve got big stores, and they’ve got to fill those stores as more sales move online,” says retail analyst Jan Rogers Kniffen. A second benefit is the halo hot new properties bring to the host store. “They give consumers more reasons to visit the store.” And these days, traditional bricks-and-mortar retailers need to give customers all the reasons they can find.

IndigoKidsTrips to malls (where many Indigo stores are situated) decreased by 14% during the fourth quarter of 2013, Kniffen says, and the average number of stores visited dropped from five to three. (The figures are American, but Kniffen says the Canadian environment is comparable.) Chains like Indigo rely on in-store amenities like its ubiquitous Starbucks counters and unique product lines to motivate customers to make the trek.

Then they need to get them to linger. In today’s challenging market, successful retailing is “all about dwell time and how to increase it,” says Kniffen. “That’s what Urban Outfitters is all about.” The American chain’s new location in Brooklyn’s Williamsburg neighbourhood pulls out all the stops to keep visitors on the premises for as long as possible, offering live music performances and even dinner—the top floor of the store houses a full-service restaurant.

In fact, Indigo has already learned a thing or two from the popular U.S. chain: In 2011, it lured Urban Outfitters’ global brand president, Tedford Marlow, to preside over Indigo’s transition to “the world’s first lifestyle store for booklovers.” During Marlow’s brief tenure at Indigo—he returned to Urban Outfitters to become CEO in 2012—he introduced a range of lifestyle products.

The savviest retailers, however, do more than simply tweak inventory and retail environments. They create a sense of urgency around their products by manufacturing “moments” that drive traffic. Indigo hosts regular in-store events—this month’s hottest tickets include a couple of appearances by Liberal leader Justin Trudeau—and plans its American Girl boutique openings with precise timing to encourage customers to schedule a shopping trip rather than simply waiting until the next time they’re at the mall. (At the Yorkdale opening, wristbands were given out at 7 a.m.; mall doors opened two hours earlier.) The chain also staged an Indigo­Kids “Sands Alive Tour” at 10 stores across the country this summer, encouraging children to have fun in a giant sandbox to boost sales of a creative-play product.

Kyle Murray, a marketing professor at the University of Alberta, says Indigo is wise to expand in the children’s category, since it has always been a driver for the chain. Most people don’t buy kids’ books online, he says. They’d rather flip through them first, to see the artwork or to make sure the content is appropriate. “Once you get them into the store, you can cross-sell them other products,” Murray says. And if a customer is looking at some of Indigo’s growing inventory of toys, which typically offer retailers a relatively slim margin of about 30% (compared with the 40% to 50% that books offer), store staff can certainly point them in the direction of the pricier American Girl dolls.

The gift niche also represents a unique market opportunity, Murray says. “I don’t think there’s another retailer operating in that space in Canada.” Like kids’ books, gifts tend to drive people into stores—you may not know what you want to give as a hostess gift until you see it, but you want to go somewhere with a range of tasteful options. “You need to trust a gift store,” he says. “You don’t have much time—you probably need whatever you’re buying tomorrow or tonight—and you want to know that you can get something tasteful that won’t embarrass you.”

The books Indigo stocks offer a good taste guarantee. You might only buy a box of gingerbread thins to bring to a dinner party, but you bought it from a store that also sells pretty cushions and throws, alongside titles by Thomas Piketty and Caitlin Moran. And while leveraging that cultural currency to sell more salted caramels seems savvy, the transformation comes with a fresh set of challenges.

“You have to start acting like a large fashion chain,” says Murray. “You have to make bets: ‘What do I need to have on my shelves that everyone’s going to want this season, that they don’t know they want yet?’” Anticipating hot gift items is trickier than predicting whether the next Margaret Atwood book is likely to be a bestseller, and lead times for purchasing are much longer in the gift sector, making it more difficult to reorder.

Saffron Beckwith, president of Ampersand Inc., a Canadian book and gift sales group, says she’s seen that strategy backfire already, citing a stylish dish designed for baking brie that took off at Indigo about four years ago. At $20, it sold out quickly, and the company wasn’t able to restock it in time for the rest of the Christmas season. Beckwith spotted it in the stores the following year, piled up in massive heaps and discounted. Unlike books, which can be shipped back to publishers if they aren’t sold, gift inventory is non-returnable. The upside is higher profits: Beckwith cites margins as high as 65%, in the case of one gift supplier she knows.

Broadening the chain’s inventory also complicates its supply chain: The move into gifts requires an expanded buying team with different expertise, and it means dealing with a host of new, likely more decentralized suppliers—many of which are located in the U.S. and have to be paid in increasingly expensive U.S. dollars. “They wouldn’t have been dealing with nearly as many suppliers when they were focusing on books, CDs and DVDs,” says Mark Thomas, who oversees the supply-chain and logistics management program at York University’s Schulich School of Business. And the broader range of items aren’t uniformly sized the way books and CDs are, which complicates warehousing, distribution and order fulfilment. “Every time you add an item, you have to handle it differently,” Thomas says.

And even with all that sorted, Indigo still has Amazon to contend with. The Canadian chain might sell 10 types of candles in its stores, but online it features 242., meanwhile, lists 38,357 candles in its Home & Kitchen section. Indigo has fought to hold its own against the online giant by expanding its web presence—it revamped its site in 2013 to make shopping easier, and last fall, it launched a mobile app.

Ultimately, the key to Indigo’s success will be in finding ways not to go head-to-head with Amazon. And exclusive deals with brands like American Girl and Poppin (a supplier of fun, colourful office products) are a way to do that. At one point, before Indigo sold its Kobo e-reader business to Japan’s Rakuten Inc. in 2012, the company was on a direct collision course with Amazon. Many saw the US$315 million windfall as a win, but as a consequence, Indigo faces diminished e-reading revenues.

“I think Indigo’s in a good spot,” says Dante Pirouz, a marketing professor at Western University’s Ivey Business School, who compares Indigo to smart, stylish U.S. retailers like Anthropologie and Williams-Sonoma. “They’re enticing me to come in more often than I would for a book, because I never know what they’re going to have. That’s what Target used to be about—you’d go in to see what’s hot, what’s cute.”

Analysts like Bob Gibson also like what they’re seeing: “The big win in FY2014 was the 15.8% jump in general merchandise sales to $240.2 million,” Gibson wrote in a recent report for Octagon Capital, forecasting continued double-digit growth at the chain. As for the American Girl in-store boutiques, Gibson estimates they could add $20 million to $30 million in incremental revenue within the next two years. (U.S. sales of American Girl were US$632 million last year.) “Indigo is gradually weaning off all that square footage for books,” Gibson said in an interview. “And they’re replacing it with stuff that’s going to sell very well.”

According to Pirouz, it’s rare to see Canadian brands outpacing international competition. “I love that they’re being risk takers and trying these new formats,” she says. “That’s where retailers have to be. If they keep innovating, they could do it.”

This article originally appeared in Canadian Business.

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