Helen Edwards on Branding: Waterstone's: labour of love

Helen Edwards on branding
Helen Edwards on branding

Russian oligarch Alexander Mamut must not let his heart rule his head in his pursuit of Waterstone's.

According to The Times Business section last week, a Russian oligarch is 'chasing Waterstone's for love'. Alexander Mamut, 51, made his estimated $1bn fortune as a banker during the Boris Yeltsin era. Two years ago, though, he declared that he is 'not in business only for money', and proved it with a book-retailing dalliance in Russia, which failed.

Undaunted, he has recently taken a 6% stake in Waterstone's parent company, HMV, with a view to prising the bookseller away. It won't be easy. Simon Fox, chief executive of HMV, has vowed that no part will be spun off and that if anyone desires Waterstone's, they will have to stump up for the entire sickly group. Such is the price of love.

If the youthful-looking, blue-eyed, tousle-haired billionaire Mamut makes for a creditable Romeo, Waterstone's is a Juliet well past her best. The business, founded by Tim Waterstone in 1982, with its impassioned belief in bringing good literature to the high street, and its knowledgeable, bookish assistants, has aged into a confused purveyor of gift-wrap, cuddly toys and greetings cards, with books seemingly tacked on as a 3-for-2 afterthought.

It gets even harder to see the attraction when you take a closer look at the market context. Waterstone's is assailed on three sides by the forces that define modern bookselling. The mass market is served by the heavy discounting of best-sellers in supermarkets; Amazon is the natural successor to the 'long-tail' stock policy that once made Waterstone's special; meanwhile, e-readers put books into people's hands with an immediacy that cannot be matched by any physical retailer.

There are still enthusiasts who love to browse through real books on real shelves, but boutique retailers, such as Daunt in London, occupy that space more credibly than Waterstone's. Even its eponymous founder concedes from the sidelines that it has expended too much of its resources 'chasing the mass market'.

All the evidence appears to point one way: the large-space, high-street, general bookseller is a defunct business model. Borders, which has a similar positioning to Waterstone's in the US, is expected to file for bankruptcy, having posted losses of $800m since 2006.

Still, if passion can raise a brand from nothing to start with - which was certainly true for Waterstone's - why can't more of the same rescue it from its difficulties? The answer is a bit like why it's harder to revive an ailing marriage than to ignite a new love affair: baggage.

For Waterstone's to bloom again, it will need to accelerate its programme of scaling back its retail space and opt for smaller, more specialised outlets. Its hands are tied, though, by penal long-term leasehold obligations.

Then there are the employees, whose commitment is so vital in a service business. When a business is young, it's possible to win them over with passion and fine words, despite modest wages. Years down the line, with gripes, redundancies and management insensitivity all part of the messy shared history, it's a different matter. Many Waterstone's employees are on the minimum wage, and it may take money, not just love, to motivate them again.

If Mamut proves to be the banker that fails to balance the books, he will be hard-pushed to find an exit strategy. Analysts believe there is no scope for a trade buyer and that an IPO will be out of the question due to Waterstone's limited scope for growth. Parting will not be such sweet sorrow.

Helen Edwards has a PhD in marketing, an MBA from London Business School and is a partner at Passionbrand, where she works with some of the world's biggest advertisers

30 SECONDS ON ... brands sustained for love

Love, pride, arrogance - call it what you like, but there are plenty of examples of brands where investor support owes more to sentiment than sense.

- Rupert Murdoch has long supported loss-making newspaper The Australian. Tim Luckhurst, professor of journalism at the University of Kent, claims this is because Murdoch cares about quality journalism. Nostalgia may also play a part - The Australian was one of his first newspaper launches.

- Last year, the loss-making Scandinavian Airline SAS received 600m kroner of 'national pride' state funding from Norway, Sweden and Denmark. Analysts claimed it would have gone bankrupt without this.

- Michael Birch, former owner of social networking site Bebo, recently reinvested in the failing company, after it was offloaded by AOL for about 2% of what it had paid for it. Chief executive Adam Levin said: 'It was his baby at one point and he cares a lot about it.'

- Hugh Hefner, founder of Playboy, let heart rule head last year when he made an offer to buy out the remaining listed shares in the ailing US adult-entertainment firm.

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