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THE BACKGROUND

Britons are becoming a nation of bookworms, with consumer spending on books increasing 33% in the past five years. However, the nature of book retailing in this country has altered dramatically during this time, with specialist retailers losing market share to supermarkets and online retailers. By undercutting specialist bookshops on price, multiples such as Tesco and Asda have gained significant ground in the sector, while the breadth, convenience and competitive pricing of online retailers such as Amazon.co.uk has been a major draw for consumers.

The combined books, music and video market in the UK was worth £8.1bn in 2003, a rise of 7.6% on 2002, according to Mintel. The book market alone was worth £4.5bn in 2003, according to the Publishers Association, taking in 609m books sold at an average price of £7.39, a rise of 8% on the previous year.

Despite this growth, the number of specialist book, newspaper and stationery outlets is declining, down 12.3% from 1997 to 2003, according to Mintel.

It expects this decline to continue because although the specialist channel remains the most important form of distribution for books - 44% of the population bought a book from a specialist shop in the year to March 2005 - and while the multiple specialists are expanding, independent bookshops are facing tough trading conditions.

Specialist booksellers, both multiples and independents, have evolved over the years to cultivate a shopping environment where browsing is encouraged and knowledgeable staff are keen to offer advice and expertise.

When it comes to the type of consumers most likely to buy and read books, women are heavier shoppers than men, while the 15- to 19-year-old and over-65 age groups are the least likely to buy books.

Women are the most likely to buy books from supermarkets (40% compared with 24% of men), simply adding the items to their grocery shopping. But the heaviest consumers of books still tend to buy from specialist shops.

Home shopping for books is on the rise, with 22% of consumers buying a book online in the 12 months to March 2005 compared with only 8% in 2002. The research suggests that this purchasing method is particularly popular with families, with the convenience factor being a big draw for busy parents.

Customer focus

The company leading the field in online bookselling is Amazon.co.uk, which is ranked as the UK's third-most visited bookseller (18% bought books from it in the year to March). It has become one of the most successful survivors of the dotcom boom by focusing heavily on customer satisfaction, building trust and loyalty in the process.

The company was created in 1995 and reached its first full-year profit in 2002. Its core market is books and music, although it has successfully added DVDs and videos, home electronics and photographic equipment, games and toys and even garden furniture, DIY and personal care products to its range. Founded in the US, Amazon made its presence felt in Europe in the late 90s, establishing a dedicated UK site after it acquired independent online retailer Bookpages in April 1998.

Rival bricks and mortar companies often form partnerships with Amazon because it is such a high-profile and well-established online retailer.

In the UK, Waterstone's' online presence is a co-branded website whose inventory, fulfilment and customer services are handled by Amazon.

Growth strategies

Waterstone's is the UK's biggest specialist book retailer, with 193 stores.

It appeals particularly to ABC1s. An EMI joint venture with US backers acquired Waterstone's from WH Smith in 1998, merging it with the 78-strong Dillons chain it bought (along with the HMV stores) in the same £300m deal. By 1999 all the Dillons stores had been rebranded as Waterstone's.

The expanded chain suffered disappointing sales in 2000, but by 2003/04 its financial performance was much improved.

Ottakar's, the second-placed specialist, was founded in 1987 and floated in 1998. Its founders are now looking to take it private again, having issued a profits warning in January this year and struggled with poor sales - even when the new Harry Potter was published.

The chain's strategy has been to open shops in mid-sized towns or city suburbs rather than open in the type of primary sites favoured by retailers such as Waterstone's.

WH Smith opened its first railway station newsstand in 1848 and has gone on to become the leading UK retailer of books, stationery, magazines and newspapers. But its broad positioning means it has struggled against both the supermarkets and more specialist retailers.

Its most recent results, for the six months to the end of February 2005, showed a marked improvement, with pre-tax profits of £61m compared with a £71m loss in 2004. Book sales dipped 3%, but the company avoided the previous year's unprofitable promotions.

Popular revival

The book market is in a reasonably good state, with the marked rise in book clubs turning reading into a more social pastime. Channel 4's Richard and Judy's Book Club, established a couple of years ago, can turn books into overnight hits. But while bestsellers such as the Harry Potter books can create a huge buzz and massive sales, the competition from so many outlets means that even new releases are often discounted immediately. Although Harry Potter and the Half-Blood Prince had a recommended retail price of £16.99, on its launch most stores were selling it at far lower prices, and in many cases making a loss on it.

Mintel predicts that book sales growth will be 'steady if unspectacular' in the coming years, with little difference in volume and value rates as prices remain under pressure. By 2009 books, newspapers and stationery retail sales are forecast to reach £8.8bn, compared with £7.7bn in 2004.

UK BOOKS, MUSIC AND VIDEO MARKET VALUE (pounds m) 2003 2001 1999 99-03 % chng 1 Books 3102 2701 2329 33.2 2 Music 2078 2130 1944 6.9 3 Video 2871 1955 1290 122.6 Total 8051 6786 5563 44.7 Source: ONS/BPI/BVA/Mintel BOOK, MUSIC AND VIDEO RETAILERS BY UK ADSPEND (£000) 2004 2000 00-04 % chng 1 Blockbuster 6759 10,704 -36.9 2 WH Smith 4928 3216 53.3 3 Virgin Megastores 3359 2181 54.0 4 HMV 2805 2371 18.3 5 Play.com 1831 96 1802.8 6 MVC 843 1811 -53.5 7 Amazon.co.uk 299 5744 -94.8 8 BCA 277 n/a n/a 9 Music Zone 268 67 297.0 10 Sanity 180 183 -1.8 11 Waterstone's 128 166 -22.7 12 Ottakar's 104 16 551.8 13 British Bookshops 82 n/a n/a 14 BOL 65 1984 -96.7 15 W&G Foyle 44 23 87.0 16 Borders/Books Etc 43 121 -64.2 17 Sussex Stationers 35 103 -65.6 18 Blackwells/Heffers 34 80 -57.4 19 Sendit.com 2 825 -99.7 Total 22,087 29,691 -25.6 Source: Nielsen Media Research/Mintel

ANALYST COMMENT - NICK GLADDING, SENIOR ANALYST, ECONOMICS AND FORECASTING, VERDICT RESEARCH

The once-sleepy retail backwater of bookselling has become the latest battlefront in a now familiar clash between specialist retailers, grocers and online retailers.

In times past, specialists could stay aloof from the pan-retail focus on price and volume growth, but with grocers and e-tailers setting the agenda on price in the £3.1bn book market, they have been forced to become more customer-focused.

Bookshop multiples have scaled up their operations, introduced sophisticated stock management systems, rolled out cafes to lengthen customer visits and become much savvier about promotions.

To date, grocers' participation in the sector has been fairly modest.

With demand split across such a wide range of titles, books are a less attractive category to them than music and video, where demand is more focused. Grocers have gained only a 7% share of the books market, compared with 23% in music and video. But with publishers eager to boost profits by focusing marketing spend on titles with broad appeal, there are opportunities for grocers.

Though the gain from books for grocers is relatively small, the impact on specialists is far-reaching. Every shopper buying Harry Potter at a grocer denies specialists potential sales of additional full-price books at the time of purchase and a rare chance to boost profits outside of the key build-up to Christmas.

The multiple grocers are set to step up their bookselling operations through the opening of standalone non-food stores such as Asda Living and Tesco Homeplus.

While HMV and Borders have sufficient buying power and destination status to counter this threat, smaller specialists such as Ottakar's will struggle to compete.