Indigo Books & Music Inc. Business Information, Profile, and History

Company Perspectives:

We said in the very beginning that we wanted to create a true booklovers' haven--a place to discover books, music, and more that might, in the rush of life, have gone undiscovered. A place that reflects the best of a small proprietor-run shop bundled with the selection of a true emporium.

History of Indigo Books & Music Inc.

Indigo Books & Music Inc. is the largest retailer of books in Canada. The company's stores, operating under the names Indigo Books, Music & More, The World's Biggest Bookstore, and Coles, are located throughout Canada. Indigo operates 88 superstores and 179 mall stores. Indigo also maintains an online presence through the Web site chapters.indigo.ca, which sells books, gifts, videos, and DVDs.

Origins

During the 1990s, the business of selling books in Canada changed dramatically. The number of independent bookstores dwindled, their presence diminished by the rise of large chains of superstores designed to eradicate competitors. Within the space of a few short years, two retail giants emerged as the only contenders for market dominance. On one side stood Larry Stevenson, the chief executive officer of Chapters, Inc., Canada's largest retailer of books. On the other side, Heather Reisman grappled with Stevenson, using her company, Indigo, to fight for market supremacy. The effect of their battle on the industry was profound. John Lorinc, a reporter for the Report on Business Magazine, gave his assessment of the aftermath of fight between Stevenson and Reisman in the October 2002 issue of the magazine. In reference to Canada's retail book industry, Lorinc wrote that "no other sizable developed country has let ownership of bookselling become so concentrated." The industry was, he added, "The closest thing to an unregulated monopoly in Canada's private sector."

Reisman, the principal agent of change in the process of industry consolidation, began her professional career as a social worker before entering the corporate world. She co-founded a management consulting firm, Paradigm Consulting, in 1979, earning the esteem and making the contacts that eventually put her in charge of a soft drink bottling company named Cott Corporation. At Cott, Reisman solidified her reputation, leading the company toward double-digit annual growth during the early 1990s. Her success at Cott was convincing, but in the midst of the rousing financial growth she made an error that cut short her career at the bottling company. In 1993, Reisman made a profit of C$1.6 million selling Cott stock options without filing the required insider trading documents within the ten-day period mandated by the Canadian government. Reisman acknowledged she was several weeks late in filling the documents, attributing the oversight to a back injury that kept her away from her office. Cott's chairman, Gerry Pencer, responded to the situation by hiring another executive in 1994, Dave Nichol, that cast Reisman to the sidelines. Reisman left Cott and re-emerged in a different industry, endeavoring to take on the retail market for books.

Across the border, a giant book retailer named Borders was enjoying the rewards of market preeminence. Reisman hoped to graft the U.S. success of Borders onto a Canadian company and grab hold of the industry. She enlisted the help of partners, convincing coffee mogul Michael Bregman, owner of Second Cup, and a book retailer in Toronto named Edward Borins to back her entry into the Canadian book-selling market. The plan was to combine the reputations and the finances of the trio, underpinned by Borders' well-regarded ordering technology, and invade Canada through a minority stake in Borders. The plan might have worked, but when a corporate consultant and financier named Larry Stevenson entered the market with the same intention as Reisman, her plan unraveled.

Stevenson enlisted the support of David Peterson, the former minister of Ontario, naming him chairman of his company, Chapters, Inc. Canada's federal government generally frowned upon the idea of a foreign company insinuating itself into Canadian culture, a mindset that presumably worked in Stevenson's favor, or at least one that Stevenson attempted to exploit. Reisman's venture failed to get off the ground, its launch aborted by the greater appeal of the Peterson-led Chapters in the Canadian government's eyes. Reisman retreated, but she would be back. Meanwhile, Stevenson was able to actualize on the dream both he and Reisman shared.

The beginning of Stevenson's empire was formed through the acquisition and merger of the two largest bookstore chains in Canada, Coles and SmithBooks. Coles was founded by brothers Carl and Jack Cole, who opened their first bookstore in Toronto in 1940. In subsequent years, Coles expanded across Canada, opening one of the first book superstores, a 67,000-square-foot retail location called The World's Biggest Bookstore that opened in Toronto in 1980. Under the ownership of Southam Inc., the Coles chain increased its physical stature during the 1980s, establishing a presence in every province in Canada. In 1994, a company named Pathfinder Capital acquired the Coles chain from Southam, the same year it acquired Canada's other large bookstore chain, SmithBooks. Like Coles, SmithBooks began its existence in Toronto, where the first store, operating under the name W.H. Smith, opened in 1950. Under the ownership of a British company, the bookstore enterprise expanded across Canada. In 1985, Classic Bookshops became a part of the chain. In 1989, Federal Industries acquired the chain and changed its name to SmithBooks. In April 1995, Stevenson completed the merger of SmithBooks and Coles. Several months later, in November, his new company, Chapters, Inc., opened its first two book superstores. Ranking as the largest book retailer in Canada, Stevenson's stores operated under the names Chapters, Coles, SmithBooks, and The World's Biggest Bookstore.

With Stevenson's bid for market dominance up and running, Reisman plotted her entry into the fray. In mid-1996, she began gathering the elements that would form Indigo. She devised a retail concept that revolved around large stores that offered superior service, gifts, and food. She raised C$25 million and hired book-industry veterans, designers, and architects. The first store, operating under the name Indigo Books, Music & More, opened in Burlington, Ontario, on September 4, 1997.

The concept that debuted in Burlington differed from Stevenson's format. Instead of the mass-market strategy employed by Chapters, Reisman focused on categories consistent with Indigo's orientation. Her buyers were instructed to focus on several departments, including travel, home improvement and gardening, art, and trade fiction. In contrast, mass-market paperbacks represented a sizable percentage of the merchandise mix at Chapters. Although both chains qualified as superstores, Reisman's units reflected more of a hybrid concept that combined the large-scale retail format of a superstore with the qualities of an upscale independent bookstore. In the first store in Burlington and in the additional stores that followed, Reisman created highly visible sections for gifts and home décor items that were intended to complement the store's gift and lifestyle books. Indigo stores contained self-operated cafes, upscale furnishings, and architectural details such as portico windows and spiral staircases.

Expansion Begins in the Late 1990s

For the last three years of the 1990s, the battleground was set as Reisman squared off with Stevenson. The battle was at times personal--there were lawsuits between Reisman and Stevenson--and it was fought on more than one front. Stevenson launched a Chapters Web site, tailored after the enormously successful Amazon.com, and Reisman put Indigo on the Web, launching a site in late 1998 and thoroughly revamping it in mid-1999. In terms of store counts, Chapters was by far the larger of the two chains, but Reisman's superstores carved their own niche in the market, drawing business and accolades because of their unique format. Encouraged by her success, Reisman expanded aggressively in 1999, doubling the number of Indigo stores in operation. During the fall of 1999 alone, the company opened six new outlets, including several in highly prominent locations such as Toronto's Eaton Centre and Yorkdale malls. Also, in June 1999, the company opened a new warehouse, establishing the 100,000-square-foot facility north of Toronto.

By the end of the 1990s, there were 14 Indigo superstores in operation. Industry observers marveled at the speed with which Reisman had established Indigo as a recognizable brand. Some pundits speculated that the company might convert to public ownership, but Reisman had other plans. Although she was renowned for avoiding publicity, Reisman's epiphany, once it was revealed to the public, would spark a storm of media attention.

Merger with Chapters in 2001

The already heated battle between Reisman and Stevenson became more intense when Reisman announced she intended to acquire Chapters. Reisman launched her bid in November 2000, and she directed it at Chapters shareholders. In her unsolicited offer, Reisman proposed to purchase 4.9 million common shares from Chapters shareholders for C$62.4 million. At the time of the proposal, Indigo operated 15 superstores. Chapters operated 77 superstores, in addition to 240 traditional bookstores that operated under the names Coles, SmithBooks, and Book Company. To realize her objective, Reisman formed Trilogy Retail Enterprises L.P. with her husband, famed financier and takeover specialist, Gerald Schwartz.

The proposed hostile takeover of Chapters grabbed the attention of both industry observers and those outside the industry. Many industry pundits considered ownership in the book retail industry to be exceptionally concentrated before Reisman's bid was announced. The union of the largest and second-largest retailers, if successful, promised to create a new breed of market giant. Chapters' board of directors was unequivocally against the deal, referring to Trilogy's attempt to secure 50.1 percent of Chapters' shares as "totally inadequate and unacceptable," adding that the C$62.4 million offer was "sadly insufficient," as quoted in the December 4, 2000 issue of Publishers Weekly. The final say on the matter was in the hands of Chapters shareholders, however. The company's shareholders, despite the protestations of Chapters' board of directors, accepted Trilogy's offer of C$17 per share. By February 2001, Trilogy owned more than 8.5 million Chapters shares, giving the Reisman-Schwartz entity control over more than 70 percent of Stevenson's Chapters. In August 2001, Indigo Books, Music & More merged with Chapters, Inc., forming the largest book retailer in the country, Indigo Books & Music Inc.

Reisman completed the year by adding another of Stevenson's companies to Indigo's fold. In October 2001, minority shareholders in Chapters Online Inc., a separate company from Chapters, Inc., voted by an overwhelming majority to a takeover by Indigo. A scant four years after beginning to build her own retail empire, Reisman had another, much larger empire. The combination of the two held an exceptionally tight grip on the business of selling books in Canada.

In the wake of merger, Indigo held sway over the book retail industry in Canada. In the company's fiscal year ended in March 2002, revenues climbed 7.2 percent to C$735.5 million. The company, according to Reisman, who now presided over a publicly traded company, was 12 months into a two-year turnaround program, as it sought to integrate the operations of two large retail enterprises. The company's 2002 fiscal year ended with a C$47.9 million loss, evidence of the struggle to transform Indigo and Chapters into an efficient and profitable whole. When the financial figures for 2003 were announced, there were signs that the process of integration was progressing well. For the year, revenues climbed nearly 6 percent to C$779.2 million. More reassuring, the company stopped losing money, posting C$1.4 million in net income. In the years ahead, Reisman's talents as the chief executive officer of the largest book retailer in Canada would dictate the fortunes of Indigo. Given the company's stalwart position in the industry, the Indigo name promised to be a fixture in the country's retail industry, provided Reisman and her executive team succeeded in effectively managing the operation of an industry behemoth.

Principal Subsidiaries: Chapters Campus Bookstores Company (51%); Calendar Club of Canada Limited Partnership (50%).

Principal Competitors: Amazon.com, Inc.; McNally Robinson; Barnes & Noble, Inc.

Chronology

• Key Dates:
• 1997: Heather Reisman opens the first Indigo superstore in Burlington, Ontario.
• 1999: The number of Indigo bookstores doubles.
• 2000: Reisman announces she will attempt to acquire Chapters.
• 2001: Indigo and Chapters merge, creating the largest book retailer in Canada.