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Aug 16, 2019

Can Indigo survive the Amazon era? These analysts think so

Indigo won’t be ‘another retailer selling books’ when it expands to the U.S.: CEO

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There’s little doubt Indigo Books and Music Inc. is feeling the impact of Amazon.com Inc.’s dominance.

The bookseller, which operates more than 200 stores under various banners across Canada and one U.S. location, reported a 7.6 per cent drop in same-store sales and lower revenue in its latest quarter, including online, where sales fell across all categories.

The Toronto-based company’s merchandise business also weakened, which it attributed to “softer discretionary spending,” in a blow to a crucial segment as it continues to expand its focus beyond books.

“If the consumer is pulling back, and we’ve seen that to a degree, then that’s concerning,” said PI Financial Analyst Bob Gibson in a phone interview. “It’s not specifically an Indigo thing. It’s more just the general economy.”

The explosive growth of Amazon has become a major battle for retailers like Indigo as they compete against its same-day delivery service and wide product selection. Indigo Chief Executive Officer Heather Reisman, who declined BNN Bloomberg’s interview request, acknowledged the challenge outright during an analyst conference call earlier this week.

"There's no question that the intensity with which Amazon is in the market is huge and we have several categories that are up against them," she said.

But some analysts believe Indigo has a fighting chance against the online retail giant, even as it takes on other major challenges, like expanding into the U.S.

“They have a lot of product in there that they’ve sourced themselves or designed themselves,” Gibson said. “Yeah, you can get mugs online, but that particular kind you can’t, because it’s Indigo-sourced, or Indigo-designed.”

 

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Heather Reisman, chief executive officer of Indigo Books & Music Inc., sits for a photograph at her office in Toronto, Ontario, on  April 29, 2015. (Kevin Van Paassen/Bloomberg) 

A need to reinvent

Jennifer Marley, partner at Toronto-based retail advisory firm Sklar Wilton & Associates, agrees Indigo is equipped to take on Amazon, but says the bookseller needs fresh ideas and new merchandise.

“They’ve remained dominant and do a really good job on books,” she said in a phone interview. “That’s a category they have to continue to dominate and defend. But they need to grow with lifestyle. They need to grow with kids’ inspiration and toys – and that’s a super competitive market in and of itself.”

Indigo recently enlisted its new chief creative officer, Nathan Williams, to help reinvigorate the brand with new products, which are expected roll out in nine months. But Gibson notes the company won’t see that impact until fiscal 2021.

‘They’re in trouble’: Money manager says Indigo can’t defend itself against Amazon

Indigo Books and Music reported a drop in same-store sales in its latest quarter as its merchandise push failed to live up to expectations. Baskin Wealth CIO Barry Schwartz says the company "is in trouble" with the rise of Amazon, and that it doesn’t have the right business model to compete against the tech giant.

Meanwhile, Toronto-based money manager Barry Schwartz warns that in order to stay relevant in the wake of Amazon’s onslaught, retailers like Indigo have to reinvent themselves.

“This is extremely tough for retail,” Schwartz, chief investment officer of Baskin Wealth Management, told BNN Bloomberg in a recent television interview.

“They don’t have a business model that can defend itself against Amazon, unfortunately. Home Depot does, or maybe a company that sells some kind of proprietary product. But [for] someone that just sells products that you can get online fast, same-day delivery – they’re in trouble.”

In order to keep the brand strong in Canada, Marley adds that Indigo needs to focus on consolidating its loyalty program, operating under one banner, and improving their audiobook offerings to have an edge on Amazon’s Audibles. 



The ‘critical differentiator’

In spite of its recent challenges and an increasingly competitive retail landscape, Indigo still has its sights set on global expansion.

The retailer opened its first U.S. store in October at a mall in Short Hills, N.J., with plans to eventually expand further. However, Reisman said earlier this week that although the retailer isn’t abandoning its global ambitions, it’s holding off opening any new U.S. stores this year.  

“They’re going slow, which I think is great,” Gibson said, adding he was disappointed Indigo didn’t break out performance metrics for its sole U.S. store in the latest financial results. 

“Their stores are different enough from anything down in the States that I think it will do very well.”

 

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An Indigo sign at the Mall at Short Hills in Short Hills, N.J., July 22, 2018 ahead of the opening in its first U.S. store location (The Canadian Press/Craig Wong)

Gibson notes while Indigo has room for improvement, particularly with its general merchandise business, it’s better off than U.S. bookseller Barns & Noble Inc., which is poised to go private after being scooped up by Elliott Management Corp. for US$6.50 per share earlier this summer.

“Indigo is not a book store anymore. But because of that, I think it’s a much better store, has potential for much better margins, and therefore should trade at a higher multiple than what Barnes & Noble got taken out at,” he said. 

Marley echoed Gibson’s sentiment, applauding Indigo’s focus on “inspiration” and the way it does things in-store.

“Against Amazon, that’s the critical differentiator.”