RICHARD HANDOVER, chief executive of WH Smith, feels his companyis misunderstood. For months now he has been trying to explain hisvision of how Smith's should reinvent itself for the Internet age,but found his audience sceptical.
The City gave the thumbs-down to Smith's pounds 185m deal to buybook publisher Hodder Headline and Smith's shares have been on theslide ever since. Next week the group is set to report its annualresults and the round of questions and answers will begin again. Whatis Smith's trying to be, and how can this most traditional of high-street retailers equip itself for the challenge of the electronicage?
Richard Handover says: "Where Smith should be in five years' timeis not where it is now. But you can't extrapolate this company'sfuture just by looking at its current position. You have to start tothink differently."
Smith has no choice but to embrace radical change. As a mass-market seller of books, music and videos it stands directly in thefiring line of the "virtual" retailers, such as Internet booksellerAmazon.com, that do not have a costly chain of stores to fund. Booksand CDs are already among the most commonly purchased items on theNet. Verdict, the retail consultants, say that of the pounds 1.9bn ofbooks sold in Britain last year, 6.3 per cent were sold on-line. Thatproportion is forecast to rise to 19 per cent by 2003. Prices of best-sellers are also tumbling all the time.
To his credit, Mr Handover has heeded the warning signs and hasstarted to act. Waterstones, the bookselling specialist, and VirginOur Price, the music stores, have been sold. In their place have comea string of deals aimed either at giving Smith the technicalexpertise to sell via electronic channels or providing the "content"for sale.
In 1998 Smith paid pounds 10m for the Internet Bookshop, an onlinebookseller. In February it paid pounds 5m for Helicon, a smallcompany that digitises material for use online and also owns therights to the Hutchinson Encyclopedia, which is being made availableonline. It has launched the inevitable free Net service provider andwill release its subscriber numbers next week.
But the big move came in May when it paid pounds 185m for HodderHeadline, the book publishers whose list of authors includes John LeCarre and Stephen King. The idea is to have the capacity to developbooks and ranges under the WH Smith name that can either be sold asphysical books or made available online. Also, Smith says, it will bemore profitable, as the retailer will be able to take all the profitmargin.
Mr Handover is looking to add further deals that will provide"content" that can be sold online. Education and travel are likely tobe the two areas of priority. His view is that as Net serviceprovision becomes commoditised, retailers and other service providerswill be judged on the quality and exclusivity of their content.
City analysts, who are forecasting profits of pounds 132m, havebeen holding their heads in their hands regarding the move towardsvertical integration. David Jeary at CSFB says: "People didn't likethe Hodder deal because it is a move further down the supply chain.The retail sector has not had a happy experience in that regard withcompanies like MFI and Laura Ashley." His view is that Smith did notneed to buy a publisher outright in order to secure a flow of onlinematerial "They could have signed supply agreements," he says.
He also points to the decision earlier this week by EncyclopediaBritannica to make its volumes available online free to everyone.This is likely to undermine the Hutchinson brand acquired by Smith.
Though Smith shares have fallen from 782.5p in April to 422.5p, MrHandover remains adamant that by buying Hodder now he has got in"ahead of the curve". He points to Hodder's "Teach Yourself..."series of educational books as an example of ranges that can be madeavailable online.
His view is that the Smith name has tremendous trust with parents,schools and students and that this brand strength has great scope forfurther leverage.
A key part of establishing Smith as the main destination foreducational material is furthering links with the Government'sschools policy. Next month, Smith will start holding maths lessonsfor pupils in some of its stores after school. The trial is startingin four stores in the Manchester area, and will involve trained WHSmith staff overseeing a game that improves arithmetic skills. Smithclaims professional teaching qualifications are not necessary to takethe classes.
Smith is also in talks with the Government about the possibilityof holding parents' evenings at its stores. It is also thinking aboutpaying teachers to come to its shops on Saturdays to provide adviceto parents on books and the school syllabus. Though Smith stressesthe educational benefits of these initiatives, it will have its tillsopen when the children and parents come in, so there is an obviouscommercial spin-off.
While Smith explores the online opportunities and attempts toestablish itself as the main retailer for educational products, it isaware that it needs to change its stores to adapt to the digital age.As one analyst says: "They have really got to be more of a lifestyleretailer. They've got to put the fun back into the stores whilebuilding on their educational heritage and brand trust."
Smith is starting to make moves in this direction. It has improvedstore layouts, but analysts say the product ranges have not keptpace. As one analyst puts it: "Smith's problem is that it doesn't adda huge amount of value to many of the products it sells. It you wanta particular book or CD it doesn't really matter where you go to getit."
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