Heather Reisman has just signed one of her most lucrative deals ever at Indigo Books & Music Inc. , but it has less to do with books than writing the next chapter of her retail business.
After making a $315-million (U.S.) deal to sell e-reader maker Kobo Inc., Ms. Reisman is in a stronger position to make acquisitions and expand non-book ventures, to offset Indigo's shrinking book business. She will invest heavily to shore up her new product design and development studio in New York City, which is focused on home decor and gift items.
One direction she won't be heading: handing out some of the Kobo windfall to shareholders in the form of a dividend.
"We have to grow very considerably to balance off what we lose in our book business," said Ms. Reisman, who, with her husband, financier Gerald Schwartz, owns more than half of Indigo. "But I have every expectation that within 18 months, we will fully make that transformation ... I would rather, for shareholders, to employ the funds and deliver to them a great result."
To fund that shift, Ms. Reisman agreed on Tuesday to sell Indigo's majority stake in Kobo to Japanese e-commerce player Rakuten. The deal leaves Ms. Reisman in an enviable position: Indigo will have $140-million to $150-million of cash in its coffers from the sale, in addition to the $50-million already on the balance sheet.
As well, a 10-year pact with Kobo ensures Indigo a "meaningful" share of Kobo's profits on electronic-book sales in Canada.
Now Ms. Reisman must reinvent the book store as consumers increasingly opt for mobile readers over physical books. She's being forced to branch out ever more into gifts, toys and home decor merchandise, even as competition gets tighter. By 2013, savvy U.S. discounter Target Corp. will launch its stores in Canada, carrying many of the same types of products.
Book sales, which now make up about 75 per cent of Indigo's business, will fall to 50 per cent in a couple of years, according to Indigo's forecast.
Up to this point, Indigo's investment in Kobo, of which it owns roughly 51 per cent, has been a drain on the retailer. In its second quarter, Indigo's loss jumped to $40.4-million from $4.6-million a year earlier, squeezed by mounting Kobo expenses and a $25.4-million accounting charge.
"It is a big challenge – there are a lot of retailers in this [lifestyle gift and home decor]space and it is where the world is going for a lot of other brands," said Anthony Campbell, a brand strategist at consultancy Level5. "Target's been doing it for a long time, and they're going to be in Canada in a short while. Heather & Co. is seeing that future ... She's getting ahead of some of her competition in this move."
By selling Kobo, Indigo also is avoiding a toe-to-toe fight with biggest digital brands – including Apple Inc. and Amazon.com – on products such as $9.99 e-books, Mr. Campbell said. Kobo recently announced the launch of a $200 tablet computer as well, the Kobo Vox.
"Taking on Apple and Amazon and Google isn't just a distraction, it puts Indigo in a position where the brand would completely lose focus," Mr. Campbell said. "By maintaining its focus, Indigo's better prepared to take on the likes of Target and other retailers who are trying to corner the lifestyle space."
To help create her lifestyle merchandise and experiences, Ms. Reisman will pour more money into product development and design at her recently-launched studio in New York. The private-label goods it produces are starting to take off, she said: in the latest quarter, sales of gift and "lifestyle" products rose between 28 per cent and 40 per cent.
Ms. Reisman said that in expanding into affordable gifts and home items, she's counting on creating "an experience" for the customer.
"I'm not interested in selling a bowl," she said. "That's not the business I'm going to be in. I am interested in creating an experience around the table for the customer ... There is so much about what inspired and created Apple – the conviction about creating an end experience for the consumer ... the commitment to beauty and simplicity."
Indigo's peers in the book industry have struggled, and many of them have faltered. U.S.-based Borders filed for bankruptcy this year, while the largest U.S. player, Barnes & Noble , is racing to expand its product offerings while introducing new e-book products.
"We know Barnes & Noble has got their hands full," Michael Serbinis, chief executive of Kobo, said in an interview. "Book retailing, publishing as a whole, is going through a massive transformation. That takes incredible will and mettle to go through."