Back to Works?

<p>The Works has proved aptly named in the past eight months&mdash;that is precisely what Britain's biggest discount bookselling chain has been through after falling into administration in January. However, the business may be poised for a revival after a cash injection from entrepreneur Anthony Solomon.</p>
<p>The Poundzone and Famous Brunswick Warehouse founder says be believes The Works could return to its heyday with 300 stores or more, and return to selling online despite increased competition from supermarkets and online specialists. &quot;We believe there is room on the high street for a good discount book retailer,&quot; Solomon says. &quot;There is nothing with the scale and buying power of The Works. It has 226 stores and a turnover of &pound;100m.&quot;</p>
<p>In June, Solomon took a 50% stake in The Works, coming in as chairman and chief executive in a deal with private equity firm Endless. The investment company brought in Solomon less than two months after buying The Works from administrators Kroll for an estimated &pound;15m. Only three years before, the chain had been valued at &pound;50m. But as its market share shrank, The Works was unable to support the heavy debts, which stood at &pound;54m at the time of the last filed accounts in 2006, racked up by former owners Hermes Private Equity.</p>
<p>Solomon's revival plan hinges on focusing The Works' product range back on books, taking out most of the other merchandise introduced under the last owners, such as toys and craft materials. &quot;The Works is a bookstore but it had added so many different products, many of them not in keeping with bookselling, that it was turning into a variety store,&quot; Solomon says. The chain will still sell items other than books, such as stationery, but the plan is to tighten the range to items related to the core book business.</p>
<p>Solomon's long-term business partner David Luper will oversee the non-book range, using his expertise in overseas sourcing to introduce better products with higher margins. Luper will also work with The Works' book buyers to increase the range and quality of books on offer. In July, however, The Works bought the stock of collapsed workplace discount bookseller Premier Direct. That purchase seemed to fly in the face of the strategy of pursuing better quality books. However, Solomon says the stock is being reserved for special promotions.</p>
<p>Solomon adds: &quot;We have been in the business two months and we are making very good progress already. We are trialling a couple of new stores with a new floorplan and new point-of-sale material making the shops more user-friendly and more in keeping with selling books. They are very promising.&quot;</p>
<p>He intends to begin looking for new sites once he is satisfied that a more effective trading model has been established, probably some time next year. He says he would consider acquiring small chains as well as individual stores if the locations are right.</p>
<p>&quot;We have funds available for acquisitions and if opportunities are there we will be able to take advantage of them,&quot; Solomon says. &quot;The model is not to go into prime sites in city centres, but into prime secondary towns. The opportunities in those kinds of locations are endless.&quot;</p>
<p>Aside from its confused product range, Solomon believes the other key reason The Works collapsed was that the business' cost base got out of sync with its performance. Kroll began a cost-cutting programme by closing 85 underperforming stores, shutting down The Works' website and making 450 of its 1,600 staff redundant.</p>
<p>Solomon has since completely restructured the management team, with only operations director Kerry Hughes remaining, out of five original directors. Solomon himself succeeds Anthony Skitt and Alan Smith, the chief executive and chairman respectively, originally appointed by Endless. Further cuts have been made in head office staffing levels but Solomon says he does not intend to close any more stores or reduce retail staff. He plans to convert 12 stores currently operating under other logos to The Works brand.</p>
<p>Another area ripe for an efficiency drive could be The Works' distribution network, currently made up of a fleet of its own vans. Solomon has brought in another former colleague, Bob Lister, as commercial director and he is currently reviewing the distribution side of the business.<br />
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A changed landscape?</b><br />
All of these measures seem straightforward and sensible, as one would expect from a retailer with a large amount of experience in the discount trade. However, none of Solomon's former businesses were in the book market and some industry insiders believe he has underestimated the structural changes putting pressure on discount book stores.</p>
<p>The past few years have been difficult for discount booksellers. David Flatman, the Scottish owner of Bookworld and Bargain Books, went bust last year. Premier Direct went into administration in June blaming &quot;challenging trading conditions&quot;. Discounters face increasing competition from supermarkets, online stores such as Amazon and the high street chains, which have become increasingly promotional in recent years.</p>
<p>Ian White, m.d. of discount chain PBC Temps says: &quot;Every bookstore is a discount bookstore now in some form. The books W H Smith has on offer are fantastic value and they must be working on very tight margins to attract people through the door. Before the Net Book Agreement ended, discount bookshops had a unique position. Now there is just a general feeling that books per se are sold at a discount.&quot;</p>
<p>He says that rising fixed costs on rent, rates and staff are also increasing pressure on discount retailers relying on impulse purchases. PBC now largely operates in temporary shops on short-term leases so that it can flex its number of stores to meet demand at peak times and negotiate the best deals on rent. It is trialling stores which sell all stock at &pound;2 in an attempt to drive footfall.<br />
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<b>Difficult future</b><br />
One industry insider claims that discount stores are also being hit by a diminishing supply of remainder books as publishers become more accurate at predicting sales and go directly to large stores.</p>
<p>However others dispute this. White, at PBC, says there are still plenty of remainders and clearance products because far fewer outlets are taking books now, and publishers are &quot;less precious&quot; about stock than in the past, given that their titles might already be selling at half-price on Amazon or in the supermarkets from day one. Discount bookstores and specialist wholesalers continue to be a useful tool for publishers because, unlike the rest of the book trade, they work on firm sale deals.</p>
<p>White says a bigger issue for The Works is getting enough stock on good titles to ensure consistency across a chain with more than 200 stores. &quot;Remainders don't often appear in the kind of quantities they need, so chains have to rely on manufactured products, such as reprints, which don't have the cachet or appeal of genuine remainders,&quot; he says.</p>
<p>To acquire stock The Works has to repair relationships with suppliers, who are likely to be cautious after the business' traumatic start this year. Some suppliers have reported problems processing orders, while insurers still refuse to cover orders from The Works.<br />
Whatever happens with supplies of remainders, Richard Hyman, strategic adviser to Deloitte's consumer business practice, believes discount bookstores face a very challenging time in the next few years.</p>
<p>He says: &quot;Discount bookstores are in a very difficult part of a difficult market. There is a retail climate in which discretionary purchasing is under the greatest threat. Mainstream booksellers are under the kind of pressure which encourages them to become even more promotional than they already are and it is difficult to see how discount book stores won't become marginalised.&quot;</p>
<p>There is a counter-argument that discount bookstores will benefit as cash-strapped shoppers increasingly look for bargains. Solomon says: &quot;I don't see the discount market as shrinking. The market is suffering from problems caused by the economy and believe good operators can ride out those problems provided we have got the right product on the shelf.&quot;<br />
Finbarr McCabe, sales and marketing director at Caxton Publishing Group, a supplier to the discount book industry, agrees. He says: &quot;I think people are being cautious about where they spend their money. If they have the opportunity to go into a discount bookshop they will compare prices and see there is an upside compared to a full-price bookshop.&quot;<br />
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<img width="375" height="281" alt="" src="/documents/UserContributed/image/York%20August%2006.jpg" /></p>
<p>The Works was set up by Mike and Jane Crossley in 1984. Initially trading under the name Remainders, it began by selling publishers' overstocks in temporary stores at knockdown prices.</p>
<p>In 2003, the Crossleys sold it to a management buyout backed by Primary Capital for an estimated &pound;25m. Primary then sold it on to Hermes Private Equity in 2005 in another management buyout led by managing director Chris Maddox. Under Hermes, The Works embarked on an ambitious strategy to expand outside the West Midlands.</p>
<p>Poor sales meant The Works fell into difficulties paying off debts and administrator Kroll was called in at the end of January this year. At the beginning of this year, the company's operations included 38 factory outlets, eight Book Sale stores, 26 temporary Christmas units, two Art Depot shops and 243 stores trading as The Works. It now has 226 stores. <br />
The last available accounts filed at Companies House record sales of &pound;97.72m, a pre-tax loss of &pound;2.5m and net debt of &pound;53.7m in the year to 29th April 2006.<br />
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Founded North Shoe, which traded as Famous Brunswick Warehouse, in 1993. He sold it on to listed retail group Brown &amp; Jackson for &pound;22.3m in 2000 when it made pretax profits of &pound;1.9m. The business went into administration in 2002. <br />
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Set up Poundzone in 2001 and sold it to Manchester-based homeware importer the RSW Group in 2003 for an undisclosed sum. RSW went into administration in 2005.<br />
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Bought The Original Factory Shop in 2002 and sold it in a deal worth &pound;40m two years later to a Barclays-backed management buyout. Barclays is thought to have paid Solomon and his partners &pound;18.4m for its stake. The business was recently re-sold to Duke Street Capital for &pound;68.5m.</p>