Early learnings for Waterstone

<p>Tim Waterstone has a gleam in his eye as he talks about his latest venture, the Early Learning Centre (ELC), which he acquired for &#163;62m from 3i this year. After a succession of failed bids, ELC is finally in the hands of Eagle Retail Investments, set up by Waterstone and group chief executive Nigel Robertson. And, as befits Waterstone's background, books are moving up the agenda at ELC.</p><p>Waterstone has always viewed ELC as a natural partner for Daisy&amp;Tom, his children's retail brand. "I have always thought ELC is a jewel--I love the fact that it has 'education' as part of its name," he says. "Its brand is aspirational."</p><p>It is not just ELC's brand that makes Waterstone's eyes sparkle--he says that for the first time in his life he is heading up a company that is solidly cash-generative. "We have very high gross margins; it's cracking retailing space."</p><p>Growth should be rapid. When Waterstone acquired ELC in April, turnover stood at &#163;170m with pretax profits of &#163;14.5m. Daisy&amp;Tom's turnover is &#163;15m. By the end of the current financial year in April 2005, he anticipates combined turnover will have reached &#163;220m.</p><p>After the acquisition was announced, Waterstone and Robertson set about merging the business activities at head office level. Commercial activities, including buying and marketing, are now handled by the London-based team, while administration and warehousing are based at ELC's Swindon site: Daisy&amp;Tom warehousing will be incorporated onto the same site by Christmas. This has reduced the combined workforce from 235 to about 170, largely through redundancies. A further 20 jobs will be shed through natural wastage.</p><p>While the business activities have been merged, the brands will be kept distinct on the high street and online. ELC has about 260 high street and out-of-town stores and concessions in the UK, while Daisy&amp;Tom has five UK stores.</p><p>The group's first task is to reposition ELC to its original upmarket core in the high street, Waterstone says. "I want to make the shops gorgeous, and to improve the packaging of ELC products. The style will be commercial but aspirational, with a learning focus."</p><p>A &#163;20m refurbishment programme is under way: by Christmas, 13 of ELC's stores will have been refitted. Refurbishment of the entire estate will be completed in three years.</p><p>Waterstone wants to take a larger slice of the naught to five years market in the UK, starting with the rollout of 40 or 50 new ELC stores in the south of England, particularly around Greater London. If successful, the number of new branches could rise to 70, all smaller units of 1,500 to 2,000 sq ft.</p><p>The Daisy&amp;Tom estate will also be extended, with one or two large stores opened in the UK and Ireland each year. A 12,000 sq ft store is due to open in Dublin next spring.</p><p>Playing with books</p><p>While Waterstone is clearly a toy enthusiast, books remain close to the heart of the man who put his name to the UK's largest dedicated book retailer. Books have a much higher profile in Daisy&amp;Tom, and he is keen to develop ELC's book offer. "We will milk the best of naught to five years publishing," he says.</p><p>Books are expected to grow from 1% of ELC's turnover to up to 7%--around &#163;13m. This will be achieved with a rapid increase in display space, from 440 to 700 bays in existing stores, and by doubling the value of inventory per sq ft.</p><p>Publishers including Macmillan and Walker Books have already seen business increase this year and expect a much greater lift in sales next year. Range will also be extended, with a new emphasis on baby and parenting titles, Waterstone says. "The nursery sector, including books, is very big in Daisy&amp;Tom, and we will be putting that area back into ELC."</p><p>Group book buyer Sally-Ann Campbell, who previously bought for Daisy&amp;Tom, is reviewing audio and home learning titles for younger age groups, and will experiment with beginner reader gift titles in the spring. One of ELC's central products in this sector remains character books, particularly sound books.</p><p>These developments will be visible on ELC's shelves in January. The important buying months for the store will remain December and July, although this does not preclude buying through the year. At this stage, Campbell says she will continue to buy separately for Daisy&amp;Tom and ELC, although she will seek to improve terms on shared titles.</p><p>Online ambitions</p><p>The development of product and high street sales will go hand in hand with direct sales activities, including online and catalogue development; "We loved ELC's online business," Waterstone says. "We saw it as an amazing fit with Daisy&amp;Tom, where we already had a solid web presence." The plan is to build online sales, and to distribute catalogues more widely in the UK and internationally.</p><p>ELC's international ambitions centre on its core toy product. Some 80% of ELC's product range is sourced in China and the Far East, and the company has about 40 staff in Hong Kong. This office will expand to help ELC improve buying margins and increase the percentage of own-brand products it sells from 80% to nearer 85%.</p><p>Its international business will be developed through two channels--by franchising the business into regions including Russia, and by selling its product range through other retailers as own-brand products. ELC already has an embryonic partnership with the Aeon group, which owns 400 stores across Japan.</p><p>Such ambitions for ELC are music to the ears of suppliers, who face an increasingly tough preschool environment. Publishers are keen to see ELC return to its glory days as a top end specialist retailer; and if Waterstone can maintain momentum, he will be propelled onto his next turnround challenge.</p>