Waterstones: a bookseller saved by letting shops act like independents

The situation

At the end of June 2011 the Russian businessman Alexander Mamut completed his purchase of Waterstone’s, the national bookshop chain, from HMV Group for £53m. HMV, a music and film retailer, had owned the chain since the late 1990s. Mamut appointed James Daunt, the founder of a small group of London bookshops, as managing director. He started in June.

What Daunt inherited was a business in decline. In the 52 weeks to 28 April 2012, its first full year under the new owner, sales fell 14%, from £477.4m to £410.4m. Like-for-like sales, which strip out shop openings and closures, fell 11.1%. The chain moved from an operating profit of £10.4m before exceptional items to an operating loss of £25.4m, and its pre-tax loss widened from £20.6m to £37m. Daunt called the results a “rather unappealing set”. Describing what he had found on arrival, he said: “it was truly shocking.”

The chain had been run from the centre. Head office in Brentford, west London, set promotions and decided much of what appeared on the front tables. The best known example was a three-for-two offer on paperback fiction that had run across the chain for more than a decade. Publishers could pay for prominent placement, so the books customers saw first were often the ones a supplier had paid to put there. Years later, when he took over Barnes & Noble in the United States, Daunt told the Wall Street Journal that “Barnes & Noble is what Waterstones used to be”.

The main threat was online. Amazon could offer a wider range at lower prices, delivered to the door, and in e-books it had built a position that Waterstones could not match. The question for Daunt and Mamut was what a chain of nearly 300 bookshops was for, and how it could earn money in the time the owner was willing to wait.

Background

Tim Waterstone opened the first shop on Old Brompton Road in Kensington in 1982. The chain grew quickly and in 1993 was bought by WHSmith. In 1998 it passed to HMV Media, backed by a consortium that included Tim Waterstone, EMI and the private equity firm Advent International. HMV later bought the rival chain Ottakar’s in 2006 and converted its shops to the Waterstone’s name.

The business model of the 2000s was that of a national chain. Waterstone’s made money from the margin between the price it paid publishers and the price it charged readers, and from the payments publishers made for promotions and space. Central buying gave it scale with suppliers. National offers such as three for two drove volume through the shops. The model depended on high footfall and on customers buying more than one book per visit.

Daunt was an unusual choice to run it. He graduated from Cambridge in 1984 and worked as a banker at JP Morgan before founding Daunt Books in Marylebone, London. By 2021 that business had nine branches and a publishing imprint. He had never run a chain of several hundred shops.

The ownership structure mattered to what followed. Mamut held the business privately, through A&NN Capital at the time of the purchase and through Lynwood Investments by 2018. There were no public shareholders demanding quarterly progress, which gave management time. The sale price of £53m, set against annual sales of more than £400m, shows how little value the market placed on a loss-making book chain in 2011.

The industry

British publishing is large. The Publishers Association, the industry’s trade body, puts the industry’s turnover at about £7.4bn in its most recent figures, with almost 64% of revenue coming from exports. Bookselling in Britain is a smaller and harder business, because the retailer competes on the price of products that are identical wherever they are sold.

The rules changed in the 1990s. For most of the twentieth century the Net Book Agreement allowed publishers to fix the retail price of books. Major publishers withdrew from it in 1995, and in March 1997 the Restrictive Practices Court ruled that it was against the public interest. Supermarkets moved in, selling a small number of bestsellers at deep discounts, and prices fell. Many independent shops closed; one estimate cited by the BBC in 2009 put the number at about 500 since the agreement ended.

Specialist chains suffered too. Borders, the American chain, sold its UK shops in 2007, and the UK business went into administration in November 2009; its remaining 45 shops closed in December that year with the loss of about 1,150 jobs. The American parent was liquidated in 2011, and Barnes & Noble bought its trademarks and customer list.

The forces at work can be set out in the language of Michael Porter’s five forces. Rivalry was intense, and the strongest rival was online. Daunt said in 2017 that “Amazon is our only real competitor”. Buyers had great power, because they could check prices on a phone while standing in a shop. Substitutes were growing: e-books, which Daunt later described as “a duopoly market”, and every other form of entertainment competing for leisure time. Publishers, the suppliers, were consolidating into a few large groups, but they also needed physical shops in which readers could discover new books, which gave a bookseller some bargaining power. Barriers to entry for a new chain were high, because good sites on high streets are expensive and a bookshop’s range takes years to build.

The underlying economics of a bookshop are shaped by returns. In the British trade, unsold books can generally be sent back to the publisher for credit. That reduces the bookseller’s risk, but each returned book costs money in handling and freight on both sides and ties up working capital while it sits on a shelf. A shop that orders books it expects to sell, rather than books it has been paid to display, should return fewer.

The decision

Daunt’s choice was about where decisions should sit. The public record, mainly his own statements and those of the trade press, shows two broad routes.

Keep the central model and cut harder

The first route was to keep national promotions, central buying and publisher payments for space, and to cut costs: fewer shops, fewer staff, tighter stock. Publisher payments were income at a time when the business was losing money, and national offers kept volumes up. The weakness was that this meant competing on price and range, the ground on which Amazon and the supermarkets were strongest. Daunt’s later remark that Barnes & Noble was “what Waterstones used to be” shows how he saw the old model: a homogeneous chain that customers had little reason to visit.

Run the chain like a set of independent bookshops

The second route was to hand much of the choice of stock and display to each shop, drop national offers, and stop selling table and window space to publishers. That carried real risks. It meant giving up income while the business was losing money. It depended on trusting booksellers in each branch to make sound commercial calls, and it would produce uneven results from shop to shop. It also required investment in shops that were tired and in systems that could support local ordering.

Daunt chose the second route and was open about the time it would need. In February 2013 he said it would take about two years to transform the business, and the refurbishment programme could take a further two years to complete. He said the business needed to generate “£30-40m worth of cash” a year to be sustainable. In the year to April 2012 it had generated £13m and ended the year with £20m in the bank.

What they did

Ending the national offer

The first visible move came within weeks. Staff were told on 30 August 2011 that the three-for-two offer on paperback fiction would end the next day, to be replaced by money-off deals on individual books. The Bookseller described it as the most dramatic change of Daunt’s tenure so far. In January 2012 the chain dropped the apostrophe from its name, becoming Waterstones.

Moving the centre

Head office moved out of Brentford and into the flagship shop on Piccadilly in central London, a move completed in early February 2013. The period’s results included £0.6m of head office restructuring and redundancy costs. By putting the managers inside a working bookshop, Daunt signalled that the shop floor, not head office, would set the tone.

Refurbishing the shops

Forty shops were refurbished before Christmas 2012, with sixty more planned for 2013. Each refurbishment disrupted trading for about two weeks. The estate shrank: six shops closed and one opened in the year to April 2012, and the chain had 288 shops by the end of 2012. Later the company invested £9m in improving its shops and £2m in its distribution hub, which raised the number of titles it could deliver to shops the next day from 3,000 to 20,000. That hub mattered to the new model, because a shop that chooses its own stock needs fast replenishment of the books it has chosen.

Handing choice to the shops

The deeper change was in who chose the books. Waterstones stopped taking payments from publishers for placement, so space on tables and in windows was no longer for sale. Branch managers and booksellers gained control over much of their range and display. In a 2021 interview with the New Statesman, Daunt said each of the chain’s 280 UK branches was different and that he accepted “variance in execution”, something most retailers avoid. “It’s booksellers who drive what a shop is like: you have to let them do it,” he said.

The reported effect on stock was large. In 2019 the Wall Street Journal, as cited by The Bookseller, reported that returns to publishers at Waterstones had fallen from 25% to 3% after placement payments ended. The figure comes from a single press report and has not been published in the company’s accounts, but if it is close to correct, it implies a large saving in freight, handling and working capital that offset at least part of the lost publisher income.

Pruning what did not fit

Daunt cut activities where Waterstones could not win. In May 2012 it agreed to sell Amazon’s Kindle e-reader in its shops. It closed its own e-book store in May 2015 and directed customers to Kobo. “E-books are a duopoly market and we never really competed in it,” he said. Non-book products such as stationery and gifts grew, from 8.2% of sales in the year to April 2012 to 12% of turnover by 2016, with a target of 15% over three years. Daunt insisted that the chain remained “absolutely 80% a seller of books”. Waterstones also opened cafés, with 46 own-brand Café W outlets by 2016.

Unbranded shops

From 2014 the company tried another way of looking like an independent: opening small shops without the Waterstones name. The first, Southwold Books in Suffolk, opened in July 2014, followed by shops in Rye and Harpenden. Some local residents objected, and the national press questioned whether a chain should trade under a local-sounding name.

Exhibit 1: Main steps in the turnaround

Sources: The Bookseller (2011, 2013, 2017, 2018, 2019); New Statesman (2021); Wikipedia, Waterstones (for the 2012, 2014, 2018 Foyles and 2022 Blackwell’s dates).

What happened

The turnaround took about as long as Daunt had said it would. Losses narrowed to £12.2m in the year to April 2013 and to £4.5m before tax in the year to April 2015. In the year to 30 April 2016 sales rose 4% to £409.1m, operating profit reached £18.8m and the chain made a pre-tax profit of £9.9m, its first profit under Mamut’s ownership. The estate stood at 270 shops after seven openings and six closures. Some reports gave the 2016 profit as £11.7m, which appears to be a different measure; The Bookseller’s report of the accounts gave £9.9m before tax.

In April 2018 the activist investment firm Elliott Advisors agreed to buy a majority stake, with Mamut’s Lynwood keeping a minority holding. The price was not disclosed. Daunt stayed as chief executive. Later that year Waterstones bought Foyles, the London bookseller, keeping its brand and seven shops.

Elliott then took the model to the United States. In June 2019 it agreed to buy Barnes & Noble in an all-cash deal valued at about $683m, including debt, and the deal completed on 7 August 2019. Daunt became chief executive of both chains, based between New York and London, with the two businesses run separately. At the time Barnes & Noble had 627 shops and sales of $3.662bn in its 2018 financial year; Waterstones had 293 shops, including some in Ireland, the Netherlands and Belgium, and sales of £402m. Paul Best of Elliott said that “readers continue to value the experience of a great bookstore”. Daunt said he would run Barnes & Noble’s shops like independent bookshops, tailoring stock to each location, and would end placement payments there as he had in Britain.

Exhibit 2: Waterstones and Barnes & Noble when Elliott bought the American chain, 2019

Source: The Bookseller, 7 June 2019.

The pandemic was a setback. Daunt first tried to keep shops open, arguing that a bookshop was “no different to a supermarket or a pharmacy”, but reversed course after staff complaints and before the first national lockdown. He told the New Statesman in 2021 that closures had caused a “massive loss of sales”, that regional shops recovered well and that city-centre shops struggled. Before the pandemic the website had accounted for about 8% of sales.

Growth resumed after the pandemic. Sales reached £452.5m in the year to April 2023, with profit of £12m, and £528.4m in the year to April 2024, up 17%, with profit of £32.8m, according to The Bookseller. In the 53 weeks to 3 May 2025, sales rose 7% to £565.6m and like-for-like sales by 5%. Operating profit before exceptional items was £49.7m, up from £45.6m the year before. The estate stood at 316 shops after seven openings. Fiction, including Butter and Orbital, and stationery and children’s educational toys drove growth.

Exhibit 3: Waterstones financial results, selected years

Sources: The Bookseller (2013, 2017, 2019, 2025); The Retail Bulletin (January 2026); Wikipedia, Waterstones (for 2013). The 2015 sales and shop figures are implied by the 4% sales rise and the net gain of one shop reported for 2016. Different sources report different profit measures, so figures are labelled as reported; “profit as reported” in 2023 and 2024 is The Bookseller’s unlabelled figure.

Other views

Booksellers and authors on pay

The model depends on skilled booksellers, and pay became the main criticism of Daunt’s Waterstones. In 2019 more than 1,300 writers signed a campaign asking the chain to pay the real living wage; the company replied that it was “simply not profitable enough” to do so at the time. Petitions by staff and supporters followed. By 2021 one had more than 9,000 signatures and a separate authors’ letter more than 2,500, including the novelist Sally Rooney. Daunt told the New Statesman that the number of staff paid below the living wage was “relatively small” and that the living wage was “remotely inadequate” for people building a career in bookselling, which was why he had added pay increments for committed staff.

Small towns

The unbranded shops drew objections from some residents of the towns concerned. The Independent reported in 2014 that, after a Costa coffee shop, a Waterstones could be the “final straw” for Southwold. The charge was that a national chain was trading on the image of the small independent shop.

Amazon and the market

Daunt’s own view of Amazon softened over time. In 2017 he called it the only real competitor. In 2021 he said the two co-existed, that Amazon had freed shops from stocking “boring books”, and that “Amazon spreads readership and ownership of books”, which he regarded as good for bookshops. A sceptic would note that a physical bookshop’s survival depends on readers being willing to pay more, or to buy on impulse, and that this willingness can change with household budgets.

The limits of the evidence

Much of what is known about how the turnaround worked comes from Daunt himself, in interviews, and from trade press reports of the company’s accounts. The returns figure of 25% falling to 3% rests on a single newspaper report. The relative contribution of local stock choice, lower costs, shop refurbishments, changes in the wider book market, and the patience of a private owner cannot be separated from the published figures. Waterstones is privately owned and publishes only statutory accounts, so outsiders see far less than they would of a listed retailer.

Reading it through a framework

Value chain

Porter’s value chain splits a business into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and the support activities behind them. Daunt changed where value was created in the chain. Under the old model, buying and merchandising sat at head office and were partly funded by publishers. Marketing meant national promotions such as three for two. Shop staff mostly carried out decisions made elsewhere.

After 2011, buying moved close to the customer. Branch staff chose much of their stock, so the shop floor became the place where the company exercised its main commercial judgement. Marketing and service merged, because a bookseller who chose a title is well placed to recommend it. The reported fall in returns from 25% to 3% shows the effect on inbound and outbound logistics: fewer books shipped in and then shipped back. The investment in the distribution hub, which raised next-day capacity from 3,000 titles to 20,000, was the support that made local choice workable. Support activities at the centre shrank to match, with head office moved into a shop. The publisher money given up was a cost of the change, offset at least in part by lower returns and by higher sales per visit.

Porter’s five forces

The five forces explain why the old model was weak. Rivalry with Amazon and supermarkets was intense, and competing on discounts meant fighting on the rivals’ ground. Buyers had strong power because they could compare prices instantly. Substitutes, including e-books, were growing. Publishers had some power over the chain through placement payments, which shaped what appeared on tables.

Daunt’s answer was to reduce the force of rivalry by making the product different rather than cheaper. A curated shop, with staff recommendations and a range that changes from town to town, is hard to copy online and hard for a supermarket to match. Ending placement payments gave the chain back control over its own shelves, shifting the balance with suppliers. Closing the e-book store in 2015 was a decision to stop fighting a substitute head on. The improvement in profit from a £37m pre-tax loss in 2012 to £49.7m of operating profit before exceptional items in 2025 suggests the repositioning worked, although the market itself also changed over that period.

Since then

Waterstones has kept growing its estate, while Barnes & Noble has become the larger test of the same approach. Barnes & Noble opened about 60 new shops in 2024 and announced plans for about 60 more in 2026. In September 2025 it agreed to buy Books Inc., a San Francisco Bay Area chain that had filed for bankruptcy protection, for $3.25m. In the latest reports checked for this case, Daunt was still leading both businesses.

For Elliott, the question is what to do with two bookselling businesses it has owned for several years. In early 2026 a trade press headline reported that Waterstones’ owner was planning bank appointments ahead of a potential float valued at about £2bn; the article itself could not be checked for this case, and any listing would depend on market conditions. A listing would bring the scrutiny of public shareholders to a model that has so far relied on a patient private owner.

The financial year to May 2026 had not been reported at the time of writing. The company said in January 2026 that it had “continued to enjoy healthy sales in the current financial year”.

What to take from it

• Decentralising decisions can work in a retail chain when local knowledge is the real source of advantage, but Waterstones took about five years to move from a £37m loss to a pre-tax profit, and needed a patient owner.
• Income that shapes what a retailer sells, such as supplier payments for placement, can cost more than it brings in once returns, handling and lost credibility with customers are counted.
• A retailer facing a lower-cost online rival does better by changing the reason to visit the shop than by trying to match on price and range.
• A turnaround that depends on skilled front-line staff will face questions about how those staff are paid, and the answer affects both the model and its reputation.
• An approach that is clearly explained can be repeated, as Elliott and Daunt did when they applied the Waterstones model to Barnes & Noble’s 627 shops in 2019.

Questions to think about

1. Which kinds of retail chain could copy the Waterstones approach of local stock choice, and which could not? What features of books make the approach work?
2. Giving up publisher placement payments meant losing income during a turnaround. Assume annual purchases of £250m at cost and that handling and freight on each returned book cost 10% of its cost. Using the reported fall in returns from 25% to 3%, estimate the annual saving. How large would lost placement income have to be to cancel it out?
3. Daunt said in 2013 that the business needed to generate £30m to £40m of cash a year to be sustainable, when it had generated £13m. How would you have set milestones for a sceptical owner over the following four years?
4. Waterstones’ sales grew from £409.1m in 2016 to £565.6m in 2025 while operating profit before exceptionals rose to £49.7m. Calculate the operating margin in each year and discuss what drove the change.
5. Were the unbranded shops a sensible way of fitting into small towns or a misleading use of the independent bookshop’s image? What would you advise?
6. Waterstones and Barnes & Noble share an owner and a chief executive. What are the risks of running two large chains on one person’s philosophy, and how should Elliott plan for succession?

Concepts at work

Decentralised decision making, Value chain, Supplier power, Turnaround management. Explore them in Insights.

Further reading

Oxford University Press covers this story as a teaching case in Cases in Strategy on Oxford Business Trove. The sources below are the public record this page was written from.

Written from the public sources listed below. Figures are as those sources report them.