Indigo… Or Indigone?
Indigo's last opportunity to save a Canadian icon
The entire retail sector is facing fundamental changes so profound that it is impossible to determine who will survive or what will emerge in their place. Target, JC Penny, Grand & Toy, Jacob, Coldwater Creek, Blockbuster, Radio Shack… the list of casualties and those walking wounded are endless. As the shifting competitive landscape started in many respects with Amazon, it is surprising that the Indigo Books & Music Inc., Canada’s largest book, gift, and specialty toy retailer, has survived. Despite closing under performing stores, diversifying its product offering, and attempting to expand its eBook presence, the company’s revenue has been declining at a compounded annual growth rate (CAGR) of -4% since 2010. Indigo is living on bought time and needs to alter its business model if it hopes to survive the shift to online shopping.
Stagnate, Stressed, and Faltering
The challenges that Indigo faces should not be underestimated. Indigo’s decline has precipitated from a multitude of different forces, but most notably, it is their flawed strategy in the wake of these issues that has led to the company’s decline. Their strategy has led to several structural problems, such as expensive leases commitments, excessive inventory levels, and an inability to compete online. At a time when others are exiting the retail business in hoards, Indigo still has 2,570,000 sq. ft. of storefronts under lease and has only reduced its store count by 3% in the last year. Their excessive distribution network has forced the company to carry larger then desired inventory levels; almost 1.5x more than their closest competitor, Barnes and Noble. Furthermore, as a result of Amazon’s predatory tactics and discounted retailing, Indigo’s online revenue has only experienced a mere CAGR of 2% for the past three years, while Amazon’s North American media sales have had a CAGR of over 16%. These issues have plagued the company’s recent performance and have forced the once profitable retailing giant to halt its dividend and sell their interest in Kobo Inc. in order to preserve liquidity.
Indigo’s Last Discernable Competitive Advantage
Indigo’s sales have been declining as a result of the shifting retail landscape and customer flight to online shopping. Ultimately, in order to establish a sustainable future, Indigo’s must attract more traffic to their existing online infrastructure and relieve the structural issues plaguing their brick & mortar stores. Unfortunately, Amazon’s announcement of a subscription based service for eBooks back in July potentially renders Indigo’s current online offering obsolete. With same-store book sales and e-book sales now in further jeopardy, the company must focus on capitalizing on and creating new high margin opportunities within their infrastructure to increase efficiency. In an industry that has been highly commoditized, Indigo has an exclusive high margin opportunity that is currently underutilized. Specifically, Indigo’s exclusive rights to sell American Girl dolls in Canada will be crucial to drive customers back to their existing stores and increase subscriptions to a newly branded, holistic loyalty program.
Dolls on Deck
American Girl dolls are a high margin preteen female toy product produced by Mattel Inc. In the United States there are 16 American Girl stores that generated sales of over $658 million in 2013. The 16 cities in the United States that support American Girl stores have a total population of 24.8 million and thereby generate sales of approximately $26.60 per person over the entire population base. Indigo currently has the exclusive rights to sell American Girls dolls in Canada; however it has only opened two “specialty boutiques” in its existing stores to date. The company currently has plans to carefully open more American Girl locations and forecasts approximately 10 to 15 in total, which would represent less than 7% of their total stores.
In an industry known for its competitiveness and declining margins, Indigo should capitalize on its last discernable competitive advantage – its exclusive rights to the American Girl product – and accelerate the expansion of these locations to turn under performing stores trapped in lease commitments into more profitable locations. Comparing to US locations, there are at least 20 Canadian cities that could support a single or multiple American Girl stores and still generate higher revenue per boutique then Indigo’s current average sales per store of under $3.9 million.
Furthermore, there are only 40 different doll types required, which is significantly lower than the thousands of stock keeping units typically needed for each store. The conversion to American Girl products should allow Indigo to dramatically reduce inventory and free up much needed cash flow. By attracting clients, and retaining them in the store for longer periods while their daughters shop, Indigo will be able to sell some of their existing inventory to this captive market, further relieving the company’s structural issues.
When Indigo opened its first two stores in Canada the company attracted over 5,500 preteen females over the course of the weekend. Considering that the preteen females were almost certainly accompanied by their parents, Indigo had access to a captive secondary market of at least 5,500 parents who were waiting for their daughters. These dolls retail on average for $125 before services and accessories, with some accessories costing as much as $350. Parents who are purchasing these products clearly possess a superior disposable income and present the company with an ideal consumer base. The company could use the additional services and accessories that accompany these dolls, such as hair salons, to keep children in their stores longer; thereby allowing in-store sales representatives to promote the sale of eBook’s, physical books, and other products to waiting parents. The focus on these high-income parents will be crucial for Indigo’s turnaround.
Recapitalizing on Exclusivity
Once these high profile clients leave Indigo’s stores, Amazon becomes a substantial threat once again. Indigo should implement American Girl events, such as fashion shows, book clubs, and play dates, in order to attract children and their respective parents back to their stores. Similar events have been successful in the United States and would encourage children and parents to spend more time in the stores, thereby enhancing sales of in-store products. The efficiency of each location hosting these events would be greatly increased as they would experience incremental sales growth, which would further increase the effectiveness of locations trapped in lease commitments. These events would shift Indigo stores toward experience-based shopping, which would generate substantial store, brand, and product loyalty.
One Doll, One Ecosystem
To encompass the company’s new focus on high margin products and experience-based shopping, Indigo must reevaluate its current reward programs. Currently, Indigo offers two distinct options: irewards and plum rewards, the former a fee based program and the later free to customers. These programs operate in isolation, thereby limiting their appeal to customers, and do not offer discounts on eBook sales. Additionally, membership of the fee-based irewards program has been declining since the introduction of the plum rewards program in 2012. Despite the plum rewards program growing to 6.6 M users over the two years since its launch, the company has not been able to monetize these captive clients as their revenue has declined by over $66 million for the same period.
In order to revive their loyal consumer base and drive their new high-income customers to their online platform, Indigo should use the plum rewards platform and re-launch it as a single holistic program designed to utilize American Girl to push eBooks sales. The new program should grant customers discounts on American Girl and other in store purchases. Specific items would provide these customers with points to be redeemed online, with a particular emphasis on eBooks, to draw consumers to their platform. As most reward programs require continual customer participation to obtain value for both themselves and the company, Indigo’s American Girl events will be particularly advantageous to the program. By creating an offering that gives customers a significant incentive to purchase again, Indigo would be able to better monetize their current customer base, build subscriptions, and further capitalize on the compelling American Girl growth prospects. The competitive threat of Amazon’s upcoming subscription based service would also be muted somewhat as Amazon does not possess the rights to the much demanded American Girl products. With a revitalized program focused on rewards online, Indigo would be able to generate substantial growth from a recurring customer base, without stressing their current structural issues or increasing their inventory levels.
Regaining Stability and Profitability
The American eBook industry is forecast to grow to approximately $8.2 billion by 2017. Despite this industry growth, Indigo may very well be living on borrowed time. Fortunately, the actions needed to preserve Indigo are not overly challenging; they need to utilize their last discernable competitive advantage in order to increase efficiency and attract customers to a newly revamped loyalty program. The exclusive right to retail American Girl dolls presents them with a method of attracting and captivating high-income customers, while a new loyalty program and American Girl events expands the company’s competitive profile against the immense threat of Amazon. Combined, Indigo has the assets, products, and relationships to be able to attract customers, mitigate competitive threats, and regain its lost market dominance; all that is needed is proper execution – and more American Girl.