The swan song of Waterstone's

Commercial pressures risk ruining the book lover's favourite chain

Remember the summer of 1997? Optimism filled the publishing world and everyone seemed to be halfway through reading Captain Corelli's Mandolin. It was a great period for the country's largest bookseller, Waterstone's. Since then, however, the chain has been berated for a loss of direction, and it is facing a tricky task to recapture the imagination and trust of its public.

Last month's headline-grabbing dismissal of Robert Topping, the high-profile manager of the flagship Waterstone's branch in Manchester, marked a pivotal point in the bloody battle for the soul of the chain. Its founder, Tim Waterstone, appears to have failed in his attempt to buy back his creation from HMV Media and reverse the breakneck changes that are having huge repercussions for publishers, readers and the future of books in Britain.

Waterstone, a self-styled maverick entrepreneur, opened his first branch after being sacked by WH Smith in the early 1980s. His model was simple: to stock a vast range of titles in a bookshop with long opening hours and the erudite feel of a library. Staff had to be experienced booksellers - or enthusiastic graduates - who could provide bespoke customer service.

Waterstone's revitalised literary publishing, turning previously obscure titles into bestsellers through staff recommendations and hosting thousands of readings by authors. In its wake, other chains, such as Books etc, Hammicks and even Hatchards, expanded fast; literary imprints and independent publishing houses thrived; and the bookshop in this country was reborn as a place for relaxed browsing.

The financial picture has been less rosy, with the chain always struggling to fund its rapid expansion. In 1989, it had 30 branches with sales of £28.5m. When Waterstone sold out to his old employer WH Smith in 1993, his chain had grown into the UK's largest specialised book retailer with a turnover of £100m - and, by 1997, it held 11 per cent of the total book market. Warning bells started ringing in March 1998, when Waterstone's merged with the HMV-owned Dillons, creating a £550m debt mountain. At first, the decision was made to keep the bookshop brands separate; then, only a year later, Dillons was abruptly dropped and the shops became rebranded as Waterstone's.

When David Kneale joined as managing director in May 1999 from Boots, he might have been forgiven for regretting his move. He found a lumbering retail group that had no central system for deciding what to sell, variable levels of service and glaring inefficiencies. His first moves were to introduce more buying of books by head office - stripping the stores of some autonomy - and to set tight cost controls, including a freeze on recruitment.

Unfortunately, Kneale did not realise that Waterstone's booksellers were an opinionated bunch. They felt that his manner was abrasive, and that he was trying to usurp their autonomy - one of the few compensations for a job that never reaped financial rewards. "His problem was that he didn't really like what Waterstone's stood for," claims one former shop manager. Before Christmas 1999, the new MD had a full-scale revolt on his hands: letters flooded in to trade magazines, while shop floors filled up with boxes of unpacked books.

Publishers were next to feel the pinch: they were told that they would have to start paying for prime promotional positions - for a book to be deemed a "Waterstone's Original", the publisher now had to pay at least £1,000. The sales generated by the promotions have been promising in some shops, but they are a far cry from the recommendations of the polo-necked philosophy graduate behind the counter.

Perhaps most importantly, the type of titles chosen for the promotions changed dramatically. Books by Marian Keyes and Terry Pratchett began to replace the highbrow, literary novels in the Book of the Month promotion. Kneale explained that the idea was to make the chain more inclusive, and to attract customers who had previously looked elsewhere for bestsellers.

The sales directors of some large publishing houses were initially pleased. "No longer do we have to struggle with snotty arts graduates to get books by big-name authors into branches," one says. But there are now fears that the shift has been too dramatic, and that the types of book on display clash with the atmosphere created by the shops' dark facades and fittings.

The effects on authors and readers are only just beginning to be felt. Trade publishers would often gamble on first-time authors, secure in the knowledge that Waterstone's would always buy in at least 1,000 copies. Now publishers have to focus their marketing strategies on titles that will sell well immediately. "It is the breadth and range of titles that made everyone want to go and visit Waterstone's," says Jamie Byng, the founder of the independent Edinburgh-based publisher Canongate. "Its whole support of the diversity of writing has been shrinking. It has lost so much of what it stood for."

It is a bad time to be undergoing such turmoil, with an unprecedented level of consumer choice of book retailers. Online booksellers such as Amazon and BOL are fighting hard with discounts. Book clubs such as Quality Paperbacks Direct are gathering subscribers through recommendations based on detailed customer information. The rival chains Ottakar's and Books etc exude confidence; and Borders, the US chain that arrived in Britain three years ago, is now stocking and selling huge quantities of literary fiction.

When Tim Waterstone opened his first bookshop in South Kensington in 1982, he told the Bookseller: "I passionately believe in books . . . people want books - they will survive." Without the same level of belief, the chain will find it more difficult than will new Labour to turn its fortunes around. As every retailer knows, customers can vote, too - with their feet.

The writer works for the Bookseller