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BUSI 493- Strategic Management Summer Term 2 -2020 Individual Assignment Indigo Books & Music Inc.- External & Internal Environment Analysis and SWOT By: Ravneet Kaur Student # 15298961

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Introduction: Indigo Books & Music Inc (Indigo) is a retailer of books, gifts and specialty toys. The company's product portfolio includes home products, electronic products, paper supplies, lifestyle products and gift cards. The company markets products under Indigo, Chapters, Coles, Indigo spirit and The Book Company brand names. Indigo sells merchandise through different store formats, including superstores and small format stores and through its e-commerce platform, indigo.ca. The company operates small format stores in retail shopping centers, street-front retail areas, major airports and central business districts. It also operates seasonal kiosks and year-round stores across Canada through Calendar Club of Canada Limited Partnership. Indigo is headquartered in Toronto, Ontario, Canada. This report will be focussed on analysing the external (PESTEL) and internal (value chain analysis) business environment of Indigo Inc. in Canada. There will be an in-depth SWOT analysis for the company based on the findings from the analysis of external and internal environments. We will be looking at the business level strategy and the financial health of the company. The research will lead to finding company’s core strategic issue and a comprehensive conclusion.

External Environment Analysis: 1) PESTEL analysis and 2) Competitor analysis 1. PESTEL Analysis: A. Politics According to MD&A, the head office remains closed due to provincial restrictions. Canada government wants Canadian business to compete and grow, so it allows foreign retailers to have flooded the Canadian market in recent years (“Sears Canada”, 2014). B. Economics Fluctuations in exchange rates: Canadian dollar is devalued in comparison with U.S. dollar. Additional costs to Indigo since some of its’ products are from U. S. C. Social culture Preference to shop online. Lifestyle Attitude: Some Canadian customers look at books in the store only to turn around and purchase them online at a cheaper price (“Indigo dropping”, 2016). Increase education: People have higher education background tend to have higher consumption towards books. This would increase sales. D. Technology

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Technological advancements: The Company continues its strong social media presence across Facebook, Instagram, Pinterest, and Twitter, with half a million followers on Facebook and over 350,000 on Instagram. In fiscal 2020, the Company also launched a new product information management system, which will provide the foundation for an enhanced digital experience. Indigo adopted some new technologies such as Interact Flash and Interact Debit, Cultural Department Store model (“Indigo books”, 2015), Provide tons of online services. Indigo is facing many challenges as the technological changes are treating all companies which sell paper products. E. Environment

Indigo is doing business as an ethical and sustainable company, so the customers are more willing to buy their products. Most of the toys and home-decorations they sell are environment-friendly.

F. Legal Change in laws: The sale of products, along with communications to customers is regulated by several laws and regulations. The sourcing and importation of books is governed by the Book Importation Regulations to the Copyright Act. If the law change may result in increased number of competitors which will cause and adverse effect on Indigo’s financial performance. This would increase incentive to commit fraud Employees need to understand consumer rights and laws as this might bring the company to involve legal issues. To summarize, it will not be incorrect, to say that the PESTEL analysis, indicates that the macro factors/external environment will and is having a huge impact on Indigo Inc. The company needs to identify the potential threats and opportunities in the external market and should strategize in accordance to the findings. I will be indicating the potential opportunities and threats as per analysis in the SWOT analysis of this report. 2. Competitor Analysis The Company competes with local, regional, national, and international retailers and directto-consumer companies that sell gift and specialty toy products through both physical and digital platforms In the age of Amazon, Borders is bankrupt, and Barnes & Noble is closing stores as sales decline, reportedly 6 percent in the first quarter of this year. But one Canadian bookstore chain is expanding to the U.S. anyway. Indigo’s first U.S. store opened in Short Hills, New Jersey, along with an in-store Café Indigo coffee shop. The company thinks it can make headway in the U.S. because of its lineup of exclusive products and its “store within a store” model to showcase different product categories. It’s also a fresh brand that avoids the legacy baggage of incumbent retailers and taps into the experiential, destination-style retail model that Amazon hasn’t quite cracked yet. The retailer, which is a publicly traded company, reported $833 million in revenue last year, up nearly 6 percent from the year before.

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“Our customers in Canada often say that Indigo is their happy place and we believe our concept will resonate for the U.S. customer as well,” said company spokeswoman Kate Gregory. “Indigo offers a unique approach to lifestyle retail with our product accusation, store design and joyful events and experiences, all inspired by books and celebrating the power of human connections.” The company, which is Canada’s largest book, gift and specialty toy retailer, currently has 85 large and 121 small-format stores under the brands Indigo, Chapters, Coles, Indigo spirit and The Book Company. It’s held it own against the growth of Amazon in Canada by moving beyond books to lifestyle and home accessories, and it’s created an inviting atmosphere for customers. It’s also built an arsenal of private-label brands exclusive to the retailer, including Indigo Kids, Indigo Baby, Wellness, Indigo Paper, among others. See Appendix A According to Management’s Discussion and Analysis, in fiscal 2020, Indigo continued to attain record-high employee engagement and customer satisfaction scores of 89% and 77%, respectively, as well as receiving external recognition for its employee and customer experience. Forbes selected Indigo as one of Canada’s Best Employers in 2019 based on an independent survey from a vast sample of more than 8,000 Canadian employees working for companies employing at least 500 people in their Canadian operations. Indigo was ranked 125th out of all selected organizations, and 12th in the retail category. June 2016, market Share of Book Industry is in Appendix F Internal Analysis: Supply Chain management: Driving Productivity Improvement: While a key focus in the Company’s retail business is on evolving to meet the emerging needs of customers, the Company is also focused on driving productivity improvements. The challenge for the Company is to continually look for innovative ways to drive costs down while improving what we deliver to customers. For this reason, the Company has implemented several key initiatives related to improving productivity. In particular, the Company has focused on two major supply chain productivity initiatives designed to further reduce costs, deliver improved operating margins and improve service to customers. Indigo relies heavily on suppliers to sell books and general merchandise on acceptable terms and within agreed upon timelines. These suppliers are impacted by, among other things, increases in labour and input costs, labour disputes and disruptions, regulatory changes, political or economic instability, natural disasters, trade restrictions, tariffs, currency exchange rates, transport costs and other factors, which more recently, include the closure of national borders and disruption of merchandise deliveries due to the effects of the COVID-19 pandemic. To date, the Company has not experienced any significant difficulty in obtaining merchandise and considers its sources of supply to be adequate, however, the Company’s flow of merchandise could be affected by the COVID-19 pandemic, including from countries such as China and India. Operations:

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Due to the continues spread of COVID-19, the Government of Canada has several restrictions in place to ensure public health and safety. The company has been forced to shut number of its stores. (Indigo 2020- Annual-Information-Form 2020). See Appendix A

Distribution: The Company operates a chain of retail bookstores across all ten provinces and one territory in Canada, including 88 superstores (2019 – 89) under the Indigo and Chapters names, as well as 108 small format stores (2019 – 115) under the banners Coles, Indigo spirit, and The Book Company. The Company also has retail operations in the United States through a wholly owned subsidiary, operating one retail store in Short Hills, New Jersey. Online sales are generated through the Company’s digital platforms, its www.indigo.ca website and the Company’s mobile applications, where it sells an expanded selection of books, gifts, toys, and paper products. The Company offers a marketplace assortment of giftable products, experiences, services, and subscriptions on www.thoughtfull.co. (Indigo 2020- Annual-Information-Form 2020). As Indigo expands its network beyond a single carrier, the company wants to provide customers a more seamless, branded experience, proactively manage delivery issues, and use analytics to support network decisions. Indigo has selected Convey’s delivery experience management (DEM) software to increase visibility and proactive communication on the real-time status of customer orders and shipments. ((BUSINESS WIRE, 2019) As e-commerce continues to become a larger component of the Company’s omni-channel business, Indigo relies on third-party logistics partners, such as Canada Post, to fulfill sales transactions with its customers in a dependable and timely manner Changes in geographic coverage, service levels, capacity levels, and labour disruptions at the Company’s logistics partners, including as a result of COVID-19, may adversely affect Indigo’s business and financial results.(annual report 2020) Human Resource Employees have developed specialized skills and an in-depth knowledge of the business. Due to COVID-19 While employees are generally able to perform their functions in a remote setting from their homes or other locations, certain additional risk factors may negatively impact the Company’s ability to perform its operations efficiently, securely and without interruptions. To mitigate the risk of personnel loss, the Company has implemented several employee engagement and retention strategies. Customer Service: The Company’s plum rewards loyalty program has also been a key area of focus over the past three years. Company now has a two-tiered loyalty program under the plum rewards brand, plum and plum PLUS. The success of this program creates a deeper understanding of the Company’s customers, as well as direct marketing and communication opportunities with Indigo’s best customers. Going forward, the Company will continue to increase its capabilities to utilize this data to personalize each touch point with customers and provide a rich omni-channel shopping experience. (Annual report 2020)

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Marketing:  

Differentiation. Plum Card/App

Instore:  Floor Division / Entertainment  Multi-format Online Merchandise:  Price penetration (discount and Shipping).  PayPal. Indigo Reports Third Quarter Fiscal 2020 Financial Results – Focus on Profitability Drives Net Earnings Growth of 20% (third Quarter fiscal, February 6, 2020) Indigo Books & Music Inc. (TSX: IDG), Canada’s largest book, gift and specialty toy retailer reported revenue for the third quarter of $383.7 million. This compares with revenue of $426.0 million for the same period last year. The sales decline was the result of a deliberate strategy to pull back on non-margin accretive promotional activities. The result of this strategic decision was an adjusted EBITDA improvement of 23.1%, excluding IFRS 16. Commenting on the results, CEO Heather Reisman said: “We are in the early stages of a fundamental repositioning of Indigo – one that will fully build on our customer affection for our brand but that will allow us to thrive in an environment which is totally different from the one we were “born into”. We are pleased to see some early positive financial impact, but we are fully committed to returning to growth and true profitability and we feel confident about the actions we are and will be taking.” Indigo reported net earnings of $25.8 million ($0.94 basic net earnings per common share) compared to net earnings of $21.5 million ($0.80 basic net earnings per common share) last year. This bottom-line improvement was achieved on a declining sales base through focused efforts to improve margin rates across the business and lower the Company’s cost infrastructure. Excluding the impact of IFRS 16, the Company reported an improvement of $8.1 million in adjusted EBITDA for the quarter. The Company launched a cost-cutting initiative at the beginning of the year targeting $20.0 to $25.0 million in cost savings. Year-to-date, the Company has been able to reduce operating, selling, general and administrative expenses, and has met the target of $20.0 million. While this reduction has been partly offset by costs associated with non-recurring expenses associated with the move of the Company’s proprietary New York design studio to Toronto, it is reflective of the Company’s commitment to future profitability. Additionally, the Company will under spend against its capital expenditure target of $20 million for this year, a significant reduction from prior years. See Appendix B. Indigo’s ratio Analysis is in Appendix C Overall, Indigo's liquidity has decreased since 2020, as the current ratio has decreased from 1.69:1 to 1.28:1. But still it is more than 1, this is due to lower account receivables and lower sales. (Appendix C-1) Overall, Indigo's solvency has improved since 2020, as the debt to total assets percentage has decreased, while interest coverage has decreased. (Appendix C-2)

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Overall, Indigo's profitability has changed since 2020, as gross profit margin, and asset turnover only changed by 0.63. (Appendix C-3) Based on the Company’s current business plan, liquidity position, cash flow forecast, and factors known to date, including the currently known impacts of COVID-19, it is expected that the Company’s current cash position and future cash flows generated from operations will be sufficient to meet its working capital requirements for fiscal 2021. However, the COVID-19 pandemic creates a number of additional risks such as the negative impact on debt and equity capital markets, including the ability to access capital at a reasonable cost and the trading price of the Company’s securities, which could impact future capital raising efforts if required by the Company. . Swot Analysis: Three most important Strengths, Weaknesses, Opportunities and Threats Strengths: 1. Their ability to cater to many groups’ segmentations in one store. a. Toys like American Girl, Lago, Barbie, LOL surprise, Paw patrol. b. Home decor for home lovers like pillows, throws, blankets. 2. Largest book retail store in Canada with a multi-format retail network. Quick and convenient targeted locations. 3. Big variety of products sold. 4. Has online operations, In the third quarter of fiscal 2020, Indigo launched www.thoughtfull.co, a gifting site dedicated to helping customers find unique and meaningful gifts. Thoughtfull provides a last-minute gifting solution with digitally fulfilled delivery for a selection of its assortment and Thoughtfull’s guided navigation tool, the Thoughtfull Assistant, helps customers find the perfect gift from its marketplace assortment of giftable products, experiences, services and subscriptions. 5. Top employer: In fiscal 2020, Indigo continued to attain record-high employee engagement and customer satisfaction scores of 89% and 77%, respectively, as well as receiving external recognition for its employee and customer experience.

Weaknesses: 1. Competitiveness-pressure to stay relevant and up to date with what is in demand. 2. “Show rooming” customers are coming into stores to see the physical copy and goes and buy it online. 3. Development and continued development of a line of proprietary products as well as various digital innovations - infringement on the intellectual property could have a negative impact on the Company's financial position. 4. Overly dependant on Heather Reisman (CEO) for her management ability. Opportunities:

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1. Improve customer service. 2. Culture and development, expansion of new products. 3. Store expansion, re-designing of the current technology, Co- Branding. expanding it’s business by opening more superstores southwards and in the United States of America and Canada. This is another future strategy of indigo, is to increase its expansion by opening more superstores across Canada, the company believes that through this new approach more sales and revenue will be generated. 4. Technological Devices - partnerships (Apple Inc.)

Threats: 1. Increasing competition in online retail (like Amazon). 2. Fluctuation in currency exchange rate. 3. Downturn in economy: The COVID-19 impacts on the Company’s business, operations and performance; credit, foreign currency, and liquidity risks generally; and other risks inherent to the Company’s business and/or factors beyond its control which could have a material adverse effect on the company. 4. Diversification in sources of media resulting in a reduced demand for reading material overall. Company’s Core Strategic Issue Indigo is currently in between a grow-it and fix- it scenario. There is nothing that is too material that needs immediate attention. The company has shown a tremendous and consistent growth in the past years. Thus, it is a grow-it scenario. On the other hand, to support the idea of fix-it scenario we have a couple of areas to focus on. The main issue is that the company has been steadily focusing on expanding within in Canada to a point where it feels that they are over doing it. If we look at the analysis in this report, Indigo supersedes all its competitors in terms of number stores. At this point, they should probably shift their attention to improving their financial health by reducing the amount of long-term debt that they have. They should focus more on recreating and empowering the brand name itself. There marketing side of the things needs some attention and resources to improve the brand perception and customer experience. In addition to that, they need to pay attention to there suppliers and look for alternative importing options globally. Conclusion: All in all, we can conclude that Indigo has been successful in creating a thriving business model and they have proved themselves to the strongest players in the books business of Canada. There is always room for improvisation and advancement and Indigo should explore the potential growth scenarios.

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Appendix A

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Appendix B

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Appendix -C Appendix C-1 Liquidity Ratios: Mar 28 2020 Current Ratio

Mar 28, 2019

= 382,239 / 297,085 = 1.28:1

= 399,732/ 235,605 =1.69:1

= 957,722/7,640 =125 times

= 1,046,824/10,543 =99.29

= 365 / 125 = 2.92 days

= 365 / 99.29 = 3.6 days

Appendix D

Receivables Turnover Appendix E Collection Period

Appendix C-2 Solvency Ratios: 2020

2019

Debt to Total Assets

= 882,970/798,965 =1.10:1

610,464/240,348 =2.5:1

Interest Coverage

= (75,111)/ (23,524) =3.19

= (53,716)/ 3,220 =16.68

Appendix – C-3 Profitability Ratios Indigo
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