Outlook; `Tomorrow the world' for WH Smith

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The Independent Online
TOMORROW THE WORLD, as Josephine Cox's latest romantic blockbuster, published by Hodder Headline, is called. Just as everyone else is abandoning the idea of vertical integration as a business strategy, up pops Richard Handover of WH Smith to claim that it is a good thing afterall for a retailer to own its suppliers. To prove it, he's buying Hodder Headline, Tim Hely Hutchinson's curious blend of old and new publishing ideas and traditions. He had a good look at Dorling Kindersley too, but found it too expensive.

Hodder Headline doesn't come cheap either, even though, as the company is keen to stress, it will be earnings enhancing for WH Smith from year one. What Mr Handover is less keen to trumpet is that it will also be dilutive in terms of return on capital, but then what does that matter when Hodder offers Mr Handover the opportunity "aggressively" to position himself for the digital age. The idea, apparently, is for WH Smith, to involve itself in every part of the chain that delivers the printed or electronic word into the consumer's hands. Who knows? At this rate, Mr Handover will be buying a newspaper next.

For those that find such explanations a little hard to get their heads round as a business proposition, Mr Handover has some more down to earth justifications. Cost savings of just pounds 2m a year is hardly anything to write home about, but the deal should also allow WH Smith quickly to raise higher margin own label sales at outlets from the present 16 per cent to the target level of 25 per cent. This in itself should yield an extra pounds 15m of profit a year.

Harder to gauge is whether an acquisition of this type really does improve W H Smith's prospects as an online retailer, or whether it is in any way necessary as a more traditional retailer to have direct control over suppliers - er, sorry, "content providers" as we must learn to call them for the new age. As Marks & Spencer is discovering to its cost, it doesn't always pay to have unduly close supplier relations, for they are as capable of dictating to you what you put in your shops as you are to them.

Despite early doubts, Mr Handover has executed himself well since he took the hot seat at WH Smith, and the City is duty bound to give him his head with this, his first acquisition. But it is in the nature of touchy feely, futuristic strategies like this one that it is going to be some years before we know whether he is right to be going the vertical integration route.