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To: M. Frank Greiffenstein who wrote (21107)	10/11/1998 3:17:00 PM
From: Glenn D. Rudolph	Respond to of 164684

Chapters Inc. – 8 October 1998 2 Chapters Inc. Chapters Inc. is the largest book retailer in Canada, operating bookstores in all provinces. The company sells books and book-related products, as well as audio books, music and educational and entertainment-oriented software on CD-ROM. Currently, the company operates 323 bookstores under the names Chapters, Coles, Smithbooks/Librairie-Smith, Classic Bookstores, The Book Company, and the World's Biggest Bookstore. The company manages the McGill University Bookstore through its Campus Bookstore Division and, starting in the fall of 1998, will offer Internet book selling through www.ChaptersGlobe.com. Barnes & Noble Inc., the one of the largest booksellers in the United States, has a 17% interest in the company. The Canadian Book Industry: Ready To Be Exploited The Canadian book industry is estimated to represent $2 billion in annual revenues. It remains highly fragmented and regionalized. The 35 to 54 age group represents the largest per capita book buying segment of the Canadian population and this group is expected to grow 20% in the next decade. This trend bodes well for booksellers. As the only national bookseller and the largest superstore operator, we believe that Chapters can ably exploit this trend. Chapters leads the charge in opening superstores in Canada with 29 Chapters superstores and 305 traditional stores operating at the end of September 1998. There are plans to expand the network of superstores to approximately fifty locations by the end of fiscal 1998. At present there are a total of 6 competitive superstores in Canada with the expectation of 13-15 by year-end. Table 1: Superstores Opened Open Deals Done Indigo 3 6-8 McNally Robinson 1 1 Duthie 1 0 Bollen 1 0 6 7-9 n Chapters Has Brand Recognition Chapters has very strong brand recognition already in Canada. National and local marketing programs reinforce its book selection, extended hours and added store services. There are ongoing activities at the local level such as author readings, book signings, seminar book clubs and live music. This promotes frequent visits to the store and enhances its image as a community meeting place and entertainment venue. A fundamental facet of Chapters' marketing strategy is its loyalty program whereby frequent book buyers receive discounts and reward coupons. Members pay an enrollment fee and an annual renewal fee which helps pay for the cost of the program. At year-end members totaled 441,000. The loyalty program also provides Chapters with important data capture to target marketing efforts. The Superstore: Chapters Version Chapters superstores offer unparalleled selection, unique store layout and ambiance, Starbucks cafes, and extended hours of operation. They are typically between 20,000 and 40,000 square feet in size and house more than 100,000 book titles. Chapters has developed a signature prototype which is then adapted for specific locations. Community rooms have been incorporated into the design of many stores and these are available at no cost to non-profit and community groups for meetings. The Starbucks Café is an integral part of all Chapters locations. The café encourages customers to increase the time spent in the store. There is a separate “My Books” children's section which encompasses a play area and a play house reading area. The company's future growth is to be superstore driven and Chapters is committed to growing this business. It has plans to open 50 superstores by the end of 1998 and has expanded the Chapter One customer loyalty program which now has over 120,000 members. We are now in the critical cross-over quarter in which superstore revenues are expected to surpass those of the traditional bookstore base. Based upon the example of superstore rollouts in the United States, Chapters has built a single store model which assumes that sales per square foot grow from $200 in year 1 to $282 by year 5. Comp store sales are expected to decline from 12% in year 2 to 6% in year 5. To date, the stores are achieving and beating this plan. Table 2: Chapters Superstore Model YR1 YR2 YR3 YR4 YR5 Comps 12% 10% 8% 6% Sales Sq Ft. 200 224 246 266 282 Source: Chapters Annual Report. There is significant additional opportunity for Chapters to grow in the Canadian market. Demographic and market data suggest that the Canadian market could support a total of 120 superstores. At present, the total number of superstores operating in Canada addresses only 23% of this potential. Chapters is developing a smaller version of its superstore for lower density markets. These stores will contain many of the same features as the larger version store but in a setting that is approximately 15,000 to 18,000 square feet. Traditional Stores Chapters traditional stores are located in almost every regional and community shopping centre in Canada. Although store closings are anticipated for the next couple of years, Chapters is committed to the traditional stores'