Do bookshops have a future?

Dominic Myers looks more like an off-duty banker than a bookseller.

Stocky and bald, with a preference for the Cameron-esque suit-but-no-tie sartorial combo, the managing director of Waterstone's also does a fine line in Cameron-esque soundbites. One evening last summer, he ascended the stairs in the bookshop chain's High Street Kensington branch to toast the first part of his plan to, as he put it, "refresh the brand".

Among the assembled canapé-munchers were bestselling authors, leading publishers, a couple of journalists who'd heard there might be free champagne (there was), and – skulking behind the staircase – Waterstone's founder, Tim Waterstone. The High Street Ken store, Myers explained, was the flagship in a fleet of 20 Waterstone's branches to which the company had returned some measure of autonomy: the power to tailor its own local stock offering; to choose which titles to recommend and display prominently; to give customers more space to sit or browse, without tripping over steaming piles of Dan Brown.

Though swaddled in Big Society-like marketing speak, it was a genuinely significant moment. Last Saturday, publishers and booksellers handed out a million free books for World Book Night. As this grand bid for new readers demonstrates, the books trade is in what optimists and Amazon employees might describe as flux, and the rest of us would call crisis. The UK arm of Borders went bankrupt 14 months ago; now its US parent is heading the same way. Myers' predecessor Gerry Johnson lost his job after a catastrophic Christmas 2009.

Waterstone's is still owned by the HMV group, which has issued three profit warnings since September, and next month expects to announce a year-end net debt of more than £130m. Before Myers' appointment, the chain's aggressive approach to competing with Amazon and Tesco had sowed resentment among publishers and previously loyal customers alike. People who had once frequented the poetry section were unimpressed by the prevalence of heavily discounted blockbuster cookbooks, airport thrillers and Katie Price autobiographies.

But perhaps, just perhaps, behind the new boss's re-designed logo lurks a real change in the way the country's sole surviving major bookshop chain does business. When he took the helm, Myers rightly cited "stifling homogeneity" as a source of his company's ills. Its financial woes are forcing Waterstone's, however tentatively, to return to what made it so popular in the first place: knowledgeable staff, hospitable stores, and a love of literary fiction with popular potential.

You'd be forgiven for thinking that "The Waterstone's 11" referred to the 11 Waterstone's branches that closed in February across Britain and Ireland. But it is, in fact, the name of the company's latest promotion: a selection of debut novels nominated by their publishers and whittled down to 11 by a panel of Waterstone's booksellers. Unlike many such schemes, including the tyrannical 3-for-2, it involves no financial sweeteners from publishers.

Sam Leith, former literary editor of The Daily Telegraph, is one of the 11; his first novel The Coincidence Engine comes out in April. "The Waterstone's 11," he says, "is, I think, a way of putting down a marker that says, 'We're not just a bookshop that piles books in the window once we've agreed on a joint promotion.' A lot of promotions – 3-for-2s, Book of the Month and so on – give punters the impression that they're a literary decision, when in fact they're supported by the publisher's marketing spend. The Waterstone's 11 is, to my knowledge, a literary decision. Obviously I'm thrilled about it."

Tom Tivnan, features editor of The Bookseller, also finds it heartening. "Waterstone's are trying to make themselves into proper booksellers again," he says. "Since Dominic Myers took over there's been a conscious decision to energise the shopfloor, to make booksellers responsible for some of their own buying. They're really promoting good writing that will sell, not just mass- market crime fiction. It seems to be in the spirit of the old Waterstone's."

When Tim Waterstone, a disaffected former WHSmith's employee, opened his first store in Old Brompton Road in 1982, he introduced Britain to a different breed of bookshop, with sophisticated stock displayed on classy black bookshelves and sold by highly literate staff. So impressed was Sir Laurence Olivier that he marched into the High Street Kensington branch, soon after it opened, and presented Waterstone with a £20,000 investment.

No book had ever been displayed on a table in WHSmith's, unless it was the Beano Annual in the month before Christmas. Waterstone's, however, filled the fronts of its stores with the works of firebrand young novelists such as Salman Rushdie, Martin Amis and Julian Barnes. With the help of a new generation of go-getting literary agents, they turned literary fiction into a bestselling genre. The Waterstone's 11 is an unashamed, top-down attempt to reproduce that early serendipitous success.

This speedy rise was a blessing and a curse. The upmarket retail model was perfect for a chain of 50 or fewer stores, but "arrogance" – Waterstone's own word – overtook the founder, whose business expanded too quickly. He was forced to sell his unwieldy young company to the dreaded WHSmith in 1993. Five years later he bought it back for £300m with the help of HMV. Yet despite being made chairman of the newly created HMV Media Group, he again grew dissatisfied with the way Waterstone's was being run. He left after three years and was made to watch, exasperated, as his original vision was diluted ever further.

Dillons had already been under the aegis of HMV, and its stores were rebranded as Waterstone's. Then, in 2006, the company took over Ottakar's – a smaller chain that many felt resembled the early, golden-age Waterstone's. Publishers and authors were dismayed when the Competition Commission failed to prevent the sale. Nowadays, if there's a bookshop on your high street, chances are it's called Waterstone's. Even after the recent closures, there are still more than 300 branches; whether any of them resemble that first Old Brompton Road store is a different matter.

If Waterstone's is to survive at all in the age of online retail, it will have to restore the values that made that original site great. That means imitating the independent bookshops it spent the past couple of decades helping to put out of business. After the demise of the Net Book Agreement in 1997 (which had fixed UK book prices since the turn of the 20th Century), Waterstone's entered a discounting war, undercutting small independents unable to afford such slim profit margins – only to be undercut itself, by the web and the supermarkets.

Around the time of the Ottakar's sale, the company was roundly demonised in the press thanks to the brash pronouncements of its then buying manager, Scott Pack. Pack is a book-lover who gave his son a middle name ("Haruki") inspired by a Japanese novelist, but his championing of chick-lit, and his Stalinist, centralised buying system, based on bestsellers, did little to endear him to publishers and the intelligentsia.

Pack's tenure (which ended in 2006) also coincided with peaking sales of the Harry Potter series and The Da Vinci Code; they no doubt encouraged the view that bookselling's future lay in blockbusters. I was a sporadic Waterstone's employee at the time, during vacations from my English degree. The fellow that hired me to work at the Guildford High Street branch was of the old school. In my time there, however, he was replaced by a manager who was happier to have Nigella and co take centre stage.

In a recent article for The Spectator, the writer Michael Henderson lamented the "illiteracy" of the handwritten "staff picks" cards at a number of London branches of Waterstone's. One had made a grammatical error while praising F Scott Fitzgerald. Another had wrongly identified Evelyn Waugh as a "her". The "duffers" responsible, Henderson speculated, were surely not university graduates. His indignation won him few friends in the bookselling community, which responded forcefully on the magazine's website. The author of the first card, Daniel Pryce, revealed between expletives that he was not only a committed Fitzgerald fan, but also planning a Masters in History.

Waterstone's booksellers are undervalued and underpaid. I'd wager the majority, now more than ever, are graduates and undergraduates. David Mitchell, an exemplar of the lit-fic genre the chain helped popularise, was once a fiction buyer for its Canterbury branch, under maverick manager Martin Latham, who has employed several published authors and screenwriters. My Waterstone's colleagues included an Oxford English graduate who made me read Naomi Klein's No Logo before departing for the BBC, and a Cambridge undergraduate, who pressed upon me a copy of Saul Bellow's Humboldt's Gift (which, admittedly, I still haven't read).

The most dispiriting development since my brief time behind the till is the staff uniform. I wore a discreet badge clipped to my breast pocket; often customers would ask, hesitantly, whether I worked there at all. Now Waterstone's booksellers all wear identical branded polo shirts and saggy fleeces, encouraging a customer's perception that they're unable to think for themselves. They look (with apologies to supermarket shelf-stackers) like supermarket shelf-stackers. If Waterstone's wants to become less homogenous, the uniform ought to be the first thing to go.

Waterstone's is not the first high street brand to try, cosmetically at least, to become more local. In 2009 Starbucks – once a place where book-lovers would linger conspicuously with a Penguin classic – launched its first "locally relevant" coffee shop in Conduit Street, London. Rather than a traditional identikit Starbucks, it was designed as a coffee-making chameleon that mimicked its more stylish surroundings. (The Starbucks idea of "local", I should note, involved sourcing furniture from Brussels and Paris.) Starbucks, though, is competing merely with its own bland reputation. Waterstone's must compete with the web, which beats it not only on price, but with an inventory deeper and broader than any physical bookshop. eBooks may seem a side-issue – even in the US they account for only an estimated nine per cent of book sales – but their popularity will surely grow. So far, however, the internet can't offer bespoke, curated experiences like a bookshop can: author readings, signings, book groups, festivals. This is the added value that makes a local bookshop invaluable to a town and its readers.

The recording industry is learning to sustain itself through live music. (Though HMV, to which Waterstone's is still disastrously tethered, has failed to restore its fortunes with its attempts to diversify.) As the publishing industry goes the same way, physical retailers will have to hope they can somehow remain in the chain that links writers to readers. Booksellers may claim they act as vital curators of books, bringing each reader a skilfully edited choice of the 150,000 titles published in any given year – but that argument hasn't kept record stores alive. And the number of independent bookshops, it almost goes without saying, has tumbled: last year, between two and three were going out of business each week.

Yet, against the grain, some smaller chains appear to be thriving. Foyles, once confined to a single huge, haphazard store on Charing Cross Road, now has a handful of successful franchises in London and, with business booming, is opening a branch in Bristol. Daunt Books has five branches across the capital, and recently took on the struggling Owl Bookshop in Kentish Town. (Owner James Daunt, incidentally, predicts there will be no national chain of bookshops three years from now.)

Many of Waterstone's early employees now hold influential positions within the publishing industry. But one of the original staff members at Old Brompton Road was Robert Topping, who later managed the Manchester Deansgate branch. Sacked by the WHSmith regime, in 2000 he stood outside the annual managers' meeting in London with a placard saying "Save Waterstone's from the Mekon" – that being Private Eye's nickname for the then-MD. He now runs Topping and Company, a pair of much-loved independents.

"We're an old-fashioned bookseller," says Topping. "We just love books. I wouldn't call the people here customers; they're friends, readers, authors – people who love books. We don't sell bags or cards or accessories. It's not about rolling out a store format across the country. We want to be individual and independent, and that takes a lot of energy and passion. I believe in the original concept of Waterstone's. Tim Waterstone was a great, inspiring mentor; he gave freedom and scope to booksellers. But that's the past. It's a different company now."

There have been whispers in the book trade that Waterstone himself could finally buy back his baby, which HMV may choose to off-load for somewhere in the region of £70m. The founder has a good relationship with Myers, and approves of his strategy, as his presence at the Kensington launch attested. Equally compelling is the prospect of a purchase by Russian investor Alexander Mamut. Mamut already has a six per cent stake in HMV; it's said his interest in Waterstone's is intellectual, not financial.

Waterstone's as a stand-alone operation is in better shape than its ailing parent: its 0.4 per cent like-for-like drop in Christmas sales is as nothing to HMV's 13.6 per cent. The company may have to shrink further to survive: a failure in business terms, but perhaps, in the long run, a good thing for the remaining stores' customers. More initiatives like the Waterstone's 11 (which is due to be an annual affair), and more autonomy for every store in the chain, can only make the company more valuable to readers again. Even the 3-for-2, though it neglects many great authors, gives many others an opportunity to be read by a big audience.

"People complain that Waterstone's narrows the market," says Leith. "But the market's not nearly as narrow as it would be without Waterstone's. There was a feeling before, which may now be returning, that here was a place that mediated somehow between the local village bookshop that we all think of as the perfect place to buy books, and titanic mega-retailers like Tesco. It intelligently but profitably found a way to sell literary fiction."

Daunt and Topping have the benefit of running bookshops in particularly wealthy areas, giving them a captive audience of book-lovers with plenty of disposable income: Daunt's stores are in Hampstead, Chelsea, Marylebone and Holland Park; Topping's are in Bath and Ely. In many other places, it may be that only a larger chain can sustain a local bookshop. Thanks to the acquisitions of Dillons and Ottakar's, Guildford briefly had three branches of Waterstone's, including mine. After the recent closures, it has just one: the town's only general bookshop. Where will people buy Sam Leith's book in Slough – subject of that famous Betjeman poem bemoaning its cultural barrenness – when it loses its only branch later this year? Luton, Tiverton and Maidenhead are already bereft. For all its faults, Waterstone's still brings a wide selection of great books to places other retailers can't reach. If you live in Guildford (and you don't fancy driving to Bath) it's the best local bookshop you've got.