The McNally Robinson location at the Polo Park Shopping Centre in Winnipeg will close Sunday. (CBC)McNally Robinson Booksellers is closing two of its four Canadian stores, citing factors such as the economic downturn and competition from the internet and electronic book publishing.

The Winnipeg-based company, for almost three decades one of Canada's largest independent bookstore operators, has filed for bankruptcy protection in an effort to reorganize, according to a release Tuesday.

The store at Polo Park Shopping Centre in Winnipeg is being shuttered, along with a location at the Shops at Don Mills in Toronto.

Management broke the news to staff in Winnipeg on Monday night, while workers at Don Mills were told Tuesday morning by Tory McNally, the company's director of operations and daughter of co-founders Paul and Holly McNally.

'It is heartbreaking to see so many hard-working booksellers and restaurant staff lose their jobs.'—Paul McNally

In total, 175 staff members will lose their jobs, according to the release.

"It is heartbreaking to see so many hard-working booksellers and restaurant staff lose their jobs. We are very hopeful, however, that we can save many more jobs and renew the company," Paul McNally said.

Fighting back tears, Tory McNally told CBC News on Tuesday that the family intends to keep its flagship store at Grant Park in Winnipeg open, as well as the location in Saskatoon.

Grant Park Shopping Centre will soon be the only Winnipeg location for McNally Robinson Booksellers. (CBC)Those two stores have always been profitable, said Paul McNally, adding that the proposed restructuring will preserve about 250 jobs in Manitoba and Saskatchewan.

"This will work. We will still be the largest single independent bookseller in Canada and will try to be the best," he said.

The Toronto store opened in April, while the Polo Park store opened in 2008. Like all McNally locations, the stores contained a Prairie Ink Restaurant and Bakery.

The Don Mills bookstore and restaurant will close immediately. The Polo Park Prairie Ink will also close immediately, while the bookstore will shut its doors Sunday.

Customers and staff saddened

One employee at the Winnipeg location who did not want to be named said the news is particularly sad because the bookstore was more like a place for family than a workplace.

Customers who spoke to CBC News shared the sentiment. They said they shopped at the store for a number of reasons: atmosphere, service and the fact the store started in the city. Said one customer: "As the store fails, a little piece of Winnipeg fails as well."

Founded in Winnipeg in 1981, McNally Robinson has been voted Canada's Independent Bookseller of the Year six times since 1995.

Another daughter of Paul and Holly McNally, Sarah, opened her own bookstore in New York in 2004. That store, McNally Jackson, is affiliated with McNally Robinson and listed on the company's website.

The Polo Park and Don Mills stores have already been removed from the site.

Ernst & Young Inc. has been named trustee and the company plans to apply to the courts to sanction a reorganization in the coming weeks. It is proposed that a new, smaller company, comprising McNally's e-commerce website as well as Skylight Books (a wholesale division) and the two surviving stores, will emerge from the bankruptcy protection, the release said.

More than $2M in red ink

Insolvency documents filed with Industry Canada on Monday show the company posted losses of more than $2 million in the 2009 financial year.

While a number of McNally Robinson's lenders have been listed as secured creditors — meaning they are first in line to be repaid — book publishers could take a big hit. Among the publishers cited as unsecured creditors:

• HarperCollins Canada is owed $472,793.
• Random House of Canada is owed $449,381.
• The Penguin Group is owed $298,365.
• Raincoast Books is owed $272,067.
• H.B. Fenn and Company is owed $241,031.
• Simon and Schuster is owed $176,554.

Other unsecured creditors include all levels of government for unpaid taxes and services.

The company's directors said in the bankruptcy documents that there is "no reasonable prospect for profitable operations, in all circumstances."

Competition from internet sales

The bankruptcy court filing follows two years in which market conditions reduced the profitability of McNally Robinson's established stores, while Polo Park and Don Mills proved substantially unprofitable, the release said. The company also had a location in Calgary, but that was closed in August 2008.

Rob Warren, who heads the Asper Centre for Entrepreneurship at the University of Manitoba, said McNally expanded when the economy was already slowing and more people were finding their books online.

"I think technology is one of the things that is really hurting them right now, and it's hurting all of the booksellers, all of the traditional mainline booksellers, because people are shifting to these Amazon e-books," he said.

McNally Robinson acknowledged those impacts.

"Booksellers in Canada are currently working against serious headwinds: recession, stagnant book prices, steep discounting and increasing competition from internet sales and electronic-text formats," the company's release stated.

Earlier this year, another independent bookseller, downtown Toronto's Pages, was forced to close shop. The Toronto Women's Bookstore has seen hard times, too, and has launched a campaign asking customers to donate so it can pay rent.