Superstore Returns Rate Information Released

From Publishers Weekly, March 25, 2011:
"In another filing yesterday, Borders submitted a motion to return pre-petition merchandise for post-petition credit. In it, Borders notes that as their financial difficulties increased, vendors refused to accept trade credit or returns. The retailer, which pre-bankruptcy returned 31% of its merchandise annually for credit, has attempted to have publishers ship books under normal terms with limited success."

While I have been saying for years that superstore chains return twice as many books to publishers as independent booksellers do, chain-store employees I know have been objecting to my statements.

In fact, over the years several highly placed chain-store employees have informed me that it is only new titles that are heavily overbought. Backlist titles, they say, generate very few returns because the sophistication of superstore computer systems ensures that correct quantities are ordered.

Now here is a report from Borders that has emerged in the midst of their legal proceedings, stating clearly that they have traditionally returned 31% of purchases, in toto.  That is more than double the 15% industry average that independent booksellers have reported for many years.

Had publishers refused to process the excessive orders from Borders all these years, publishers would be in much less trouble today -- because Borders would not have been able to carry so much publisher debt. 

In addition, publishers could have kept prices for books lower all these years, since they wouldn't have had to absorb the costs of disposing of the excessive returns from superstores. 

Perhaps the implosion of Borders will finally provide an opportunity for publishers to review their openness to tolerating huge levels of returns from Barnes & Noble.

The Borders Lesson: Sell Low to Sell Out High

We were knee-deep in planning our own independent bookstore. It would be a community gathering-place, a center of literary life, a crazy dream we’d make real. But in a Boston hotel conference room, after the first day of the 1984 American Booksellers Association’s school—a day spent sharing plans and fantasies with 60 other prospective booksellers, guided by four accomplished bookstore owners—my partner had a question for the association’s Education Director. “Why don’t you open a bookstore yourself?”

“Because there’s no return on investment,” the Education Director replied.

It was a straightforward, depressing response, and I have learned over the years that thousands of experienced independent bookstore owners will concur with that former ABA staffer. Indeed, there’s no question that if you operate a socially responsible community bookstore focused on passionately selling marvelous new trade print books, you’ll probably get a poor return on capital and your chance of ultimately selling your business for a profit is minimal. A more likely outcome is that after years of dedicated bookselling you will lose your original investment when you close your store down. Your only return on investment will be the pride you take in the work you have done and the gratitude of your former customers. (The exception is when bookstore owners buy their buildings and the value of this real estate grows.) If you’re not prepared to accept the reality that there’s no return on investment in the bookstore business, it’s unwise to launch your own bookstore. Every year, more than a billion dollars worth of books are sold by bookstore owners who know they are sacrificing return on investment in order to benefit society.

And yet, if there’s truly little possibility for return on investment for owners in the trade bookselling business, how could Tom and Louis Borders have sold the Ann Arbor, Michigan bookstore company they founded in 1973 for $126 million to K-Mart Corporation in 1991? How could Len Riggio, creator of the modern Barnes & Noble company, have gone from a single college bookstore in 1965 to a personal net worth of more than a billion dollars today? How could Amazon.com founder Jeff Bezos have made so much money in the past fifteen years that he can afford to dabble in the space tourism business?

The U.S. new-book market has been stuck at about $24 billion for many years, so what’s been the business secret of these highly profitable booksellers? (It obviously wasn’t selling more books to more readers; instead according to Nielsen Bookscan readers’ choices are getting less diverse.)

The big booksellers have specialized in leveraging the customer traffic that promoting low-margin new books attracts to then sell products and services that in some manner do provide decent return on investment. Then when their popular companies’ perceived value has been high, these owners have sold part or all of their ownership stakes to outsiders.

It’s the loss-leader approach: hyping low prices on some products to sell different products and services—and then company shares—high.

For instance, both Borders and Barnes & Noble have made lots of profit on high-margin publishers overstock discount books (authors earn no royalties on these; that’s partly why they’re cheap). B&N has supplemented that with proprietary books they publish themselves (similarly: few author royalties paid).

B&N and Amazon have earned great profits from publishers’ promotional payments (this payola is a secret; readers believe these companies’ featured books are selected for quality and popularity).

For years Borders sold inventory management services to other bookstores; the company could then use data they collected to open bookstores that competed with stores they’d once serviced.

Amazon has done well with brokerage fees and commissions charged to used-book sellers (somehow these fees just go up and up and up), while keeping costs low by evading sales taxes (too bad for communities that utilize sales taxes to fund local services).

           All three companies have sold lots of high-margin non-book items—in fact Amazon sells more non-book items than books, though they retain their customers by hyping their high-status image as a bookselling company.

Big-league booksellers are today plunging into digital bookselling because in the constricted marketplace of the no-growth book industry they preside over, they must innovate to compete with one another to continue generating the consumer traffic that will ultimately be converted to some other form of profit-making enterprise.

At Borders, amid management turmoil over the past decade, business innovation slowed. The company was created in 1973 by book-lovers, and the Borders brothers’ original commitment to books attracted scads of customers from whom the company could earn profit in creative ways. But the thrill is long gone for former Borders customers. Its 90s-era business plan served for a decade (music sales were key)—and in particular the company succeeded in destroying many independent bookseller competitors, keeping the marketplace constrained to its own advantage—but Borders then failed to invent new profit-making techniques once music CD sales slowed with the arrival of digital downloading.

Still the Borders brothers themselves did earn a great return on their initial investment, and this year’s Borders bankruptcy should serve as a reminder that money-minded owners can indeed generate personal wealth in the bookstore business, if that is their objective. They can take a lesson from Tom and Louis Borders: get out while the getting’s good. Don’t just sell low; sell out high.

 

Andy Laties has launched five bookselling companies in the past thirty years. In 1987 he won the Women’s National Book Association’s Pannell Award for his innovative community outreach work at The Children’s Bookstore in Chicago. After ten years as an American Booksellers Association School instructor, Andy wrote Rebel Bookseller: How To Improvise Your Own Indie Store And Beat Back The Chains, published by Vox Pop, which won the 2006 Independent Publisher Award for best book about writing and publishing; a revised and expanded edition entitled Rebel Bookseller: Why Indie Businesses Stand For Everything You Want To Fight For, From Free Speech To Buying Local To Building Community is due out in July 2011 from Seven Stories Press. Andy holds a Masters degree from the School of Community Economic Development at Southern New Hampshire University. He co-founded and still manages the museum shop at The Eric Carle Museum of Picture Book Art in Amherst, Massachusetts, which Parents Choice called “the very best bookstore for picture books in the entire world.”

 

Barnes & Noble Shows Its Hand

1) Last year Barnes & Noble superstores sharply reduced book inventories and ramped up sidelines.

2) A few weeks ago Len Riggio of B&N complained that if publishers offer Borders extended terms in order to help stave off a Borders bankruptcy, Barnes & Noble should get these special terms too.

3) Today, Barnes & Noble fired many long-time national book-buyers.

What do these steps mean?

Back in the early 80s, American Bookseller Magazine published an article in which Barnes & Noble reported that by reducing the number of different titles in its children’s book section and facing the remaining titles out, it was able to cause profits to jump sharply.

I’ve experienced this in my own stores, and in my children’s book-fair company. If you have a solid lock on your customer base, the most profitable thing to do is reduce title diversity and face most of the remaining (bestselling) titles out. By concentrating on selling more of what’s selling, you reduce your operating costs and get better discounts from suppliers.

B&N is returning to that discovery of theirs from the early 80s, and applying it to the entire storefront bookselling operation. That's because since Borders has been put on hold by lots of publishers, it’s safe for Barnes & Noble to cut back on the number of different titles stocked: there can be no unfavorable inventory-depth comparison by customers of B&N to Borders.

Why maintain a full staff of specialty book-buyers in New York if your new buying strategy is to use your (incipient) monopoly on national shelf-space to force publishers to pay for access to the (upcoming) bestsellers-only, face-out space in your stores?

No more will publishers be able to simply assume that B&N will be open to stocking “just any” high quality book that has a known readership. Publishers had better get used to ponying up lots more promotional money to get their books into B&N. (Where every book in the store will be a FEATURED book.)

Even worse for publishers, if Borders DOES end up getting special terms from publishers to help avert a bankruptcy, then Barnes & Noble will not WAIT to be offered those same terms. B&N’s “request” for equal treatment from publishers is actually a warning. B&N will simply TAKE extra time to pay publishers: this will be the way they retaliate against publishers for helping save Borders. No publisher will be able to stop this, since no publisher will be able to stand up to B&N, with Borders on the ropes. Publishers will need B&N’s newly constricted shelf space more than ever!

There is only one solution for publishers to this dilemma, and it’s not eBooks (which will always be a market that is subject to intense bestselleritis, since an online selling environment tends to cause readers 1) to be acutely aware of what other readers are reading most, and then, 2) to choose principally from among these most popular books).

The solution to regain a marketplace where great diversity of titles are on display is for publishers to join in the upcoming push for more indie bookstore openings all over the country.

In the 80s, 3,000 indie bookstores opened in just seven years. With the current collapse of shelf-space at Borders and Barnes & Noble (and with last year's closing of 700 Walden and Dalton mall bookstores), the time is right. Publishers must take part. Their businesses are at stake.

Publishers Must Avoid eBook Dominance by Barnes & Noble

Many years ago, when Len Riggio and Barnes & Noble used $275 million of Michael Milken's junk bonds and bought B. Dalton's 779 stores, which controlled one billion dollars of bookstore market share, Riggio promised the publishing industry that he'd maintain the B. Dalton company as a separate operating entity from the Barnes & Noble chain.

From The New York Times, 1986:
“Mr. Riggio, whose 35 Barnes & Noble stores are situated mostly in the New York City area, said that he would continue to operate the two chains independently…He specifically said that Barnes & Noble would continue to sell only discount books, and that B. Dalton…would continue to sell the major portion of its wide selection of stock at full price…When one bookseller buys another…there is concern within the industry that the combination will restrict the number of authors that appear on bookshelves, and industry insiders expressed those concerns over the purchase of B. Dalton. Though all stores carry the same best-selling books, their stock of midlist books—the industry term for lesser-known [new] titles—differs from one chain to another. If one buying office begins to buy for both B. Dalton and Barnes & Noble, those insiders say, the variety of books available to consumers in the market could be reduced….Mr. Riggio insisted that the purchase of B. Dalton was not ‘connected’ to his strategy at Barnes & Noble. The ‘center of gravity’ for B. Dalton, he said, ‘will remain in Minneapolis; B&N’s will remain in New York.’”—Lisa Belkin, “Discounter Purchases B. Dalton: Barnes & Noble Adds 779 Units To Book Realm,” New York Times (November 27, 1986): D1.


Instead, today there are no B. Daltons in the country; they have been steadily closed down over the past 24 years. Wherever Barnes & Noble stores opened, B. Dalton stores were closed.

In those years, B&N also bought the Doubleday bookstore chain: twenty stores that were subsequently closed down. B&N bought Bookstop and closed all the stores.... And so we see that this is the Barnes & Noble technique. Get access to someone else's money (for instance, in the 80s and early 90s by running up huge debts to publishing houses, selling the books those publishers provided, then taking a very long time to pay the publishers for the sold books), and use the cash so obtained to take more and more bookstore competitors out of the market, by acquiring these competitors and shutting them down.

...And then...turn on the people who provided the money to do this (the big publishers) -- and manipulate these publishers to act in a manner that's unprofitable for them, by dictating what they should publish....or by making publishers pay for in-store display.

Blogger report from an educational program in 2009 with B&N buyers:
"As the morning progressed, it quickly became clear that book buyers have a lot of control over what publishers publish. Not only do the buyers get the final say on whether a book appears in their store, Edward and Sallye emphasized that they may influence a book’s packaging (from the cover design to its trim size), price, publication date, and even store category and placement. From this standpoint, it appears that publishers are far from having the upper hand in their relationships with book buyers."
http://nyupubposts.wordpress.com/2009/09/27/publishing-buying-power-at-work/

Publishers Weekly report from 1994:
"Among the examples of illegal practices mentioned in the suit…was Barnes & Noble’s ‘bestseller pricing’ system which requires publishers to pay for their titles to be discounted as bestsellers—even though [sic] may never be true bestsellers—by having them pay fees of at least $18,000, terms that are not available to independents. To illustrate the financial effect of the illegal policies, ABA’s [Executive Director Bernie] Rath noted that Barnes & Noble had said in 1993 that publishers had paid it $11 million in coop money, substantially more than the chain’s profits….”—John Mutter and Maureen O’Brien, “ABA Sues Five Publishers,” Publishers Weekly ABA Show Daily (May 28, 1994): 1.

So much is well understood inside the book industry. B&N is a big bossy bully. We knew that. Publishers have to publish with B&N in mind (and the books so published get sold through all channels). Publishers have to pay B&N to get the books thus created also displayed in decent spots in-store.

Len Riggio did not tell the truth in 1986 about his plans for the future of his company's relationship with publishers. He planned to use his control of the market in order to manipulate publishers, and he proceeded to do this very quickly.

Well, how should we read stories about Barnes & Noble's big plans for the future? Should we believe anything they say? Should we assume they have the interests of publishers, authors or readers at heart? Whose interests are they really serving?

From a recent investor conference call, as reported in Publishers Weekly:
"[Mitchell] Klipper said the children's department continues to be the fastest growing area at the stores, and that over the summer B&N will roll out its educational toys and games and school departments to 400 stores...."

"Klipper didn't deny there will be fewer bookstores in the country, but both he and Riggio said B&N will be the beneficiary of the consolidation.... Riggio agreed that the number of traditional bookstores will be consolidated, he said given B&N's strong numbers he expects B&N "to be the ones doing the consolidating."
http://www.publishersweekly.com/pw/by-topic/industry-news/bookselling/article/43738-barnes--noble-sees-bright-future.html


But, meanwhile over at The Eric Carle Museum (inside of which I operate an independent children's bookstore), according to Publishers Weekly:
"The symbolism was not lost at this past Tuesday’s meeting of the New England Children’s Booksellers Advisory Council, held at The Eric Carle Museum of Picture Book Art in Amherst, Mass., that Ken Geist, v-p and editorial director of Orchard Books and Scholastic Press Picture Books, and author of the picture book The Three Little Fish, should choose this setting to ask independent booksellers to get behind picture books. “I’m not finishing this year until we move the needle and sell more picture books,” said Geist, who added that he was not speaking on behalf of Scholastic. “I’m here to talk about what we can do collectively to raise the profile of picture books.”
http://www.publishersweekly.com/pw/by-topic/childrens/childrens-industry-news/article/43542-an-impassioned-plea-for-picture-books.html?utm_source=Publishers+Weekly%27s+Children%27s+Bookshelf&utm_campaign=aa98276b4c-UA-15906914-1&utm_medium=email

And, WHY was Ken Geist so worried about the future of children's picture books?? Why was he begging of all people those legendary weaklings, the indie bookstore owners, to strive to save the picture book...?

As indie bookseller Josie Leavitt reported on her PW blogpost about the same presentation:
"One statement Ken [Geist] made that chilled me was that Barnes and Noble, in their store redesign, has removed the picture book back wall from its stores. Instead there are activity books and some picture books mixed in. No longer is there an unbroken expanse of picture books; the message that sends is enormous. If parents only see activity books or media tie-in books, then that’s what they’ll buy."
http://blogs.publishersweekly.com/blogs/shelftalker/?p=1309

So -- if the children's book section is the fastest growing section of the B&N stores, as stated in the investors' conference call, AND B&N is now dramatically backing away from children's picture books and replacing these with activity books and educational toys.....well....what is the truth? Are they HAPPY with their children's book sales....or, not??

When B&N talks, should anyone listen to what they say?

Let's put this all together. Barnes & Noble has a history as a so-called consolidator, meaning that they specialize in controlling the marketplace by constricting it. They REMOVE bookstores, they REMOVE sales opportunities. Then, panicked publishers pay when B&N says pay, publishers publish what B&N says they should publish.

That is: Barnes & Noble has an abusive relationship with publishers. With every move B&N makes to tighten a noose around publishers' necks, by "consolidating" the market, publishers make nice ever more energetically.

So the risk is that publishers will enter the eBook market with their eyes on Barnes & Noble...doing things the B&N way. ...that publishers will pay fees for placement on B&N's website, pay fees for write-ups in B&N e-newsletters, pay for display of images, chapters, pay, pay, pay to access the market they see B&N as providing.

But I wonder. With Ken Geist asking indie booksellers to help.... Is it possible that in this industry cycle, publishers will not be fooled again?

Is it possible that as B&N plays its consolidating game, closing stores, reducing shelf space for real books (bringing in toys) -- THIS time publishers will stop running from the bully, and instead stand their ground and look the bully in the eye?

What could publishers do to end their abusive co-dependence on Barnes & Noble? Are they simply going to play along whenever Barnes & Noble sets up a new system of rules and regulations? As the new eBook market emerges, and Barnes & Noble endeavors to corner that market -- will publishers permit this?

From the investors call, as reported in Publishers Weekly:
"Riggio and other executives, including CEO William Lynch, also stressed that B&N already has a larger share of the e-book market (20%) than it does of the bricks-and-mortar store market (17%). Lynch said given the investment necessary to sell a large number of e-books, he believes the e-book market will be dominated by only three or four players."

Will publishers let this stand? Or will publishers ensure that eBooks are available for resale by a very wide variety of retailers? Will they ensure B&N cannot corner this market? It is for publishers to decide....and should they once again permit B&N to control their fate, then once again, they will pay the price, suffering editorial-unit dismemberment, corporate takeover, downsizing....

And it's not necessary. Publishers, stand firm against Barnes & Noble this time! Work with indie booksellers to ensure you maintain your freedom to make your own publishing decisions. The eBook market belongs to the publishers. You can keep it that way.

Superstores Down; Indies Down Too?

Yesterday's entry made it into the national specialty media:
http://news.shelf-awareness.com/ar/theshelf/2010-07-20/amazons_relative_gains.html

Today, I engaged in further conversation on Mike Shatzkin's blog:
http://www.idealog.com/blog/publishing-conversation-at-the-ballpark

Here's the relevant excerpt:

Mike Shatzkin:
"Andy didn't quite interpret me right. He think I said Barnes & Noble is
going down. I think B&N (assuming their new management doesn't screw it up)
will be the last bookstores standing (except for a tiny number of hardy
indies.) I think times have already proven demonstrably more difficult for
indies (writ large; there are always exceptions) than for chains."

Me:
"I agree that there will always be some chainstores around. If you recall however, just a few years ago Barnes & Noble announced that their existing 500 superstores would soon become 1,000, nationwide. At that time I was predicting that their superstore model would collapse. Unless I am mistaken, you are also saying now that their business model, trumpeted so aggressively a decade ago, is now on the rack, and that they will soon be closing many superstores. Nationally there are perhaps 1,100 superstores [run by various chainstore companies] right now. I assume that you agree that a significant reduction in that number does vindicate my prediction five years ago that "superstores are going down". Here's my analysis (and the part I was playing) from that time:
http://rebelbookseller.livejournal.com/29137.html

Mike Shatzkin:
"Superstores *are *going down. But where are the indies compared to the time
when you made that prediction 5 years ago versus where is B&N? That's the
point I was addressing."

Me:
"Indies are down from about 1600 members of ABA to about 1450 members of ABA. We seem to be losing 100 stores per year and gaining 100 stores per year. My premise is that indies will begin their rebound as superstores begin to close in significant numbers because laid-off superstore managers and workers will in some cases open stores (in many cases probably underwritten by local real estate interests attempting to restrain drops in property values associated with the closing of book superstores). That is: superstores in many cases were incented and recruited by city fathers. Their departure means the city fathers will again work through chambers of commerce and other local business groups to facilitate the presence of local bookstores. It's good for neighborhoods. That's my guess, as of five+ years ago, and I think it's happening here and there right now, and will accelerate. I want to express again my appreciation for the time you are taking to have this conversation."

Mike Shatzkin:
"It's an interesting theory, Andy. I still doubt it, but we'll see where it goes."

Me:
"I see that the numbers I just quoted in fact say that indie store ABA member numbers have declined 10% in the past five years, which I think is correct. Sorry if I made the incorrect statement that indie numbers aren't declining at all any more. However, the rate of decline is pretty slow compared to the disaster of the 90s when we dropped from 5,000 to 2,000 in seven years. To conclude this thought (I am standing at a small bookstore cash register on a very busy day today!!) -- chain bookstore HAVE lost very big, in the sense that Dalton and Walden are defunct. Over the past five years those two chains lost about 800 stores. It's true that's not the superstore sector of the chainstore business, but I was right that chainstores would be in trouble over this period. You are right that as yet, my prediction of an upswing in indie store numbers has not materialized though."

Publishing Industry Legend Says Superstore Chains Are Going Down

For the past several days I've been vociferously commenting on a fascinating blogpost. Industry expert Mike Shatzkin believes that the rapid rise of eBooks will depress print-book sales so much that chain storefronts will not be able to continue to operate profitably. He thinks that a very large number of superstore locations will close. He is principally concerned about this because he thinks that the major publishing companies will be seriously damaged. However in a number of exchanges with him, in the comments section of his blog, I was able to elicit the opinion that unusual, quirky, creative and talented independent booksellers might be able to continue to operate bookstores during the coming eBook revolution, even if the large general bookstore corporations were in dire straits.

My conclusion here is fairly obvious. I won the war!

Or, okay, we, the indies, won the war.

Some may say, "You didn't win the war--Amazon.com and Apple and Google won the war."

I disagree. I have been fighting the bookstore chains since 1985. So, if I have been fighting them, and if the chains go kerplunk, then, clearly, I won.

Thank you very much!

Here is Mike's blogpost. His blogging software isn't built to withstand the number of comments I have made to the post -- in some places my comments are displayed one word wide and dozens of words deep!!
http://www.idealog.com/blog/where-will-bookstores-be-five-years-from-now

I feel great!