What bears do in the woods…

To write that the current economic downturn is having an impact on the book retail and publishing industry is to do no more than state the obvious, or as one commentator asked when commenting on the publication of a new Bookseller Association report on profitability: “I wonder if the BA would look at what bears do in woods…”  Quite.  Independent booksellers have been reporting similar observations for years but it didn’t cost non-BA members £100 for a copy.  Ask any indie.  They’re hardly going to be swamped with a rush of book buyers this Christmas and will have more than enough time.

The more difficult task is to ask what can be done with a pro-active view to effecting change, a task made more difficult in that publishing is in many respects an old-fashioned industry that is yet to celebrate the dawn of the dawn of the Twentieth Century.  There are some exceptions.  Some people are at least framing the question.  Neill Denny, Editor-in-Chief of The Bookseller points out: “The cosy belief that the book trade was somehow recession-proof has been exposed as wishful thinking. For the first time since Nielsen BookScan TCM records began in 2001, book sales have slipped into negative territory.

Independent booksellers know that the real beginning of the ‘recession’ was back at the turn of the millennium when some new players entered book retail with some very modern notions about how to shift large volumes of books: the supermarkets who make no distinction between the loss-leading margins on bananas and books.  If a product perpetuates the illusion that a certain supermarket is cheaper then it will be discounted and books are very good at helping consumers immediately spot a bargain: the RRP is printed on the book jacket.

The millennium also saw the rise of the internet.  As connection speeds increased, so did the ease of shopping online.  As the cost of a moderately-good PC came down, so the size of the potential market for online-only retailers increased.  Christmas 1999 saw the more wide-spread availability of bandwidth faster than a fax machine.  It also saw the sort of change in retailing of a sort that Malcolm Gladwell described in his book, The Tipping Point, a moment when consumers began to hear about a new no-fuss book retailer that shared the same name as the mighty river and were excited about a new way to shop.  Crucially, the horror stories about online fraud would not kick-in until later when the first Daily Mail correspondent got an email address.  So far so good – so much discussed already – but I wish to make a quick diversion…

While industry insiders were still supping the Bollie, toasting the realisation that not only would the demise of the Net Book Agreement (NBA) not result in the (immediate) demise of bookshops but the discovery of a new retail channel, they would not have been listening to their staff on the shop floors, who were reporting what would become a very significant factor not only in book retail but in the economy in general.

It is not always the case that when junior staff complain about the poor quality of their pay packets that they are just griping because they have too much time on their hands.   When government and business leaders report an increase in national wealth, they neglect a very important detail in their statistics: when reporting averages, they generally mean the mean average.  The mean average should never be used where one wishes to obtain a solid understanding of anything involving money: it is a quick and easy back-of-envelope calculation that readily conceals problems from those paying out (and indeed, receiving) big fat bonuses.  In terms of the book trade, the truth was there all along: while the volume of books sold has increased slightly, the same has not been true of the value of those books sold and this at a time when the economy was supposed to be growing exponentially.  It does not take a genius to infer from the increase in the gap between richest and poorest reported in July 2007 being at the greatest it has ever been in 40 years that the same consumers who regularly bought books must simply have been taking advantage of large discounts to buy more books and most crucially at a lower rate of margin.

What we should do at this point is look at the recently published report by The BookSeller’s Association (BA) into the impact of how we sell books on industry growth, consumer behaviour and how this compares to similar markets.  The report, titled “Bookselling: International Market Comparisons – A Benchmark Study of Profitability” draws conclusions based on a study of available data by two independent advisors, one of whom worked with KPMG for 17 years, that is not dissimilar from the arguments being made by independent booksellers for a number of years.

The conclusions are quite awful and in brief, essentially state that: “The US and the UK make significant use of promotions and discounts but this does not translate into higher growth in volumes when compared to other markets studied. The UK has the lowest growth in market value while the US has managed to achieve higher value growth reflecting their ability to increase average prices despite their use of promotions and discounts.”  Another key finding was that: “Although volume in consumer books has grown at around 2.1% per annum between 2004 and 2007, the value of books in the UK has grown by 2.3% per annum at current prices.” In essence, the UK book market has barely grown at all during a period of what before the current recession was described as a period of economic growth.

To be absolutely blunt: if you can’t grow your business when the going is good, you simply haven’t addressed the underlying flaws in your business strategy.  The chance of your business surviving this recession are pretty much naff-all without yet more needless consolidation (needless because the fundamental flaws that led to downturn in profitability and growth are not addressed when two failing businesses simply double the seats in the boardroom and therefore the number of idiotic decisions made by directors who don’t know what’s happening at the ground-level… the fish rots from the head and so on but do two-headed fish stink twice as much?).

Even now, there are some who will swear blind it’s not their fault, that the picture is rosier than the nay-sayers claim.  Setting out the deckchairs for publishers who are going to have a very nasty hangover in January, is Phillip Jones writing in The Guardian.  A typical criticism made of the BA study is: “In France, for instance, booksellers are restricted from selling books at discounts of more than 5%, yet the French government recently had to introduce a range of measures aimed at saving its independent bookshops.”  What Phillip has forgotten is that the French book market was not used in the study precisely because it is unlike the UK: the French still maintain an equivalent to the NBA and their average margins are lower.  (A few years ago, I heard that Michelin will tell booksellers what margin they receive – cough, cough, try it here and see where it gets you).  However, what the French do share with the UK book trade is the peculiar phenomena of book sales remaining relatively flat while the costs of conducting business increase .ie. the cost of property.  In the UK, we simply lay off staff to cut the costs of business in the short-term (or in the case of Waterstones ban overtime, cut staff by not recruiting for vacated positions and collapsing 8 pay grades to 6) but the French have labour laws and unions with an abundance of sheep.

As the figures published are even now being debated from a position of wilful denial, let us instead look at observed phenomenon.  Any bookseller on any given day is going to be asked for more discount than is already offered by a customer in their shop, regardless of whether they work in a chain store or in an independent.  There is a constant myth that still holds among many consumers that books are too expensive.  In a very real sense, deep discounting has served only to reinforce this perception.  Readers don’t care if Tesco is selling books as loss-leaders; as consumers, they are simply happy to get the book of their choice cheaper than elsewhere.  There is simply no use deploying the argument that a typical paperback will be around the same price as a cinema ticket and will provide – typically – at least 6 hours entertainment compared to 2 and can then – bonus this – be passed on to friends for free without charge of illegal piracy.

Consumers are not sheep but exhibit a complex variety of observed psychological behaviours: everything from the Wisdom of Crowds to Learned Behaviour is at play on any one trading day.  If we wish to understand why consumers are not cramming into shops now and helping the book retail industry toward a level of break-even – let alone profitability – we have to look at how we have offered books in recent years.

Guess what the book trade did last year when an upturn in Christmas season trade was slow in coming?  It discounted.  And what did it do the year before?  It discounted.  Consumers have learned that if they wait long enough, the discounts will be even greater than in the previous year and this does not just apply to bookshops.  The customer, so the saying goes, is always right.  This time, it’s breaking our industry because not only have we not succeeded in growing the interest – and sales – in books to a sustainable level but we have become over-dependent on the same consumers.  We have fed them and made their shelves fat on big discounts during the very time when we should have been consolidating any genuine growth.  These consumers have bought more books while they were able but we have always assumed that they would always be able to do so and not developed strategies that will continue to attract business when those same customers can no longer afford those books even at discount.  As the only retail sector to offer the newest product at a cheaper price than the older product, we have not only thrown away premium revenue – an opportunity to maximise profit when interest in a particular book is at its greatest – we have squandered an opportunity to educate our consumers into a solid buying habit that would have seen us through lean years.

As ever, it is education that is the key.  How many have noticed that Starbucks is collecting new books on behalf of local schools?  As a G8 nation, we should be ashamed.  This scheme would have no chance of success if we did not already know that our children are not provided with ample opportunities to engage with books at schools.  We are not talking about schools in inner-city quasi-battle zones – such establishments will always need our charity and support – but schools in areas that are easily defined as ‘middle class’.  I’ve not only seen a collection box in my Starbucks here in Swindon but in the Starbucks on the Royal Mile in Edinburgh.

While our government – in the very loosest sense of the word – is determined to continue spending £5bn on a valueless ID card scheme that will continue to cost £500m every year after, we are entrusting the future of our country, our children’s future and to be quite selfish, that of our publishing industry to a bunch of morons who cannot see the common sense in deploying that money in educating the future generations properly.  And let us not go into the fatuous gas-back program that is Trident… oh go on then.  The replacement will cost UK tax-payers £70bn.  And no, I didn’t confuse an ‘m’ with a ‘b’.  While the government is finding pennies down the back of the VAT sofa, we are spending £70bn to renew a weapon that is no use in the wars (note the plural) that we are actually fighting.

But the stupidity and down-right ignorance in Britain is not reserved for our Right Honourable Unmentionables.  A recent BBC article highlights how the difference in levels of education between China and the UK could not be more absurd.  Among the rest of the propaganda that The Great Clunking Fist would have us believe when he fiddles the tune of Britishness, is the assurance that we are a ‘brain’ economy, that Britain is at the fore-front of design and technology and research and all things wonderful and we are great quite simply because we are Britain.  Ahem.  It is quite a shock to be reminded that since the demise of Empire (aka. democratic freedom for the ‘help’), we have become a bunch of fat, useless oafs sat on the sofa watching X-Factor and only engaging our brains when we need to solve the problem of how to get our oafish, lardy, drunken arses from the sofa to the fridge without falling over the dog.

Think this excessive?  Then read this article that discusses the shocking revelation that it is not only pupils but teachers who are regularly emailing one of our top writers for help on understanding her books.  Susan Hill’s I’m the King of the Castle was on the curriculum when I was at school.  (As a GCSE-level story, it is not difficult to understand: a boy’s mother remarries; they move to the country; the boy’s new step-brother bullies him; the parents don’t believe him because they don’t want their new idyll spoiled, until finally; the boy commits suicide.  As a story, it’s full horror is on a scale with The Lord of The Flies – in other words, a classic).

We are not a manufacturing economy.  In one of those moments of hubris that makes the careers of historians, the Conservatives under Thatcher dispensed with industry as we were – perhaps necessarily at the time – repositioned as a ‘service’ economy.  The problem is that call centres are cheaper to run from India and the Philippines.  We have to reinvent our economy again and this time, make the changes lasting and profitable.  We must become what we already boast we are: an economy founded on intelligence.

Only this week was it reported that Lord Mandelson has targeted which companies to save during the recession.  According to Patrick Wintour’s article on Guardian Unlimited, this decision is not being made arbitrarily: “Company data such as the number of employees, the importance of the firm’s research and development and its performance were likely to be factors in deciding which businesses should be given government aid.”  These are criteria which would ordinarily exclude publishers and book retailers.

In attempting to (properly) become a ‘brain’ economy, it is clear that we will need better schools and the foundation of any good school is not only the books offered the pupils but the core understanding of those books by teachers who consistently demostrate to their students how best to make use of books.  Beyond key science, maths and humanities texts, novels (and plays and poetry) will never build a national economy and we shouldn’t expect them to.  However, the task of creating a strong economy is for a generation of graduates who can concentrate for the period required to read, understand and finally appreciate those books.

Questions of how publishers and book retailers can better support the education of future generations of book readers are already being asked with various schemes up-and-running but in the long term, it is surely the ambition of all groups to initiate, develop and grow schemes that are every part as ambitious as World Book Day.  However, as commercial enterprises, publishers and book retailers need short-term solutions to questions of profitability.

Children’s publishers are, for instance, still discovering the profit to be made in re-issuing out-of-print books and while this would never be sufficient for general trade publishers, a similar approach may certainly be complimentary, especially where books accompany marketing campaigns allied to film releasesFreezing the purchase of new books from literary agents is obviously going to be of no benefit to publishers and book retailers would surely take a dim view of publishers restricting future range, a measure which would impact on future sales.  Poor sales for retailers obviously means less money being fed back to publishers and ultimately authors.

While one UK publisher seems able to grow profits organically and is forecasting strong growth in 2010 in its US educational division, it would be reasonable to argue that this growth is vulnerable to changes in policy and trading conditions external to the group’s own strategy.

As much as I dislike the over-use of the term, a more holistic approach is needed, one that sees retailers working collaboratively with publishers in identifying which books consumers would like to see before they are produced.

However, these schemes do not generally lend themselves to supermarket involvement, for the inventive promotion of books are propelled by professionals regularly engaged with the books that are being promoted on a local level.  It would be naive to believe that retailers who can order many thousands of copies of a single title in advance and thus support a first print-run would be excluded from publisher marketing strategies because in the end, all commercial activity is about money.  This is why any strategy involving a change in how we promote books has to be of cost-benefit to supermarkets and further, the ultimate owners of the books involved – the authors.

There appears to be little perception among even bestselling authors of the true impact of discounting on their earning potential but authors reading this should ask themselves a simple question: in negotiating a first contract – or renewing a contract that is about to expire – did the publisher press you to accept royalties based on a final, net selling price (perhaps after returns) or on RRP?  If your agent negotiated – and agreed – a contract based on something other than a fixed percentage (regardless of sales channel) of the RRP then quite frankly, you are either uninformed or a prize chump.

In my regular dealings with publishers, there are some representatives of those companies who will on occasion lapse into speaking of ‘our books’.  This is incorrect.  Publishers are more correctly the first licensees (with newspapers and book clubs as secondary – or subsiduary – licensees).  In such a role, these commercial groups are the guardians of copyright but as authors will have realised as publishers aggressively (attempt to) secure not just digital rights but rights on all formats as may yet be developed, publishers can be somewhat over-zealous.  It is the author, with sound advice from their agent (this being the reason why you engage such a professional), who must decide who best represents their works and safeguards their income.

An author with a contract that earns royalty against net selling price must be aghast at the discounts on offer but fortunately, students who have excelled in literature rarely excel in mathematics too and the assurance that higher volume sales cover any loss of income through discounting must therefore have so far gone unstudied.

Here’s a mental exercise: assume that the margin – or royalty – earned per sale is the same percentage whether a book is sold at £2 or at £10, say 10% (the true average is around 8%).  If total sales across all outlets at Average Selling Price £2 are roughly 10,000 copies and for a similar book with ASP £10 sell approximately 2,000 copies, which title then has been more profitable?

If you answered neither or both the same, you should volunteer to work in a bookshop for a couple of days.  Every trading day accrues expenses for a retail outlet and whether it be staff, utilities or rent, it is obvious that to sell the greater number of 10,000 copies, you are either going to need a very big shop with a massive footfall or a very long sell-through period in a smaller shop.  A medium-sized bookshop might expect to sell a bestseller like Dan Brown’s The Da Vinci Code at a rate of 100 per week (at reasonable discount).  Do the maths.  To reach the higher sales volume of 10,000 copies, you are going to need the constant support of supermarkets over an extended period and this will necessitate TV exposure and so on.  Look again at the shelves of even the largest supermarket in your local area: there will be lots of face-outs that conceal how small the actual range of titles is on offer.  This range will change weekly.  Logically, the number of books that could potentially reach that magic 10,000 copies sales level is commensurately smaller.

Now consider your local independent bookshop: it’s quite likely that Miss Bookseller buys her groceries at the same supermarket.  She can see how cheap are the latest bestsellers and is therefore very disinclined to carry your book in a quantity greater than one copy.  Her income will likely arise out of all the other books that the supermarket is not promoting.

The recession is going to cause a surge in the number of independent booksellers going out of business.  Banks are yet to be coerced by the government into advancing loans so new independent bookshops – even from small independent chains like Daunts – are simply not going to appear in 2009.  This will impact upon the range offered and those publishers who do not manage to win support of their titles from supermarkets are going to struggle without those important middle-men, the knowledgeable and experienced booksellers.

The industry – publishers and book retailers – have to begin moving now to shore up the position as it stands now.  We cannot go back to the Net Book Agreement as there is not only too little consensus to do this beyond the independent booksellers and such a protectionist measure would likely face legal challenge.  Consumer groups may well appear on the forefront of any challenge, as rolling back to a non-discount model would be a breach of trust.  It is also likely that larger retailers could still break restrictions even where they were signed into law using their superior buying power as leverage.  Further, many of the players in publishing and book retail are public companies who have become intent on increasing market share and there would be an insistence on adhering to the norms of the open market where aggressive trading compels companies to evolve.

There is another media industry that we can look to for inspiration, an industry that is experiencing similar challenges through an increasingly digitised model that is forcing it to respond to changes in distribution.  The film industry has faced many challenges recently including distribution, the digitisation of media content and piracy.  The lead time between the appearance in cinemas of a new movie and the subsequent offer on DVD for even the biggest films has shrunk to just months.  The latest Batman film appears at the beginning of December having been a summer blockbuster – a similar lead time seen between hardback and paperback publication of contemporary bestsellers.

What then if bookshops were to ‘premier’ the books with an extended lead time?  Think about it: here is an opportunity for bookshops to collaborate with publishers on an unprecedented scale.  Publishers would no longer have to expose themselves to the exaggerated risk of paying six-figure advances on any book until it had proven itself through the promotion by bookshops and by word-of-mouth among the consumers reading – and buying – the books.  With lower print-runs publishers would be reducing their risk and could offer royalty advances to authors on a two-tier basis: if a book proved itself, the higher advance would kick-in and then books would be rolled out to other retailers with a discounting model – supermarkets and internet.

Supermarkets would gain by only having to give valuable display space to stock that will move quickly.  Assured of a sale, supermarkets would no longer be locked into a Sale-or-Return model that limits the terms at which they can buy but could buy Firm-Sale and thus negotiate superior terms.  It follows that supermarkets would not then be selling books as loss-leaders but as profitable stock.

Amazon would be in a unique position to profit twice-over.  Amazon currently takes a share on the sale of every book purchased through it’s Amazon Marketplace scheme with consumers generally buying from the highest-rated vendors – those who deliver quickest with the best packaging and so on – so not being able to offer books at discount would be no impediment to sales.  Discount-incentives could be offered in terms of free postage and packing.  Later, when a book becomes available for discount sale, Amazon would have a comprehensive sales history which would inform it of which titles it should then buy in bulk at Firm-Sale cost-price.

The mechanic is a simple one: there are a number of people in the book trade who are currently looking to scrap Sale-or-Return supply.  It is wasteful but only because we don’t make better use of the books returned and because we don’t make the process work for us collectively.

The standard lead time before a new title can be returned is three months.  Give independent book shops the opportunity to work their magic, selling in-demand, new books at full RRP.  If books don’t work, publishers can scale back both the planned printing (saving money) and the top-up advance to authors (another saving).  Publishers, supermarkets and other discount retailers will have sufficient data from Nielsen BookData to be able to anticipate which books should be bought Firm-Sale and in bulk.  As the publisher will not be taking back returned stock from these retailers, the larger print-runs can be to order and much cheaper than the initial printing with the sales of first print-run stock subsidising following print-runs.

Bookshops will not lose out at this point for once the publisher has a more accurate picture of the continuing support available for each title, the bookshop can then be offered a higher discount to continue supporting the book at a price offered to consumers competitively.  Publishers may wish to stipulate on the first offering of a title that bookshops can only buy-in to higher margins if they support the book intitially and this will ensure that bookshops stick to the mission: that is, offering range.

There are disadvantages to such a scheme: celebrities would no longer be guaranteed huge advances for their ghost-written remainders-fodder.  Are these books really so important to the book trade?  If we look at the Top 500 book sales from January 2001 to September 2008 (Source: Nielsen Bookscan),  the short answer is: no, they’re not.

The biggest books – by volume and by value – are (no surprise) novels by Dan Brown and JK Rowling.  Books which were hungrily snapped up even by people who didn’t normally read – and better for us, buy – books.  At this stage, it is pertinent to ask which retailers backed JK Rowling in the beginning, creating the word-of-mouth success that the series eventually became?  The supermarkets? Amazon? You know the answer already.  Booksellers hyped the first two books so that by the time The Prisoner of Azkahaban was released there was some buzz but nothing like the monstrous marketing blitz of books 5, 6 and 7.  If the publishing industry wants another Harry Potter, it is going to need its booksellers and bookshops.

Disadvantage number two: the buying power of the supermarkets helps keep publisher costs down.  This is one of those assumptions that is so easily challenged one can only wonder why it’s not laughed at more regularly.  Supermarkets do not buy Firm-Sale.  If the books on their shelves do not sell, they return those books for credit on their next invoice.  This is why the collapse of EUK has been such a disaster: even smaller publishers are going to have to write-off money.  As the middle-man in the supply chain, publishers did not receive their income directly on receipt of the goods but will have to wait for the leavings from the Inland Revenue’s table.

The key is not to see bookselling and publishing as rival ventures but two faces of the same trade.  Where publishers attempt to learn the experience of book retailers, it is surprising the things that can and will be learned but such ventures should not blind us to the fact that many aspects of the trade are already known.  Why is no-one talking?  A poster on a bus stop is not going to make the next Harry Potter.  Only people talking about books can do that and still the best place to talk about new books is bookshops.  An automated suggestion online for your next read is not going to be half as accurate as one skilled bookseller but one bookshop – a hundred bookshops – are not going to offer the same buying power and therefore the same revenue for a publisher’s growth as a single supermarket chain.

We do need a new agreement on how to sell books and how to grow our respective industries (or at the least, in the current recession, sustain them) because if we can’t develop our core business, even the largest retailers are going to lose.  Only when we have secured our current position and with a working strategy in place can we then look forward to the long-term goal of shaping tomorrow’s readers and further, developing our economy so that it does not experience such toxic shocks in the future.