The Shatzkin Files


Ideas about the future of bookselling


There is a vision of online bookselling, which I share, which is that it will become increasingly atomized. Books (and, ultimately, other content too) will be merchandised in unique ways across countless web sites curating and presenting content choices for their own communities and audiences. One early prototype of how this might work is the Random House initiative powering “bookstores” for Politico and Publishers Lunch’s Bookateria.

This is not a new idea. I remember a meeting more than five years ago hosted by O’Reilly Media in New York City to plan the first Tools of Change conference at which Brian Murray of HarperCollins, not yet their CEO, talked about how a way should be found to merchandise books on current affairs topics around and adjacent to today’s news stories that were relevant. The Random House capability, among many other things it can do, readily enables just that.

This is not necessarily bad news for the biggest online retailers like Amazon, B&N, Apple, and Kobo. The Random House execution delivers “their” customers to one of the others to consummate the sale and they’re rewarded for having pushed the “discovery” by collecting referral fees from the etailer  which processes the sale. (How the revenue is split between Random House and the web site providing the screen real estate is not known to me, and presumably only one of a number of moving parts in the negotiations between them.) Doing things this way allows both Random House and their clients to avoid the two biggest (and closely-related) headaches of online bookselling: managing DRM and customer service. In addition, the costs for what is called “card and cart”  — handling credit cards and providing shopping cart technology — are also avoided by handing off the actual transactions.

Bookish, the new discovery engine and bookseller which was financed by three of the Big Six, also offers referrals in addition to their own fulfillment (which is provided by Baker & Taylor).

Peter Hildick-Smith of Codex, our go-to guy for understanding the concept of “discovery”, says that bookstores offer discovery combined with availability, a “twofer”. In effect, web sites offering ebooks (and possibly print too) alongside their information and conversation are doing the same thing.

In fact, the same approach makes sense in the brick-and-mortar world, but it is a lot harder to do.

Merchandising is the bottleneck for any retailer, online or in stores, trying to sell books. Which books do you offer? Which books do you feature? What do you discount? This is a challenge online, which is why Random House believes it can build a business helping web sites do it. But it is even more challenging in a physical environment, which requires actual printed books to be displayed, sometimes to be sold and sometimes to be returned.

But smaller and more targeted displays of print books in stores — whether a general selection or one targeted to store’s other customers — also make more sense than big book superstores in the digital era. Physical bookselling locations can offer consumers convenience and speed. If you’re shopping, you can see more titles faster than you can online and you can walk away with your purchase rather than waiting for delivery.

Publishers gain access to their audience through retailers. Non-book retailers, just like web sites, are specialized in some way and they both attract and serve customers if they offer appropriate books.

The challenge for non-book retailers who would like to carry books is stocking them. Almost no matter what a store sells, from clothes to hardware to specialty food, there would be a selection of books that would please their customers and perhaps increase their sales of core items. This is obvious in, say, a crafts store or hardware store where just about everything that’s sold is part of a project (selections of which and instructions for which are often found in books) and could require instruction about how to use it most effectively (also content well suited to books).

Picking the right books is hard work. If the retailer buys them from publishers (whose sales representatives would know their content and could actually guide one to the best title choices for one’s audience), it is a hopelessly fragmented challenge. In many areas, you might find 25 good books that could require you to buy from 10 or more different publishers. The publishers’ sales terms will be one problem (minimum order sizes) and the administrative costs would be far too big to justify considering the small sales the store would get from ancillary merchandise like this. Wholesalers have the books of many publishers, but their teams don’t have the kind of title-level knowledge the store needs to make the selections.

Meanwhile, bookstores labor under a similar constraint. We pointed out in our recent B&N analysis that the cost of their supply chain gets harder to bear as sales of books diminish. Independent bookstores have also always been constrained by the cost of buying, although they don’t really see it that way because it is part of the landscape.

The core point is this: the responsibility for getting the right books onto retail shelves is one that has always belonged to the retailer. That reality encouraged, even required, large book retailing operations: big independent stores and large chains could amortize that cost across far more sales than a small bookstore or a little book department in another retailer.

There is one established way to reduce those costs: vendor-managed inventory. With VMI, the cost of negotiation — of conversation between a “buyer” and a “sales rep” — plummets. In addition, it is actually easier to stock the right books at the right time. A key component of making better decisions is making more decisions that cover shorter prediction times. Ordering more frequently makes it much easier to avoid over-ordering as a protection against going out of stock. That increases stock turn (the key to bookstore profitability) and reduces the need for returns (leaving more margin for both the retailer and the publisher).

As I’ve written previously, a long-standing client of mine called West Broadway Book Distribution has been operating a VMI system in a small number of non-book retailers for a decade. They have a system which interprets the sales reporting and makes restocking decisions based on them automatically. They also have a system to test new titles in a sample of a chain’s outlets to decide whether or not to roll them out. Their automation has enabled them to manage a lot of granularity — thousands of potential titles in more than a thousand stores with the books coming from more than a hundred publishers — profitably and with workable margins for both the retailers and the book-providing publishers.

West Broadway started because its owner had a few books of their own that they wanted to sell to a couple of “women’s hobby” accounts where they already had relationships. We encouraged them to be more ambitious and they were willing to try. So they aggregated the books from many of their competitors, larger and smaller, to add to their own and invested in the VMI system (which they might not have needed to make sales of their own books alone).

That’s a path we should expect to see other specialty publishers taking in the future. Subject-specific knowledge is helpful in doing that (although it can be done successfully without it).

Stocking a general interest store with VMI is much more complicated and will take more time to evolve. But bookstores can take steps in the right direction by consolidating their buying to a smaller number of suppliers and pushing all their really small vendor ordering to a wholesaler (or two) to gain efficiencies from managing fewer vendors.

Remember that one of the keys to efficient stocking is frequent ordering. Bookstores mostly understand that and order from wholesalers every day. But they probably also order directly from dozens of publishers. They do that to gain a little bit of additional margin and, perhaps, to reward the sales rep that calls on them to present the list.

I’m going to say flatly that the margin differential is almost certainly not worth pursuing for what it costs in stock turn (capital tied up) and risk (returns because people buy more copies when they’re tempted by the higher margin order). My father made that clear in numerous examples in his monograph, The Mathematics of Bookselling.

The rep reward is a little more complicated but most publishers these days figure out how to pay their reps for sales that go through the wholesalers.

Any store routinely dealing directly with more than 20 publishers and distributors will almost certainly improve their financial performance by cutting that back and consolidating. They might  lose a little margin; they might miss a couple of smaller-potential titles (but not big ones), but their lives will be simplified and that will save a lot of money.

And with daily ordering from wholesalers, which just about all stores do, it becomes unnecessary to carry more than a copy or two of most books, except for the purpose of display prominence.

Once a bookstore has taken those steps, it is in a position to start demanding some VMI help, even if just from the sales reps. This was an idea that was pioneered in around 1980-81 by an indie in Shaker Heights, OH, called Under Cover Books in a project on which I consulted.

We were too far ahead of our time (the computers were too klunky), but the idea was that we gave the reps reports of how their titles were performing: on-hand, shipments in, and sales. Then they had an inventory ceiling stipulated and were free to order more books, of their choosing, up to the inventory ceiling. We then calculated the inventory’s performance (beyond the scope of this piece to get into that particular detail, but essentially combined the impacts of discount and turn) and raised the inventory level for the most profitable publishers and reduced it for the less profitable.

What defeated us was the complexity of administration. Part of that was because there were so many more smaller publishers then. Part of it was that the only way to communicate the inventory data was by shipping spreadsheets by snail mail (slow and not cheap).

This would be infinitely easier to do today, and the ease would be multiplied if you were only trying to do it with a handful of big suppliers.

I am only aware of one publisher today that has worked corporately on a VMI system for books, and that’s Random House. I believe they initially developed the capability and implemented it for chains: first for Barnes & Noble and more recently for Books-a-Million. But they also seem already to be prepared to offer the service to independents. Since, when the Penguin merger is complete in a few months, stores will be able to get damn near half the most commercial books from Penguin Random House, having “just” them operating VMI would constitute a sharp reduction of the store’s operational demands.

Whether or not this is what they’re thinking at the moment, the new Penguin Random House is bound to find it sensible to employ its VMI capabilities in self-defense to open retail print book outlets in places that are bereft of bookstores in the years to come. Those outlets will have space for shelves, customers and cash registers, but no ability to discern what books they ought to stock or what the timing should be of ordering. They’ll be sought out as necessary because bookstores, which are carrying the requirement of making these stocking decisions, will have increasingly become uneconomic (and therefore defunct).

This vision of the future is of books being sold mostly in stores that aren’t bookstores, enabled by VMI systems that largely don’t exist yet. It would be even better if the VMI vision took hold in time to save some of the bookstores that exist today to survive to that future time when the demands on them to manage inventory will have been ameliorated by necessity.

In my last post, I cited a bunch of suggestions pulled together by Philip Jones for how publishers could help bookstores survive and promised to review them. This post was intended to get to that, but I couldn’t get there within a reasonable number of words. Next time.

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  • http://twitter.com/philipsturner Philip Turner

    How nice to be reminded of the experiment that Undercover Books, my bookstore that Mike cites above, undertook in conjunction with him and his dad back in the early 1980s. As I write about it in a personal career sketch on my blog, with Mike and Len we sought to innovate a buying method that would stock our three stores profitably while taking optimal advantage of critical info known to sales reps and sales management at the publishing houses from whom we ordered our inventory. We called this seminal experiment “the rep program” for the emphasis it placed on utilizing key intelligence from the publishers and their reps. It was outlined in Chapter 7 of the elder Shatzkin’s 1982 book, “IN COLD TYPE: Overcoming the Book Crisis.” We encouraged the reps as much as possible to tell us the quantities and titles they believed we should be ordering, so we could focus on taking care of our customers and merchandising our stores. The experiment was constrained, not only by the absence of available computing power, but even worse, by the companies’ insistence that they continue loading us up with far too many copies of their lead titles, overlooking the particularities of our stores. Despite the limitations, the mindset it engendered in me as the nominal lead buyer led to greater profitability and fewer out-of-stock situations than we had achieved before. This, in a sense, was just-in-time-inventory before the term had been coined. The experience shaped me in to the editor I am today.

    • http://idealog.com/blog Mike Shatzkin

      Thanks, Phil, for the reminder that this is covered in the pages of In Cold Type, for which I had failed to provide a link in the body of the post but I do here.
      Mike

  • http://twitter.com/emmittc emmittc

    “Any store routinely dealing directly with more than 20 publishers and distributors will almost certainly improve their financial performance by cutting that back and consolidating. They might lose a little margin; they might miss a couple of smaller-potential titles (but not big ones), but their lives will be simplified and that will save a lot of money.”

    these stores may be outliers and anachronistic (still many exist and are thriving) – but there must be a place in a physical bookstore for good books – whether they are “smaller potential titles” or not – and the consolidation you recommend runs the risk of overlooking those books and fundamentally altering an inventory mix that customers have come to know and love over many years….then financial performance could be threatened in a much more critical and fundamental way….

    i feel compelled to defend the place of these “smaller potential” titles in a physical location where booklovers/readers can browse and sample freely…and if it takes some investment to get them to that shelf – it is a worthy one…..

    • http://idealog.com/blog Mike Shatzkin

      You can get any book you want from Ingram. There is no need to buy directly from a tiny publisher to get their books.

      Mike

      • http://twitter.com/emmittc emmittc

        respectfully – that is simply not true….you might be able to make that claim about amazon – but I have had plenty of experience in bookselling and there are plenty of books that they don’t stock….and we want….

      • http://idealog.com/blog Mike Shatzkin

        Plenty? That’s really a surprise. I’ll be very curious to ask my friends at Ingram about that! Pretty amazing that there are any substantial number of books that are important to you commercially that they *won’t *stock!

        Mike

      • http://twitter.com/emmittc emmittc

        plenty…substantial…whatever……let’s just say enough to matter and, considering the amount of books published, is not really that surprising…ingram is a great company and is incredibly efficient and of course it is not that they “won’t” stock – they are very responsive – BUT – we don’t expect them to have everything and if our customers want it or we think they might – we do what we need to do….but we won’t just throw our hands up if ingram doesn’t have it….

      • http://idealog.com/blog Mike Shatzkin

        I’m afraid you’re offering a service that fewer and fewer stores can afford. And, frankly, it might even be you lose money on many of those sales.

        Mike

      • http://twitter.com/emmittc emmittc

        no doubt fewer and fewer stores offer it (sadly) – but it is possible and we are profitable and thriving…just wanted to make that point…..i seriously doubt that we lose any money on those sales – no matter how you calculate the costs….and we are maintaining customers in the process….who come back for more… (thanks for the always informative and generous blogging)….

      • http://idealog.com/blog Mike Shatzkin

        The marketing and customer retention value of the service are undeniable. And, I suppose, the rarer it is, the more powerful it is to offer it.

        Thanks for the kind words about the blog.

        Mike

  • John Andrews

    For the websites ‘providing the screen real estate’ the split between the publisher and the website is crucial. Physical bookstores would not like to see smallish websites enjoying the wholesale prices they enjoy – but if publishers paid more than the Amazon Affiliates scheme then website publishers would put a great deal of effort into promoting the books.

    • http://idealog.com/blog Mike Shatzkin

      John, remember that the RH model as it stands is about splitting *affiliate* fees.
      So the websites offering real estate will get *less* than the Amazon affiliate fees, because they’ll be dividing them.

      Let’s assume that any website already finding books to promote and working for affiliate fees will be a tough sell (although not impossible). The point is to put sites into the book business who aren’t in it now and can’t undertake the work necessary to curate. There are plenty of those. Politico and Publishers Marketplace are not unique in having a big and focused audience that could benefit from a “bookstore” that serves their interests but the site has too many other fish to fry to tackle the problem. (In fact, it is a problem that benefits from scale when being attacked, which is part of what Random House is counting on.)

      Mike

      • http://www.facebook.com/profile.php?id=100004628737284 John Andrews

        Sorry if it’s a naive question but why shouldn’t publishers drop-ship for etailers, and offer them retailer-level discounts?

      • http://idealog.com/blog Mike Shatzkin

        Several factors here. One is that most trade publishers are not really set up to mail single copies to individuals. In fact, the big wholesalers (Ingram and Baker & Taylor) *do* ship a lot of books straight to customers in boxes that say “Amazon” (or some other etailer) on them. Amazon actually started without any inventory at all, buying all their books from wholesalers and then trans-shipping them.

        The main problem is that there are literally thousands of publishers and no retailer could satisfy its customer base using them. Their service levels would be widely variable and managing that granularity would be really daunting; it would be impossible to give a customer a straight answer to a question about “where’s my package”. That being the overall case, there’s no incentive for a publisher to develop the capability to offer the service.
        Mike

      • John Andrews

        Thank you for the explanation. It leaves open the posssibility that, if the demand was there, a horizontally integrated intermediary could run the warehouse and despatch facility. I wonder how the costs of online retailing, for books, breakdown beweeen the physical aspects of book delivery and the associated costs of promotion, order processing, customer service etc.
        Another thought is that a specialist etailer (eg of books on fishing) could, in the manner of Ebay sellers, use their garage or spare room as a warehouse.

      • http://idealog.com/blog Mike Shatzkin

        The intermediaries you imagine already exist and they’re being used. They’re called Ingram and Baker & Taylor.

        Mike

  • Jack W Perry

    The old Crown bookstore chain used VMI for its backlist replenishment. They were once the third largest bookseller in the country. Reps would visit the stores once a month and write re-oders based on criteria.

    Also, some independent publishers have dedicated sections within independent bookstores that are basically “on consignment” and the inventory is managed by the publisher. It is branded by the publisher too.

    I knew RH hd implemented VMI, but I also though at least one other Big 6 had a program with B&N.

    • http://idealog.com/blog Mike Shatzkin

      Forgot that was how Crown managed their backlist. You’re right! And think of how much easier it would be today with computerized inventory available remotely.

      Mike

  • http://twitter.com/philipdsjones Philip Jones

    Hi Mike, thanks for the reference to my email in this post and your last. Just to say that we begin the first of our Foyles Bookshop Workshops on Monday, at which we will crowd-source ideas from across the trade about what bookshops can be. We’ll start sharing some of that information from Monday onwards. VMI looks interesting, particularly from the point of view of Foyles and its history (when books were organised by publisher and imprint). It is also worth keeping an eye on Waterstones. Daunt is pursuing a strategy that he thinks is the direct opposite to that of B&N, making bookshops about books and creating curated environments from book lovers (apart from the small Kindle tables, of course). It’s an interesting gamble. Both strategies cannot work.

    • http://idealog.com/blog Mike Shatzkin

      Philip, I’m not sure that “both strategies cannot work” anymore than I’m convinced that *either* strategy *can* work!”

      Interesting about Foyle’s. When I first worked at Brentano’s in 1962, the mass-market paperbacks were organized that way.

      The quest for answers is certainly a clear sign of universal recognition of the problem!

      Mike

  • Pingback: E-Textbooks Not Taking Off: Lesson for Trade Publishers | Digital Book World

  • http://twitter.com/PeterTurner Peter Turner

    “The costs for what is called ‘card and cart’ – handling credit cards and providing shopping cart technology — are also avoided by handing off the actual transactions.” These costs are actually pretty trivial, especially in comparison to the costs of attracting leads and converting them to customers (either direct or via 3rd party). And it’s this cost, and expertise, that is largely new to the publisher landscape and isn’t supplied by an out-of-the box solutions as are shopping cart and card processing solutions.

    • http://idealog.com/blog Mike Shatzkin

      You can lose a lot of business forcing them to shop with you rather than from a vendor who already has their credit card info. One major publisher I know about got such a high rate of sales from their Amazon clickthrus (8 to 17 percent depending on circumstances) that they didn’t think they could really make more money trying to ring up those sales themselves.

      The sensible solution, of course, is to offer the consumer the choice. That is what Bookish is doing. The Random House formula also opens a choice, but it doesn’t include buying direct from the web host.

      Mike

      • http://twitter.com/PeterTurner Peter Turner

        While it’s certainly true that you CAN “lose a lot business forcing [customers] to shop with you rather than a vendor who already has their credit card info” it may not be necessary if the focus is on delivering value that differentiates what you offer from what 3rd party eCommerce sites offer.

        I think your suggestion that “the sensible solution . . . is to offer the customer a choice” isn’t based on any data or is self-defeating. That is, if you don’t try to deliver value that allows you to garner customers then, of course, you are, of course, better off sending customers off to 3rd party vendors. But that’s not a strategy, it’s a fait accomply.

      • http://idealog.com/blog Mike Shatzkin

        It IS a strategy. It is perfectly strategic to select what resources you’re willing to apply to what problem. If you’ve never done direct sales, it makes sense on many levels to begin as RH has had Politico and Pub Lunch do. It would actually be crazy for either of them to commit to running their own ecommerce without having any idea how much business they’d really be able to drive.

        Mike

  • http://twitter.com/PeterTurner Peter Turner

    So, investing in direct marketing strategies and platforms in exchange for a share of affiliate fees from 3rd party shopping carts is a good business model for publishers? Really? Geez, at best it kind of sucks the joy out of publishing if you merely end up as a content provider AND the marketing engine for driving customers and customer data to your frenemies.

    • http://idealog.com/blog Mike Shatzkin

      That’s one way to look at it. The other way is whether it increases a publisher’s power if it controls the book merchandising to millions of members of many (two now, but dozens? hundreds? thousands?) web communities.
      And the resource isn’t just about sales. It is also about driving a lot of targeted awareness.

      Mike

      • http://twitter.com/PeterTurner Peter Turner

        Perhaps it makes sense to invest in driving sales to 3rd party shopping carts but I don’t think there’s enough data to figure the value of the loss of the offset of the direct customer relationship over time.

      • http://idealog.com/blog Mike Shatzkin

        Perhaps. But the investment required to build direct customer relationships is real. It’s a commitment. There’s nothing crazy about coming to it incrementally.

        Mike

  • Libros Mas Vendidos

    The challenge for non-book retailers who would like to carry books is
    stocking them. Almost no matter what a store sells, from clothes to
    hardware to specialty food, there would be a selection of books that
    would please their customers and perhaps increase their sales of core
    items. Its really very beneficial guideline, interesting.

    Libros Mas Vendidos