The Shatzkin Files


Some ideas for publishers that will help bookstores; other suggestions that make us skeptical


This is the fourth of a series of posts on bookstores and their future. The previous posts have covered the challenges of buying (proposing VMI as a possible solution), explored what we should expect for the future of Barnes & Noble, and envisioned what the world of brick-and-mortar book retail might look like in the years to come. I promised previously to review the list of suggestions for publishers to help bookstores recently rounded up by Bookseller editor Philip Jones. He’s written more about this since, but the “original” list from Philip included:

1. Publishers offering books to retailers on consignment. That means the store pays when the book sells rather than on a date based on when it was shipped to them.

2. Publishers offering books to retailers with higher discounts. That means giving stores more margin between the price they pay and the price the publisher “suggests” as the retail price.

3. Bookstores taking advantage of Amazon’s “weaknesses” as an online bookseller. That would apparently be about localized curation as opposed to algorithmically-based suggestions.

4. Bookstores becoming something more (or less, but different) than bookstores. This suggestion may be inspired by B&N’s claim that they are creating new “prototype” stores.

5. Publishers creating special print editions for stores. This was done in Canada by the device of Random House creating Indigo-specific editions for Canada’s biggest bookstore chain.

And since then, in a radio interview, Harper UK MD Victoria Barnsley added a sixth suggestion:

6. That bookshops should charge “admission” to allow browsing (and perhaps credit the admission charge against a book purchase.)

We’re going to dismiss suggestions 3 through 6 pretty quickly. They either don’t scale or don’t help.

The notion that indie stores can beat Amazon at online selling is nothing short of preposterous. What indie stores can do, and should do, is offer an online sales capability to allow the customers they have who want to express their loyalty to do their online shopping with them. And they should do that in the simplest and easiest way possible. To the extent that the store has done curation work (store bestseller lists, recommendations from staff or customers), those should certainly be reflected online. But the notion that a single player can beat an online behemoth at the behemoth’s own game is a delusion and no great effort should be wasted on it.

The idea that bookstores become something other than bookstores, which is how I’d interpret suggestion number 4, is also not really much help. If not a “bookstore”, what, exactly? And if you can’t tell somebody “what, exactly”, then how is this advice anything more than a suggestion to keep throwing stuff at a wall until something sticks? That’s a strategy? Bookstores have already and always been “community gathering centers”. Playing up that piece of it is never a bad idea, but it hardly seems like an original one.

Similarly, the idea that publishers can save stores by offering them “unique” product is not really a solution at all. Yes, Random House (the biggest trade publisher) can do it for Indigo (a dominant retailer that owns the Canadian market). Even if it is adding value for Indigo, and we really don’t know if it is, there are precious few situations in the world where it could be applied.

And the suggestion that stores can save themselves by charging admission is one that can be very rapidly be disproven by any store that cares to try. It actually strikes me as a very good Candid Camera sequence. Put a toll booth at the front door of a retail store (any retail store, but a bookstore will do) and record the reaction of customers when they encounter something that makes absolutely no sense to them. I suspect wild enthusiasm for the idea will be rare.

However, the first two suggestions — to provide the stores inventory with more time to pay (consignment or extended payment terms) or more margin to work with — are worthy of more analysis and thought.

For publishers to consider easing the financial burden for bookstores based on their importance as a marketing component of the supply chain is a reasonable idea. But neither expanding retail discounts nor applying consignment is without complications.

Expanding margin needs to be done carefully, so that the margin expansion accomplishes the purpose that publishers seek: to increase the display of books in retail stores. Simply increasing discount is a difficult way to do that. What needs to be applied is an expansion of an existing principle.

In the book business, “coop” is the heading under which publishers purchase display for their books in prime locations. Coop was originally used for publishers to purchase space for their titles within a local bookstore’s newspaper ads. (Sometimes that “local bookstore” was a branch or group of branches of a chain.) But recently it has been applied to getting prime display locations, often near the cash register, as part of a promtion. The convention is for the payment for the space to be calculated as a percentage of a “supporting order”. This process imitates what happens in other classes of trade and is referred to outside the book business as RDA (retail display allowance) or MDF (marketing development funds). Another application of the same idea is for publishers to pay for “pockets” (sometimes called “slotting fees”). Under an arrangement like that a non-book retailer (like Michael’s, the craft store chain) can get an additional subsidy over and above what the discount schedule calls for on every title they carry.

But what we may be learning is that every book in a bookstore, or perhaps any retail location, has its discovery enhanced, not just the ones on promotional tables. So perhaps a publisher (followed by others, in time) might consider extending the idea to pay a “shelving fee” for every book in a “qualifying” bookstore. Consider a little math.

Let’s imagine a store that does $2 million in annual sales. If their average discount is 40% (which is a reasonable number; discount schedules would say it is higher than that, but it is reduced by freight costs, including for returns), the value of the inventory to make those sales is $1.2 million at cost. If they turn their stock three times a year, the average cost value of the inventory in the store is one-third of the total, or $400,000.

The two million in annual sales means shifting about 133,000 books (if the average retail price of the books is $15), and the average inventory is about 45,000 books. If publishers paid ten cents per book per month to be shelved, that would deliver an additional $4500 a month — $54,000 a year — to the store. If publishers paid 25 cents per book per month to be shelved, the store would get an additonal $135,000. Since a bookstore would be doing quite well to earn 10% on its sales, our notional $2 million store would be happy to earn $200,000 in profits now so, in either case, the “shelving fee” would be adding a meaningful increment. Certainly, for some stores it could make the difference between staying open or closing down. For others, it would encourage a bigger book inventory. In either case, that’s what publishers want to accomplish.

Publishers could, if they chose, make the “shelving fee” applicable whether the store bought the book directly from them or from a wholesaler. It actually makes it less tricky to apply if the wholesaler-supplied books are included. Invoicing now is done when publishers ship books, not when they arrive at the store so the time lag in between works in the publishers’ favor. For a “shelving fee”, publishers wouldn’t want to pay for time the book is not on the shelf: while it is in transit, or in a box waiting to be unpacked, or in a stockroom unavailable to a browsing customer.

In order to collect “shelving fees”, a store would have to deliver much more robust data than they now have to publishers about stocking and selling. But modern technology can make doing that not terribly difficult (systems don’t routinely do it now, but they surely could) and, in fact, stores should want to know about the efficiency of their shelving practices for their own reasons. And doing things this way would put publishers and stores on the same side around returns, because both would have good reason to get books that can’t sell off the shelves (and replace them with ones that have better odds).

Increasing the margin as a reward for a brick-and-mortar store being open and stocking books is doable and it is doable without cutting the wholesalers out of the picture. Consignment is definitely more complicated. And perhaps less helpful.

Sometimes the sale-and-return convention that has prevailed for nearly a century in the US book business is thought of as equivalent to consignment, but it isn’t. Although bookstores sometimes use returns as a tool to diminish the payments they have to make to publishers, they also “own” (and, in many cases, have paid for) a lot of books on their shelves at any particular time. And a non-trivial side effect of sale-and-return is that “shrinkage”, books that don’t sell but for whatever other reason may disappear from a store, are very much the store’s problem, not the publisher’s.

Under consignment, the payment from stores to publishers would be based on what passed through the cash register, not what was shipped from the publisher’s (or wholesaler’s) warehouse. “Shrinkage” would only be detected if a publisher called for a return of a book it had previously shipped and the store was unable to send it. Since even with the best of intentions, a store wouldn’t necessarily know a book was missing and certainly couldn’t pull a missing book for a return, the payments for those books would, at the very least, have to wait until some inventory check or returns protocol was invoked and discovered it.

The big question in consignment is when and how often a store pays. I recall having a discussion about consignment with a very large book retailer ten years ago. The top person there was thinking in terms of paying publishers every six months or so. It is safe to assume that no publisher would be excited about offering consignment on that basis. Allowing a store to “pay on sale” is one thing; allowing them to pay six months after sale is much more costly to the publisher.

For consignment to be workable, payments would have to be no less frequent than monthly, and would have to cover sales pretty much up to the moment of payment. What might make sense, for example, would be payments on the 5th of the month for sales made through the end of the preceeding month. That would be 35 days after sale for some books, 5 days after sale for others, and an average of about 15-20 days after sale. It wouldn’t be unreasonable for a publisher offering consignment to want payment more often than that, perhaps even as often as weekly.

The challenges of turning consignment into a workable commercial practice in our business include establishing a payment timing that makes sense and some method to catch shrinkage.

But the next problem is that the process of ordering would probably have to change. It is sometimes said that stores are now too easily tempted to over-order because, after all, they can return whatever they don’t sell. Imagine how much less restraint there would be on over-ordering if the store could hold books cost-free for as long as it took for them to sell! (There could still be the cost of freight in and out to discourage over-ordering, but that exists now.) Unlike the “shelving fee” concept, consignment puts the publisher and store in conflict around slow-moving inventory.

Let’s also take note of the fact that consignment is not all about paying later; sometimes consignment would require paying earlier. Bookstores get a boost when a bestseller comes in and flies off the shelves for the first week or two it is out. The revenue on those books is kept by the stores for 45 or 60 or 75 or 90 days (depending on how publishers enforce their collections) before they have to pay the publisher. Under a consignment arrangement, they’d have to turn over the publishers’ share much faster. (Of course, at the same time, they wouldn’t have to pay for some slower-moving books that might have come in the same shipment but hadn’t sold yet.)

There are other complications to consignment. The way things work now, publishers carry books in their warehouse on their balance sheet at inventory “cost” (something like manufacturing cost). When they sell them, they book the amount they sell to the store for, and keep some “reserve” for potential returns. On the store’s balance sheet, the books sit at the price the store paid, or will pay, the publisher for them.

But if the books are shipped to the stores on consignment, there has been no sale. So the publisher would have to continue to carry those consigned books on their balance sheet at the manufacturing cost and not credit themselves with the sale until the store reported it and paid them. What this would do to public reporting and bank covenants is a company-by-company proposition, and perhaps a knotty problem in some cases.

And sometimes there are state or local taxes based on “inventory”. IANAL (“I am not a lawyer”) but the taxing authority probably expects payment from the entity that ownsthe inventory. Under sale-and-returns, stores “own” it (whether or not they’ve paid the bill). Under consignment, the publisher certainly owns it. That would create complications, at the very least. Complications could also arise over insurance. (If a store had a flood or fire, would consigned inventory be covered by a store’s insurance?)

The bottom line is that publishers can help stores most by helping them carry their inventory less expensively and there are a great variety of ways to do that. The simplest way of all, of course, is just to extend the payment time from the current (as it often enforced) 60 days to something more. Thirty-five years ago, my father had me administer a program called “credit for overstock” where we gave stores 180-days extended billing for books left unsold after Christmas if they’d delay returning them. (Simple to do: issue a credit for what’s there dated today and an invoice for the same stock dated six months from now).

We’ve heard through the grapevine that at least one of the Big Six is experimenting with 180-day terms and that another might be a fast follower. That strategy is apparently offering competitive advantage (stores stock more of that publisher’s books, so they sell more of them too). That’s a way for a publisher to give benefits that are “like consignment” without the complications. From my perspective, it’s a shotgun, not a rifle, because it extends terms for everything equally. Credit-for-overstock targeted books that would very likely have been returned. The old “dated billing” plans targeted particular titles at particular times of year. Consignment requires that books that sell fast be paid for fast. A big across-the-board increase in time to pay is a far less targeted tool, but it still constitutes a big step in the right direction.

That’s because books on bookstore shelves are more valuable to publishers than books in their warehouse. Increasing recognition of that fact is occurring; more actions will certainly follow.

Worth mentioning — and inadvertently neglected by me in the VMI post — is that VMI does not need to be, and should not be, at odds with bookseller-management of curation. A publisher can certainly manage lists of titles that are designated “do not stock” or “always have on hand” that are designated by the store. The point to VMI is not to take tastemaking power away from the store. Of course a store should be able to exclude books they find offensive or that they think their customers will find offensive. And their decisions about categories or authors to stock out of proportion to how well they sell — higher or lower — can also be accommodated. And so can their inputs about local promotions that a publishers’ central office would have no way to know about. VMI offers two enormous benefits in any case. One is that the publisher knows things about individual book promotions, and recent performance, that might not be factored into each store’s calculations. And the other is that most stocking decisions are routine and  best made — particularly in the age when we’re discovering Big Data — by a system massaging the maximum amount of information.

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  • http://www.facebook.com/drew.goodman2 Drew Goodman

    Two points:

    Consignment- Walmart has been effectively doing this for years with magazines. Magazines come into the store on consignment. When a magazine is sold through the POS system, a “deposit” is made to an account, and at the end of the day, the money in that account is sent to the magazine service provider. With today’s technology, it wouldn’t be that hard for the same thing to happen with books.

    Pay to Browse: This is an idea that has worked for, wait for it- adult bookstores and magazine shops. They found too many customers were coming in to “browse” and then left without buying anything. They began charging at the door. The price of “admission” was taken off the price of an item, if purchased. They started making nearly as much money from browsing fees as from sales. Only problem- your content has to be compelling enough to make people want to pay to browse.

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

      I love your second point. So many things work differently if sex is involved!

      As to the Walmart system, thanks for the info. What that says to me is that the magazine publishers are probably getting better cash flow than they ever did before, when they probably got paid after the accounting for the particular issue was complete!

      Mike

  • sethgodin

    Stores that sell jewelry and gifts and electronics and just about every other specialty store don’t work to sell EVERYTHING. They sell a few things, things they chose.

    The future of the bookstore is smaller, curated and oriented around books you should/must/are excited to read or give. No, it won’t fill the role that the B&N superstore or even the grand old stores on fifth avenue filled, but those days are gone.

    Books are about to be a specialty item, and they’ll be happily sold in small specialty stores. And they might even be more fun to visit (and to run).

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

      Yes, bookselling, like book publishing, will be “atomized”. Books will be sold more contextually (for non-fiction) and in smaller collections all around.

      But the fact that some smaller stores will work isn’t much comfort to publishers, which will see their once-robust and still-important bookstore and physical bookselling network shrink to an ancillary channel (with vertical exceptions, of course).

      Mike

  • http://twitter.com/mmcardona maria cardona

    Consigment is how bookshops work in countries like Spain where we still have fixed price for books (that is the price is the same in every shop for one title, and that price is set by the publisher).

    Consigment helps but it hasn’t prevent bookshops from closing here.

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

      And it won’t prevent bookshops from closing here either! But it would slow down the erosion.

      Mike

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  • Annette Chaudet

    Bookstores have, for years, had returnable inventory from the big publishers…something that hurts smaller presses who can’t afford that. But really, what other businesses rely on free inventory to fill their shelves?

    Many businesses would love the opportunity to fill their shelves with products and then just wait to see if they sell. If not, no loss to them but a big loss to the makers of the product who must now pay return shipping for merchandies they can only hope isn’t damaged, or just erase the debt and allow the store to toss the product in the dumpster. Can you imagine such a thing with coffee pots or toasters?

    Good bookstores know the books they sell and know the customers they sell to. This is what will save brick and mortar stores and what killed Borders and is huring B&N.

    As a small press, I can’t afford to supply stores with free inventory. I have to pay for the books I print and discounting 40 % to the stores leaves me with $1.39 per book, while the store makes $8 when they sell it. I’m happy to sell them books one at a time, if necessary, but if they’re not willing to commit to my titles, I can’t commit to them. Small presses are in business, too. Not all publisherts have Time-Warner or another conglomerant behind them to spread the losses.

    Being small, we find our titles’ popularity grows the communication between readers—word of mouth, if you will. It is slower, of course than a multi-million dollar media blitz, but it creates customers for us who trust the quality of what we offer and who follow the work of our authors. There are still millions and millions of readers out there waiting for good books (and who are often disappointed!) and I say this as an avid reader as well as a publisher.

    The entire book industry is in flux and we’re all waiting to see how it shakes out. From my perspective, I can only encourage our independant booksellers to know their book and their customers and continue to share what they know.

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  • Jean

    All this seems like an elaborate way of saying, since there aren’t enough people going into b&m bookstores and buying books, publishers should subsidize them.

    Re Annette C’s comment, that might work for big publishers who place relatively many books per store and get discounted print runs, etc. But it will cause small presses to turn away from bookstores and rely completely on on-line sales, which in turn would be a deadly blow to b&m bookstores large and small as their selections become indistinguishable from the mass merchandisers’.

    Re Drew G’s comment (and your response): How can magazines be compared to books? As you know (don’t you?) magazines are supported by ads; they tend to sell more/store, and their issues are trashed (not returned) at the end of their sell period.

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

      http://www.idealog.com/blog/the-unit-of-appreciation-and-the-unit-of-sale/I think the smart — and right — small publishers would adapt to the change. There are always variations there. I remember small publishers in the 1970s who progressively had to be convinced that a) it made sense to give the bookstores the books at half price rather than selling them directly to the public at full price, then b) it made since to pay sales reps 10% to go get them orders from the stores rather than waiting for them, etc. as marketing costs are progressively seen to be worthwhile and the impact on and of volume is appreciated.

      The widespread notion — to which I subscribe — is that bookstore exposure is important marketing and drives sales beyond the bookstore. If that is true (and I believe that it surely has been) it is still not immutable. As the Grisham and Patterson readers leave the bookstores, it might be that the positive impact will also diminish for the art books and knitting books.
      But yes, the idea is that the stores are worth something to the publishers worth paying for.

      Haven’t gone back to look at the comments to which you refer: magazines are QUITE different than books, even beyond the advertising and returns convention. Magazines have a “unit of appreciation, unit of sale” issue that most of the biggest selling books don’t share.

      Mike

      • Jean

        We’ve come a long way since the 70s, and bookstores will have to convince publishers, once again, that they’re competitive with direct sales. The internet has changed direct sales so radically, in fact, that the situation in the 70s doesn’t offer any kind of comparison at all.

        If you’ve ever looked at a title P&L for a small literary press, for example, where 5000 (Nielsen) unit sales = success, you would truly understand that there’s only so much such a press can “give the bookstores.”

        Don’t get me wrong. I want bookstores to succeed and I agree that having a book face out in a bookstore is great exposure, if you can afford the payola and/or shelf-talkers, flyers, etc, to even get it in the door. I get that bookstores are struggling, and I believe that small presses and bookstores have a lot to offer each other. But there has to be a balance of mutual benefit.

        Again, it goes back to where people buy books. If a small press can sell only 2000 or so books via bookstores (in itself a feat for works by new writers with relatively modest campaigns bolstering them), said small press has to look very hard at whether it’s worth the cost and time of marketing to bookstores versus putting their efforts into direct sales–or even doing an offset print run vs POD, especially when the day dawns that reviewers get a clue and realize that small press POD books aren’t necessarily amateur hour. Or that knitting book publisher may go ahead with a print run, but their b&m sales efforts will focus not on bookstores, but on crafts and fabric stores.

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

        Your hopes for reviewers are a bit optimistic. It isn’t about whether they think small press and POD are “amateur hour”; it is the number of titles that would be competing if they lower the artificial barriers to entry.
        I totally agree that for the knitting book publisher, bookstore exposure could become very much secondary to retail exposure in a store that sells yarn. And that they should have lots of ways to reach knitters directly, including through their own lists.

        But I’d really be surprised if fiction could work in that vertical way, except in genres. Most publishers of fiction need to accept the fact that the readers they consider “their” readers read other people’s books much more than they read any particular publisher. The lists would be hard to compile and not worth much. And to the extent that it “works” today, it will work less effectively as the number of competitive publishers mushrooms, which it will. (And the weaker the big guys get, the more it will mushroom.)

        Mike

      • Jean

        You’re right about reviewers. It’s a slim hope. Yes, an artificial barrier, but it is bolstered by the idee fixe that if a book is printed offset and is available in b&m bookstores, it is surely more worthy of review.

        Agreed re readers not subscribing to publishers. Problem is, I misused the term “direct sales.” What I really mean is selling as close as possible to the title’s potential reader, versus competing with the big boys who can rent space, place ads, etc to get the attention of store browsers. The unhappy reality (for bookstores and small presses) is that if b&m retail squeezes harder, small presses may end up confined to online sales, combined with some “sure thing” nontraditional outlets and maybe some hand-selling at festivals, cons, etc.

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

        I am not an expert in these things, but I have to believe that there are ways to work Facebook, GoodReads, LibraryThing, and other book conversation centers *now* that are the skill sets publishers of writerly books are going to have to have in the future. But I think the point is to use brand to build audience; and brand requires some conistency in what it delivers to have value. Easier on the author level than on the publisher level.
        The other thing that might evolve naturally are clusters of reader/reviewers that deliver an output that becomes more widely respected and become the new “gatekeepers” that you need to get a digital galley to.
        Most of the roads for ebook sales and marketing — or post-bookstore sales and marketing — aren’t paved yet.

        Mike

  • Lorraine

    So happy I found your post! I am a second generation bookseller, and have a copy of “Mathematics of Bookselling” on my desk. I read it every year to help keep me focused on turning my inventory efficiently. Do you know anyone who does training on this topic? I believe my mom day through a presentation by your dad in the 80’s. It’s just as relevant today!

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

      Lorraine,

      I remember my mother and father talking about Parable 20 years ago!

      I don’t know anybody who conducts training of this kind, but it is a good idea. Perhaps the ABA does? Is there still a CBA? Sorry I can’t help you…
      Mike

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  • Peter

    I think the higher margin to bookstores/ higher coop course of action is pretty likely. It’s really basic supply and demand.

    Supply of bookstores is down, but demand for promotion is up due to ebooks.

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

      Seems like basic economics the way you frame it.

      Mike

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  • Matthew

    Very interesting as usual.

    Not very convinced by the ‘shelving fee’ idea. That’s a service that someone is going to tax at some stage and both the publisher and retailer will lose out.

    How about a varying discount level instead? Shops get a decreasing discount the longer books are on their shelves. It provides an incentive to sell quickly and publishers would b better compensated if they ended up subsidising the shop’s inventory for a longer time.

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

      Your formula accomplishes the same thing. But I wouldn’t worry about tax on anything but he fact that the store will have increased margin, and therefore increased income. And that would be true either way.

      Mike

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