Harcourt Brace Jovanovich

Sometimes expressing your opinion can have unintended consequences.

In a post last week, I observed that the explosive growth of ebooks made it likely, in my opinion (shared by others, some of whom are in high places), that as many as half the book purchases could be online purchases by the end of 2012. I see many consequences of that change, but one of them is likely to be a complete reconsideration of the long-standing industry policy of accepting returns from retailers and wholesalers of unsold inventory.

My reasoning was that once returns only help you reach half the potential market, viable publishing becomes possible without them. And with perhaps more than half of the brick-and-mortar outlets (by that time) for most books (excluding bestsellers, which are sold in mass merchants) being accessed through a single retailer (Barnes & Noble) that has its own distribution centers and a managed supply chain, returns would start to fade away. (With their robust supply chain capabilities, B&N will be able to work the new marketplace, which will undoubtedly feature a higher discount no-returns option, to their competitive advantage.)

I didn’t deal with my feelings about that (mixed) or the impact on sales I would expect (damaging), but I’m moved to do so today because my prediction has led to a celebration in anticipation of that turn of events, a 2-part series (Part 1 is here and Part 2 is there) called “Publishing 3.0: A World Without Inventory” by agent, ebook publisher, and digital thinker Richard Curtis. He casts preprinted inventory distributed with returns as “the speculative model” and a no-returns marketplace supplied largely with books printed on demand as “the prepaid model.”

Richard characterizes returns as “a bargain with the devil” and “an addiction”. He cites return rates in the neighborhood of 50% (which they are — and even higher — on some books but which they are not for any publisher across their list) as the killer of publishing profits. But I think Richard leaves two very important realities out of his analysis:

1. Inventory creates sales that would not take place without the inventory placement.

2. Publishers (and Richard’s clients: authors) have a great deal to gain from the publisher’s practice of selling returnable.

In fact, this piece effectively argues that a responsible agent will prefer a publisher that allows returns to one that does not for their client, if the royalty rates are the same (and often if they are not.)

Before making the two arguments promised above, let me deal with three realities that are often elided when returns are discussed.

First of all, book publishing is not the only business with returns, despite frequent claims by returns skeptics that it is. Newspapers and magazines have returns, of course. But, apparently, so does technology hardware! I learned this hearing our client Copia present itself and its parent company, DMC, to publishers. DMC is very deep-pocketed. They make the point that putting out six ereader devices (which they are doing) requires the financing to put tens of millions of dollars of inventory onto retail shelves, and taking them back, eating the cost of producing them if they don’t sell. That’s one reason why there are few upstart manufacturers of consumer electronics. Even if you could get in the door at Walmart and get an order for your gadget, the financing required to fill the order would be beyond anything but a large and well-established company. So the principle that the manufacturer insures the retailer who stocks speculative inventory is not applied to books alone.

Second: publishers are customarily asking retailers to put books on their shelves before there has been any public exposure to the title. It hasn’t been reviewed (except possibly by the diminishing industry sources for pre-publication reviews); it hasn’t been sampled by the public; it hasn’t been read by the sales rep pushing it or by the buyer deciding about investing in it. The promotion plans are promises that are sometimes not kept. It is a competitive requirement to offer returns in that situation if the publisher wants the books in place at retail on publication date. I have never heard a clear narrative about the introduction and spread of returns in publishing. Curtis’s account, which confirms my understanding, is that the practice began in the 1930s. This was before my Dad’s time in the business; he thought it was Viking Press that began the practice. But the practice apparently spread so quickly that nobody got clear credit for starting it. And we all got a lesson about the competitive requirement when Harcourt Brace Jovanovich tried to eliminate returns (in favor of much higher discounts) in 1981 and rescinded the policy in about 90 days because the trade just wouldn’t stock their books.

And third, publishers’ practices affect returns. Most returns from major retailers to publishers are on big books for which the publisher wants to force out a quantity that creates a noticeable presence in the stores. There are occasions when the over-ordering is due to retailers being zealous or concerned that they’ll have trouble getting replenishment inventory. But, more often, they are due to publishers pushing out bigger quantities because they know that bigger stacks in the store make the book move faster. Or because the rep wants credit for a bigger sale. Or because the publisher’s discount schedule rewards a larger buy with a better price.

(It is commonly suggested by no-returns advocates that publishers at least eliminate returns on backlist. It would be a dumb publisher that did that. The way you entice the trade to buy without returns is by increasing the discount, shifting margin from the publisher to the retailer. But backlist returns are already low for most publishers. So following this suggestion would lead to a publisher giving away margin to reduce returns on the segment of the list on which there aren’t many returns. It is worth noting that no publisher that I know of has taken the bait to eliminate returns on backlist.)

And all that leads to me making the first point: that inventory creates sales that wouldn’t otherwise occur. The point is made over and over again, most recently by Bowker PubTrack data (click that link and take a look; it’s quite startling) that what happens in the store — how books are displayed and what clerks say (which is also affected by how books are displayed) — influences a lot of purchases. If we don’t have retail locations with books merchandised to entice people to buy, I believe overall book sales will go down. And as long as we do have stores (which we will for quite some time, even after the end of 2012), then the books well displayed in them will have a competitive advantage over the books that are not.

And the first point leads to the second point. The author, in effect, “hires” the publisher to maximize the sales of the author’s book. Pushing out inventory and taking the returns that enable pushing out inventory are part of what a publisher does for an author that the author can’t do for herself. While I believe that publishers will move to no-returns and no-inventory models for many books, and that will enable the publication of  books that would have been too risky the conventional way, the sales expectations for these books will definitely be lower than for those published with inventory and risk. And let’s remember that the cost of each book produced is substantially higher printing one at a time compared to a press run. Press runs are distinctly more profitable if returns aren’t astronomical and very few books are published with the expectation of astronomical returns.

So the days of returns may be numbered, just as the days of brick-and-mortar bookstores likely are numbered, but that’s not a good thing for overall book sales or even for the profits of publishers. For the books with highly-targetable audiences the effects will be less damaging but for the books that sell the most — the kind that agents represent to publishers — it will mean a great reduction in the chances that the book will take off and reach big numbers. And for the publishers that step down from returns by managing them before they eliminate them, there will be a real competitive advantage.

I didn’t make it to London. I’m in good company. My friends who are in London are wondering exactly how and when they’ll get home. Of course, there are far worse places to be stuck.

I see in today’s Shelf Awareness that The Bookseller in the UK has been sold by its corporate owner to an entrepreneur (its publisher, Nigel Roby) just a week after Publishers Weekly in the US was sold by its corporate owner to an entrepreneur (its long-ago former publisher, George Slowik.) There are powerful structural and institutional forces that have weakened the inherent position of a trade magazine for trade publishing in both markets and making a success of them will be a real challenge. We wish the bold new owners luck with their ventures.

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The subject of eliminating returns seems to come up more and more frequently these days. Last week we were interviewing a major independent bookseller for our BISG “Shifting Sales Channels” project and they brought it up. In this case, they were complaining about the new “no returns” policy from HarperStudio. As I understand what the store said, the high discount (61%) only applied to the initial order but the no-returns option, if elected, would apply to the reorders too.

“So you’ll do all your reordering from Ingram, right” I asked.

Of course they will. But they’re happy with 61%. They’d much rather buy everything non-returnable at 61%.

Returns were invented, some say by Viking and others say not, in the 1930s as a proactive response to the stores’ reluctance to take risks during the Depression. It became a widespread practice pretty quickly. Since I came into the business in the mid-1970s, there have been two big changes in returns:

They didn’t have returns as a routine matter in the UK when I began my career; they do now.

Publishers have chipped away at returns credits, so that it is not uncommon that returns result in a small margin for the publisher. The most common device is that all returns credits are calculated at maximum discount, even though some books may have been purchased at lower discounts. 

The commercial logic for returns is that offering them helps the publisher persuade the retailer to buy more aggressively: both more titles and bigger quantities of some titles. The ethical justification is that the publisher knows all about the book and the store only knows what the publisher tells them until it comes out. Such things as a marketing plan, and follow-through on a projected marketing plan, are entirely in the hands of the publisher.

In my experience, the flawed, misleading, or downright erroneous analysis of returns is common. A longtime publishing sales director at three of the biggest houses (now long retired) had the practice of computing returns percentages for his biggest accounts every month. It was amazing how high the returns percentage was every February, when few big new books had initial shipments and the returns from Christmas hit the warehouse.

In fact, the returns in any time period are not from the sales in that time period but result from sales made at some earlier time. So when you think the returns percentage for any period is too high, you might just be saying that the sales in that period were too low. Any time you have a year when sales are low relative to the year before, odds are the returns that year will also be computed to be high. Let’s hope nobody makes a strategic choice on that basis.

Shrinking shelf space at retail would result in higher returns percentages. Two ways. The books on those shelves come back. And no new books head out to replace them. Bigger numerator, smaller denominator, higher returns percentage.

Here’s another instance where more refined thinking about returns is needed. When a title has sold for a very long time (at any level of sales), its overall returns percentage will be very low. After a while, the overall returns percentage for a title is a meaningless number. What a publisher should be measuring is their success in bringing a title’s inventory down in the supply chain without excessive returns. But you’d measure your success against that objective by measuring returns against what was in the supply chain when you start retiring the title, not against all the copies that have sold in 12, 18, or 24 months when the book was being constantly reordered with almost no returns.

These examples make a central point: returns percentages are the inverse of reorder activity. If you have a lot of reorder activity, you will ultimately have low returns. If you don’t, you will almost certainly have high returns.

Returns are also not uniform across any publisher’s list. Frontlist has a higher returns percentage than backlist. Heavily promoted titles risk huge returns, both as a percentage and in absolute numbers. When booksellers ask publishers to sell the backlist at a higher discount non-returnable, they’re asking publishers to give away margin for little gain because solving returns on the backlist doesn’t solve the returns problem for most publishers.

The biggest experiment with no-returns selling by a large commercial house was by Harcourt Brace Jovanovich around 1980-81. They offered discounts up to 58% (if memory serves) when the standard most indies bought at was in the low 40s. There were a lot more independents back then and they rejected the experiment emphatically. It lasted only one season.

Today, independents are not enough of the market to make the call, but many of them would actually support no-returns buying at high discounts. I think the chains might too, but most big publishers would probably be nervous about selling the chains that way. They’d be afraid they wouldn’t be able to get the big promotional advances that drive the top end of their business. They’re right, or at least the non-returnability — or some shared markdown concessions — would get negotiated away on a title-by-title basis. And that creates the complication of having to offer the same deal to everybody.

Some publishers who offer a non-returnable option feel it is successful, but they don’t really know how important it is that returnability is still available for their customers: through the wholesalers (and those non-returnable publishers still take returns from the wholesalers themselves!)

Managing returns rather than eliminating them also has the payoff to publishers of making it easier to keep backlist titles alive at full price. If retailers started marking titles down when they got impatient about their sale (and if higher no-return discounts gave them the margins to do it relatively painlessly), then the stores successfully selling those titles at full price would be hurt. Or at least they’d look bad.

The most effective way to cut way back on returns is to increase the frequency of replenishment. If you restock every day, then very few titles need to be carried in a quantity larger than one to avoid losing sales to out of stocks. That focuses the problem on building and then selling down platform quantities, which is where the “problem” really is.

The returns from books you put out and just don’t sell are an inevitable cost of doing business for publishers and for booksellers. There will be a failure rate. The trick is to make failure cheap, and you do when you put books out in small quantities to find they don’t sell.

That strategy works when you get reorders, keep a book going (and growing). 

But the big returns come from putting out the numbers you need to give a book retail “presence”. If you isolate those and calculate them, maybe it would be more accurate accounting to treat them as a marketing cost?

Ingram has offered the fast-turnover daily-replenishment stocking model to retailers for years and even at the expense of the middleplayer’s cut of the sale, it has been a good practice for many retailers. Almost all independents order from Ingram and/or Baker & Taylor every day and most have relatively low returns rates.

Another thing that has changed about returns in my time — and which argues for eliminating them — is the percentage that are actually ultimately recycled and resold. Many things mitigate against putting a return back in stock, including that it probably takes a human review to certify that the book is in condition to be sold as new. And these practices all began when the ratio of hardcover sales to trade paperback was much greater than it is now. If the book is not going to be recycled, it makes a lot more sense to accept either a shared markdown or affadavit that the book was destroyed than to require the return for credit.

It is hard to debate the green logic that shipping the same book around several times in 2009 is idiotic. (Green logic also should tout used books, but we’ll leave that inconvenient truth aside.) Returns restrictions and no-returns offers will likely become more widespread. As they do, there will be a complicated commercial problem to work out with Ingram and other wholesalers (who ultimately can’t take returns from stores if publishers don’t and who can’t be the back-up on a conservatively ordered “big” book if they can’t return to publishers). And it will put increased pressure on publishers to routinely process all orders within 24 hours.

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