In our country, leaving aside the copies going to libraries, 70 % of books reach their readers through bookstores. There is no doubt that the well-being of book publishing in America - for the author, for the publisher and for the general public - rests solidly on the shoulders of our retail bookstore network. The health of those shoulders - the health of the retail bookstore - is very important to the health of every aspect of American publishing, to the author, the publisher, and the general public.

If you are faced with buying a bookstore - those of you not yet unfortunate enough to already own one - just as when you might be faced with buying stocks or bonds, the key question to be answered is "What is the likely return on the investment?" In the case of stocks and bonds, you keep asking that question, and you keep judging the success of your ownership by the return on that investment - but not in the case of the bookstore.

Once you own the bookstore, you are expected to forget about return on investment.

I suggest that almost every bookseller in this room - and almost every bookseller in the country - is measuring the return - the profit - of his business not against investment but against sales.

So, according to the bookseller's accounting, if the bookseller buys the Random House Unabridged Dictionary on January 2, it makes no difference - profitwise it makes no difference - whether he sells it on January 3 or on December 31, almost one year later. And, says the accountant, if the bookseller sells the dictionary at a discount, he makes less money than if he sells it at full price. Yet, you and I know very well that if he sells it at a discount of 25% on January 3, he is a lot better off than if he holds it to sell at full price on December 31.

Or look at it another way.

A bookstore with sales of $10,000,000 and a "net income before taxes" of $500,000, a profit of 5 %, is considered just as profitable as another store with the same level of sales and the same income. That is what ABACUS says. That is what the Manual on Bookselling says. That is what Publishers Weekly says. That is what the U.S. tax collector says.It may be that the first store has $2,000,000 invested in inventory - so its return on inventory investment is 25% - while the second store has $20,000,000 invested - so its return on investment is 2.5%. According to the criteria widely accepted in book retailing, these two hypothetical stores, one returning 25% annually and the other 2.5% annually on the money invested, are equally profitable.

How does this happen? Why don't we keep close track of return on investment and adjust our retailing practices to maximize return? We would if we were dealing in stocks and bonds or dealing in bookstores instead of books.

At least a part of the reason must be that the United States government does not tax return on investment. Our investment doesn't interest the tax people except as it affects the return on sales. The first and primary obligation of our accounting department is to supply the detailed information on which to base our tax return - and to supply it very accurately. Get your taxes fouled up and you might pay a fine, or even go to jail.

To keep track of return on investment in addition to return on sales, we would need to keep a second set of accounting records - one set to help us pay our taxes and one set to help us run our business. We think the return on investment set of books - the second set - would quickly become the more important.

First, perhaps we should clarify exactly what return on investment is:

A book that is one dollar at retail

For each dollar of sales:

At 40% discount, bookseller pays 60¢, margin = 40¢

For each dollar of purchases, bookseller has a margin of .40 / .60 = 66.7¢

Buy one dollar worth of books on January 2, Sell on December 31 Stock Turn = 1 Return on Investment = 66.7¢

Buy one dollar worth of books on January 2, Sell on July 1 Reinvest dollar in more books on July 2 Sell on December 31 Stock Turn = 2 Return on Investment = $1.34

If you invest 60¢ in books bought at 40% discount and sell that 60¢ worth of books you bought, for one dollar, you earn 40¢. It is more convenient in doing this arithmetic to think in terms dollars rather than odd amounts. If you invest a dollar in books bought at 40% discount, and sell that dollar's worth of books you bought, you earn 66.7¢. The arithmetic is simple. It is the discount, 40%, divided by the cost, 60¢.

If you buy this dollar's worth of books on January 2 and sell them on December 31, there is a one time "stock turn" and your return on the dollar investment is 66.7¢. If you sell those books earlier, July first, say, and reinvest the money in more books at 40% discount, and sell the second batch of books on December 31, there is a two time stock turn, and your return on the dollar invested is $1.34.

It is evident - and it is universally recognized - that stock turn and discount are both important to the economic welfare of the store.

Return on Investment

Depends on Discount, which determines margin per dollar invested

and on Stock Turn, which determines how many times you get the margin per dollar

After all, it is clearly better to buy book inventory at 45% discount than at 40% discount, and it is also clearly better to sell the inventory four times than to sell it only twice. But the precise relationships of stock turn to profitability is a little vague to most people. Most booksellers do not even bother to measure their stock turn, or when they do, are satisfied with very rough measurements. Fewer still use the measurements.

Why? Because the bookseller is looking closely at his return on sales and stock turn has almost nothing to do with return on sales. Stock turn has a great deal to do with return on investment - as we shall see - but has only indirect effects on return on sales. You can have a high return on sales with a high or low stock turn; you can have a low return on sales with a high or low stock turn. So the bookseller is very very conscious of average discount which is centrally involved in return on sales, but not of stock turn which is not involved.

But in the case of return on investment, we know that discount and stock turn are both important factors. There are others, of course, like store location, caliber of sales clerks, shifts in reading trends, and so on. What is the relative importance of those two factors: discount and stock turn?

In the literature of publishing and bookselling, you will find occasional suggestions that stock turn should be held between three and five, or some such range, but no explanation of why those numbers are the right ones, which, of course, they are not. These suggestions represent a recognition that stock turn is important, but a lack of solid information on just how important and why.

Fortunately, we do know now with much greater precision how much discount contributes and how much stock turn contributes to return on investment.

Under Cover Books, a bookstore in Shaker Heights, Ohio - back in 1980 - did not benefit very much from the care with which they kept track of how each publisher was putting his titles into the store, but their efforts created a bonanza of useful information on the book business.

We have information for full year on books of 165 separate publishers in the store Number of dollars bought each month from each one Discount earned each month from each one Sales each month of each one's books How long each book was in the store Average inventory each month of each one's books.

We calculated the return on investment for each one of the 165 publishers Range: from 2¢ earned per dollar invested to $9.12 per dollar invested

Under Cover Books had a full year's data on 165 publishers on whose books completely separate records were kept.

The records show the number of dollars of books bought each month from each one, the average discount earned each month from each one, the sales each month of each publisher's books, how long each book was in the store, average inventory each month of each publisher's books ...and a lot more

We calculated the return on investment for each of the 165 publishers.

The range was great: from 2¢ earned per dollar invested to $9.12 per dollar invested.

The difference in earnings between 2¢ and $9.12 had nothing,

N O T H I N G,

to do with who the publisher was, popularity of the book, popularity of the author, colors on the jacket, subject, category of the text, author's previous sales record, number of pages, number of illustrations.

What we are interested in analyzing is return on investment. What helps increase return on investment? What makes a difference and what doesn't?

To give you some idea of how we approached this problem, I want to show you a somewhat depressing chart.

Click here to view the graph on smoking and cancer.

It shows the relation - according to figures from the American Cancer Society - between smoking and premature death. Along this vertical axis are the average number of cigarettes smoked daily - the chart goes from zero to 50 cigarettes (two packs) a day - and on the horizontal axis is shown the number of deaths of such smokers per 100,000 people.

When I was twelve years old and started to smoke, we did not have charts like this. The facts were there - but the facts were confusing. People told me that smoking would stunt my growth, but I knew tall smokers. People said I would die young, but I knew lots of old smokers. It was just very hard to see any pattern between smoking and anything else - except that girls were more impressed by guys who smoked than by guys who didn't.

You can see how putting the information in the form of this graph cuts through the confusion. It tells you that the more you smoke, the poorer the odds are for you. You may be lucky and beat the graph - but most smokers won't be that lucky - if they were, there wouldn't be a graph.

As a kind of warm-up exercise, and to test a far out possibility, we compared return on investment for each publisher with the number of letters in the publisher's name.

Workman had a value of 7, Simon & Schuster had a value of 14 - we did not count spaces as letters - and so on through 165 publishers. How does each publisher's production of bookstore income compare with the number of letters in his name?

The results are shown on this chart.

Click here to view the graph on publishers' names.

Each dot is one of 165 publishers. The higher the dot is on the graph, the higher the return on the store's investment in that publisher's books. The further to the right, the more letters in that publisher's name.

As you can see, there is not much pattern. Some publishers with short names - here on the left hand side - contribute high return on investment and some contribute low return on investment. And the publishers with longer names - on the right hand side of the graph - don't seem to be any different. The fact that publishers do not have half-letters in their names makes the dots bunch up a little.

So there does not seem to be any reason for a publisher to change his name to make his titles more profitable to the bookseller.

No surprise.

We did not expect that the number of letters in the publisher's name would make any difference in the profitability of his books to the bookstore - and it doesn't.

Now let's go to the things that really matter.

First, the publisher's discount.

We calculated the average discount that Under Cover Books got from each of the 165 publishers. Average discount varied from 34% to 47%. It is certainly reasonable that the books bought at a higher discount would be more profitable than books bought at a lower discount.

The results for 165 publishers are shown on the next chart.

Click here to view the graph on bookstore discounts.

The discount increases as we go from left to right. The return on investment is higher, as in the first chart, the higher the dot is on the chart.

Discount does seem to influence return on investment more than the number of letters in the publisher's name, but not much more. Here is a dot at 44% fairly high up, but here is a dot at only 37% which is higher. As a matter of fact this dot shows the highest earnings per dollar compared to all the 164 other publishers - at only 37% discount. With the help of some imagination, you can see that there are more high points toward the right hand side - the higher discount side of the graph, than there are on the left hand side where the discount is lower.

But if smoking was as much a cause of cancer of the lung as discount is of return on investment, we would all be happily puffing away without a care. I would never have quit.

Now let's consider how stock turn relates to return on investment for the same 165 publishers.

Click here to view the graph on stock turn.

Again we have a separate dot on the graph for the books of each publisher. The difference in the nature of the relationship is evident as soon as you see the graph. No need to study it. It is as tight a graph as you would get for graphing smoking against lung cancer.

What the discount graph tells you is that at an average discount of 42%, your return on investment could be a little higher or a little lower or a lot higher or a lot lower than it would be at a discount of 40% or 43% or 44%. It may surprise some of you, but discount is not very well connected to return on investment - which means that discount is not very well connected to profitability.

Click here to view the graph on bookstore discounts alongside the graph on stock turn.

What the stock turn graph tells you is that, nineteen times out of twenty, your gross margin per dollar invested will be 66.3¢ times the stock turn, minus 1.2¢. Increase your stock turn by 2% and, nineteen times out of twenty, your gross margin per dollar will increase by very nearly 2%. Increase your discount by 2%, and you might do very well, or the sheriff might be coming to close your doors. Which of the two happens will depend on your stock turn - not your average discount.

Let me anticipate two categories of response I can expect some of you to make to this information.

First, those figures come from one bookstore. My bookstore may be different.

Agreed.

That is why a good friend of mine did not stop smoking. He thought his lungs might be different. And some people's lungs are different. Or it might be that his cigarettes are different, and some cigarettes are different.

But I challenge any one of you to put together the figures in your own store for 165 or 100 or even just 50 publishers. It may take some digging to squiggle out the data on discounts and sales and inventories and return on investment, publisher by publisher, but it will be worth it if that is what is needed for you to convince yourself to run your business acccording to things that are real instead of things that are imaginary.

If you don't like the idea of keeping track by publishers, though it will be a lot more work, you can number your shelves and keep track of titles by shelves, mixing up the publishers. Either way, I would like to hear from you after you have worked over those records. They will be very, very close to the figures I have shown you here. Discount will show very little relation to earnings - stock turn will show very great relation to earnings.

That is one category of possible response.

Another category of response we might get is "so what?"

"You have just proven that the earth is round even though it feels flat, but what practical difference does it make? I find my way with no trouble at all around the streets of Chicago whether the earth is round or flat, and I find my way successfully around the operation of my bookstore without the information on your graphs, so what difference does it make?"

It makes a whole lot of difference. Unfortunately, we do not have time to cover it all here, but you will find it spelled out in the pages of The Business of Publishing. But let us think about a specific way to apply this understanding

Here is a typical publisher's discount schedule. It is not a special publisher, and schedules differ a little bit from one publisher to another.

Discount Bookseller's Margin Per Dollar Invested:

1 copy; 20%; 25.0¢

5 copies; 40%; 66.7¢

10 copies; 42%; 72.4¢

50 copies; 43%; 75.4¢

100 copies; 44%; 78.6¢

500 copies; 45%; 82.0¢

1000 copies; 46%; 85.0¢

2500 copies; 47%; 88.7¢

5000 copies; 48%; 92.3¢

Now assume a bookseller is sitting with the publisher's sales rep constructing an order.

They reach an order for 425 assorted books, which, as you can see from the discount schedule, is much more than enough to earn 44% discount. It is almost, almost to the next discount step.

The sales rep is right on the ball. He reminds the bookseller that by increasing the order from 425 to 500 books, the discount can be increased to 45%.

Order = 425 copies, Discount = 44%, Margin = 78.6¢ per dollar

BUT order of 500 copies, earns Discount = 45%, Margin = 82¢ per dollar

The increase in margin is not just on the increase in the order but applies to the WHOLE, ENTIRE ORDER

At 44% discount, the bookseller earns 78.6¢ - .44 divided by .56 - for every dollar invested. At 45% discount, the bookseller earns 82¢ - .45 divided by .55 - per dollar - almost 3¢ more for every dollar invested. And it requires increasing the order by only 75 assorted copies.

Right on! says the bookseller, 82¢ margin is much better than 78.6¢.

Adding 75 copies to 425 copies is increasing the order by 17%.

We can assume that a bookseller, making up an order, puts on it first the copies most likely to be needed soon, and then copies most likely to be needed a little later. But let us assume that this bookseller does not figure things out that carefully, so the first copies and the last copies he buys have the same sales potential.

An order increase from 425 copies to 500 copies=17.5%. Conservatively, it will take 17.5% longer to sell the larger order. If a bookseller is turning stock three times per year, books are in inventory an average of 17.33 weeks (52 weeks divided by 3). If it takes 17.5% longer to sell books, they will be in inventory (17.33 times 1.175) = 20.36 weeks. Stock turn will now be 2.55 (52 weeks divided by 20.36).

So increasing the order by 17.5% will increase the time to sell all the books on the order by 17.5% and not longer as we might logically expect.

We will assume the bookseller is getting a stock turn of three. That means (52 weeks divided by 3) his books are in stock an average of 17.33 weeks. If these books from this publisher are like his average, and it takes 17.5% longer to sell them all, they will be in stock, on the average, 17.5% longer, or 20.37 weeks. The stock turn on these books (52 weeks divided by 20.37) will be 2.55 instead of 3.

Income per dollar on 425 copy order 78.6 cents multiplied by 3 turns = $2.36

Income per dollar on 500 copy order 82¢ multiplied by 2.55 turns = $2.09

If average cost of 500 books at 45% discount was $10 total order was $5,000

Bookseller's income decreased $1,350 just to get a higher discount

If the bookseller had left the order alone and had earned the paltry 78.6¢ per dollar three times during the year (a stock turn of three), his earnings on the investment would have been $2.36 (78.6 times 3) for every dollar on the order.

Increasing the order to earn the more impressive 82¢ per dollar, earning it 2.55 times in a year, his earnings on the investment dropped to $2.09 for every dollar invested.

By getting himself an extra point of discount, the bookseller managed to decrease his income by 27¢ for every dollar invested.

If the average cost to the bookseller of those 500 books at 45% discount was $10 - and the entire order amounted to $5,000 - the bookseller managed to cut his earnings by $1,350 - just because he thought discount was more important than stock turn.

That should help take care of the "so what" response to book retailing arithmetic - but there is more than that of interest to booksellers in The Business of Book Publishing.

It seems to me that any bookseller will need at least two copies - one for himself and one to give or sell to a friend so the friend understands what booksellers are up against.