“The future of distribution” is simply too big a subject to be covered in an hour, even by a fast-talking New Yorker like me. So we’re going to focus our attention on “distribution” as defined by the companies that call themselves “distributors” and by publishers who offer “distribution services” to other publishers. That is, we’re going to talk about how it works when a publisher hands off important distribution functions to another entity.
One might say that this is a subject of universal and growing importance. Almost every publisher today is either a distributor of others or a distributee of another. More than a handful are both. The chances are good that, whatever publisher one works for, a distribution relationship will be part of the landscape.
And right this minute is a pretty active time in the world of distribution. Competition has heated up; distribution deals are where a lot of the consolidation of the trade book publishing industry in the US is taking place.
Let’s start by defining the distribution functions. What is covered by the term “distribution”? Here’s the complete list:
* Warehousing (and related services)
* Receiving orders
* Picking, packing, and shipping the orders
* Managing data associated with maintaining inventory and filling orders
* Collecting accounts-receivable
* Sales representation to the trade channel (usually exclusive)
* Sales representation to special markets (usually non-exclusive)
* International sales representation and fulfillment
* Sale of subsidiary rights
* Sales representation to non-trade, special sales, or export channels
* “Basic” publicity
* Additional title-specific marketing
Distribution arrangements usually cover most, but not all, of these functions.
So why do publishers collaborate for distribution? What’s in it for the distributing publisher? And what’s in it for the distributee?
Publishers take on other publishers for distribution to reduce their own costs. “Scale” is an advantage for virtually all aspects of distribution. If you’ve got a warehouse, you want to fill it, because you pay the same for empty space as you do for utilized space. More volume gives you more leverage to collect money and makes it easier to support a sales force. And we live in times where systems costs keep rising; several of the largest publishers have spent double-, or even triple-digit millions in the past few years putting in new “enterprise” systems to manage their business. That’s one of the factors driving the growth in distribution activity now. It is helpful to amortize those costs over more books than publishers care to invest to create.
Another factor driving distributing publishers to seek clients is that launching new titles successfully and maintaining sales on backlist are both getting harder and harder in the current marketplace. So volume increases are most easily achieved by getting more books to sell from somebody else’s investment. That means getting distribution clients.
The distributed publisher also seeks the value of “scale” that may be beyond its means. Only a handful of publishers can afford to invest in an S.A.P. enterprise system. Selling today requires knowledge of standards for data transmission, for example, that all big publishers and distributors have and that would be expensive and draining for small or new publishers to gain.
Going to a larger entity for distribution also has the effect of making large costs “variable” rather than “fixed.” You pay for the warehouse space you use, not the whole warehouse. You pay for the pick and pack activity associated with your actual sales; you don’t have a payroll to meet regardless of whether anything is selling this week. In the ideal world for a distributee, sometimes achieved, distribution costs can be set as a percentage of net sales, creating a high degree of predictability of expenses in relation to sales.
What also becomes more predictable for the distributee is the pace of collecting their money. Little publishers, particularly, may find themselves stretched out well past 90 days waiting for payments. Bigger publishers and distributors usually have more reliable collection times, so that they can “guarantee” payment of receivables on a contractual schedule timed to the sales. This certainty of when cash will arrive can literally be of life-or-death value to a small publisher.
Distribution relationships are complicated and cover a lot of ground, which is reflected in the great variation that exists in the deals that govern them.
Of course, the first question is: what is covered? Historically, distribution usually covered sales and fulfillment as a bundled service at an overall, percentage of sales, price. When I first got involved in distribution more than 30 years ago, just about the time current industry leader PGW began in business, most deals covered virtually all the services we enumerated earlier and the charges were usually a fixed percentage of net sales. Some publishers, like Harper at that time, offered a sliding scale of charges that were reduced as volume increased. One publisher at that time, Scribner’s, charged based on gross sales — what they shipped out rather than what was sold net of returns received. Scribner’s percentage charges were lower, but they transferred some of the “risk” of returns to their client publisher. A publisher with high returns would end up paying a greater percentage of “net sales” for distribution. This is fair and logical, but less attractive to a smaller publisher seeking cost certainty.
The two biggest dedicated distribution companies — PGW (for Publishers Group West) and NBN (for National Book Network) — have standard arrangements that illustrate this distinction. PGW’s contracts, usually, call for them to collect a fixed percentage of the “net sales”, which means “value of shipments minus the value of returns.” NBN’s standard contracts enumerate two different percentages. They charge a percentage of “gross sales”, which means “value of shipments” for the fulfillment portion of their responsibility and a percentage of “net sales” for their sales efforts.
“Sales only” distribution relationships are rare but there have long been “fulfillment only” relationships. For an example involving very large players, HarperCollins has been handling the trade fulfillment for Scholastic for many years, although Scholastic handles its own sales efforts. For years, Hyperion has been distributed and sold by TimeWarner. Hyperion has just taken back the sales component, but continues to use TimeWarner for fulfillment.
There are other charges by distributors to distributees. Some of these are for ancillary warehouse services a distributor might perform, such as stickering inventory or putting books into promotional display cartons. But sometimes extras are for core services. Distribution contracts might call for “in and out” charges: a fee by the distributor for “receiving” inventory or for shipping books on behalf of the distributee when the distributor doesn’t share in the revenue, to a foreign distributor, for example. Some contracts charge for warehousing based on the volume of books being stored. More and more contracts call for “returns processing” fees.
Another variable in distribution contracts is how the distributee is paid. It is normal for there to be a contractually-defined payout based on when billings are achieved, and the payout is designed to pass money along to a distributee only after it is collected from the accounts. Most contracts call for all money to be paid within 120 days of billing, but, beyond that, there is a wide variation in the speed of payment.
A major concern for many publishers arranging to be distributed is their “identity” as publishers. This starts with the control of “metadata”; the information about each book that is put into the supply chain by the publisher or the distributor acting for the publisher. This basic information — title, author, retail price, type of binding, subject matter of the book expressed in standard ways using BISAC codes — includes the name of the publisher or distributor. It is not uncommon for a distributor be listed as the publisher, rather than the publisher itself. This has even happened on books on a Bestseller List.
This confusion of identities is almost inevitable. The distributee’s books are often presented from the distributor’s catalog. The review copies may go out in the distributor’s box. Because bookstores and wholesalers order the distributee’s books from the distributor, the distributor may be listed as the “publisher” in many of the customers’ internal systems. The distributed publisher faces an ongoing conflict between pushing its own identity forward out of pride or pushing its distributor’s identify forward out of practicality.
But perhaps even more important than what imprint name appears on the bestseller list is a distributed publisher’s lack of direct contact with major accounts. Majors have opportunities, and new ones arise daily, to promote titles in exchange for payments from publishers. Whether these opportunities are “cost-effective” can be questionable. But the sheer logistics of capturing these offers and referring them to another publisher’s organization for a decision can lead a distributor’s rep to turn down these proposals without even submitting them. This can result from an honest difference in perspective. I have seen more than one case where a distributor, usually a larger and more powerful company, thinks that a customer’s deal for a promotion is not good value but the smaller distributed publisher would have jumped at the opportunity to buy into it.
The market for distribution services in the US right now is in greater flux than it has ever been. The number of players among publishers has been growing, as has the size and number of dedicated distributors, for at least two decades. But a pair of recent re-entrants into the market, Random House and Ingram Book Company, are accelerating the movement of lines from one distributor to another.
Ingram tried for years, with less than great success, to set up distribution services for publishers, shutting down the effort a few years ago. Random House disposed of its distribution business when the company was bought by Bertelsmann from Advance in 1999. Bertelsmann’s thinking at that time was that they didn’t want lower-margin distribution business using their state-of-the-art capabilities; they saw their distribution operations as a competitive advantage they would prefer not to share.
But then Random House spent an enormous amount of money improving their capabilities even further, particularly on an S.A.P. enterprise system. Ingram saw their primary business — book wholesaling — under assault as independent bookstores died off and big ones, like Barnes & Noble, Amazon, and now Borders, created their own distribution centers to supply back-up stock. The allure of being able to use existing facilities to serve distribution business became too compelling to resist.
It is coincidental, but at the same time, the biggest dedicated distributor, PGW, lost several key clients, which made distribution’s biggest player suddenly aggressively pursue more distributees while, at the same time, redoubling their efforts to keep the ones they have. PGW’s parent company, a wholesaler called Advance Marketing whose business was primarily in mass merchants and price clubs, suffered a criminal investigation centered around sales to publishers of ads in circulars which weren’t printed in the promised quantities. This hurt PGW because distributees feared a possible negative impact from the parent corporation’s troubles. It increased the urgency for PGW to leverage their global sales and marketing capabilities across more publishers. PGW executives maintain that they have added over 25 new distribution clients, including several with sales in the millions of dollars annually, even in the face of their difficulties.
Both Random House and Ingram have great operations and they brought them to the market at rock-bottom prices. PGW’s principal competitors among dedicated distributors — NBN, IPG, Consortium, and Midpoint Trade plus other major players among the publishers — Simon & Schuster, Holtzbrinck, TimeWarner, Norton, and Chronicle — all have responded by getting increasingly active pursuing additional lines while they’re scrambling to hold onto what they’ve got. Prices for distribution services appear to be falling and unbundling — buying specific distribution services rather than an all-inclusive deal — has become common. A recent distribution deal was announced for one publisher who will use Ingram for fulfillment and Midpoint Trade for sales.
When a publisher shops for distribution services, which all but the largest publishers will do every few years in the current environment, the biggest decision is how to handle sales. Comparing the quality of fulfillment services is relatively straightforward. How efficient each distributor is can be learned from their customers, the stores and wholesalers. But how effective the sales effort will be depends not just on the skill of the selling organization, but also on the effectiveness of the communication between the distributor and distributee. And that’s a variable within every stable of distributed publishers.
By my observation, the experienced dedicated distributors tend to have better procedures to absorb product information and project it through the sales organization than publishers who distribute. And they also tend to have established mechanisms to manage coop offers and marketing opportunities through many publishers at one time. Distribution clients are, inevitably, more important to the top management of dedicated distributors than they are to big publishing houses. Every client relationship is different, of course, but the generalization still holds and, in many cases, really matters.
But, while consolidation on the customer side has really made it essential to have a larger operation with “critical mass” to warehouse, bill, collect, and to make bookstores and wholesalers feel comfortable buying the books, the paradox is that sales can still be done by a small company. If your books come in a box from a company they already do business with, most large accounts will make some time for a small company to see a buyer. If a small company has enough titles in a niche, it can even establish real relationships with major accounts. And there are still commission rep groups in every corner of the country looking for lines to pitch to the smaller bookstore and specialty accounts in their territories.
The challenge for the distributed here is that increased “control” only comes with increased management responsibility and expense. Yes, you can cover major accounts yourself and handle the rest with commission reps, but you have to manage the big relationships and support the reps with costly selling materials and management attention. None of these is a trivial task.
Although distributors will often offer “basic” publicity — getting to key pre-publication review channels, listing the title in various databases and sending out an initial press release — and will broker marketing opportunities with retailers, which more and more is about in-store price and position promotion — the marketing direction has to be provided by the distributed publisher. Some rights activity takes place as a by-product of marketing, such as serial sales. But even keeping those rights to save commissions might be a mistake, because the administration of these things can often be done better by a larger department.
Some special — that is, non-book-trade — sales activity arises naturally out of marketing, as well, particularly for a niche non-fiction publisher. An important element of special sales success is “critical mass”; a body of titles in a subject area is necessary to serve the accounts. Publishers who have it often have already cultivated key sales relationships before they arrive at a distributor. In many trade book distribution deals, the special markets are carved out and treated separately, or not included at all.
So the choices and combinations of choices for distribution, if not limitless, are so plentiful that very few publishers have the time, energy, or resources to explore and consider them all.
The best strategy for any distributed publisher, which most are and will be, is to keep contracts and commitments as short as possible because competitive pressure is likely to keep prices falling for some time to come. When looking for a distributor, a publisher should try to shop the market as broadly as possible and maintain touch with the ones they like but don’t pick, because they’ll still be there when the next contract is up. And all publishers should do their best to own as many buyer relationships as possible, even if a distributor has primary responsibility for sales.
Book publishing everywhere is bound to have more publishers using fewer warehouses to supply an increasingly consolidated general account base in the years to come. That means that getting the most out of their distribution relationships is bound to be one of the core concerns for publishers over the next decade or longer.