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.


Consignment might be helpful, but it is not a panacea and not easy to implement

One of the commenters on the blog asked last week about consignment selling, because, he believes, a number of publishers are entertaining it. (I am not personally aware of that, but it doesn’t seem unreasonable that they would be contemplating it.) This is a subject I’ve paid some attention to over the years, partly because I had a hand in creating a business which puts the books of many publishers into specialty retail chains on a consignment basis, and has been doing so for well over a decade.

Of course, we’ve had pretty widespread (but not universal) returnability of books in the US market for the better part of a century. (It might be worth noting that Britain has ubiquitous return privileges now, but returns were not the norm when I first became aware of the UK trade in the early 1970s.) But it is not the same thing for a bookstore to buy books from a publisher with the right to return them as it would be for the store to receive books on consignment although much of the logic behind the two is very much the same.

Consignment underscores that the inventory risk is mostly with the publisher, as well as timing the store’s responsibility to pay to the date of their sale rather than to the date when goods were shipped to them. But just like there is variation in sale-and-return terms that is material, so there is with consignment terms.

Under the sale-and-return convention that governs the sale of most books today, here are some important variables.

1. The discount off the retail price.

2. Whether the store pays the inbound freight or the publisher does. (I am not aware of a publisher who pays return freight.)

3. Whether the amount credited for a return is equal to the amount the store originally paid for the book or, as is often the case, just a little bit less.

4. The payment terms: how soon after shipment (which is usually the invoice date) the publisher expects to be paid.

All of these except the amount credited for a return would also be variables in a consignment arrangement. Saying “consignment” doesn’t promise a particular discount, doesn’t imply anything about who pays freight, and doesn’t in and of itself stipulate a speed of payment.

The point is that saying “consignment” isn’t saying enough to describe the commercial relationship. What’s the discount compared to the sale-and-return discount? How often and how soon after the sale is made is the store obliged to pay?

The reason that stores ask for consignment is that they believe it will improve their cash position and enable them to carry more inventory. In fact, there are circumstances in which consignment would speed up payment. When hundreds of thousands of copies of a new novel from a perennially bestselling author land at Barnes & Noble, they’ll sell a large number of them long before the 60, 90, or 120 days they’re going to take to pay the publisher. If consignment called for weekly payments for sales made through the prior week (which is a reasonable formula), the cash flow on hundreds of thousands of sales would be worse for the chain than it is in the current paradigm.

For consignment to be an advantage to the store, one or more of three things must be true. Payment must be delayed after the sale is made, payment must be infrequent, or the store must be permitted to carry many books that it would otherwise have deemed too slow-moving to be worth the investment.

Consignment will add responsibility for publishers, just like the agency model, which also changed the buy-sell relationship between publishers and retailers, did in the ebook world. Consignment inventory is owned by the publisher, not by the store. It is possible that consignment could create “nexus” and possible tax liabilities for the publishers in locales they’ve never heard of.

Of course, consignment would have been a great advantage to the publishers if the inventory Borders possessed had been consigned because publishers would have been entitled to take it back. Under sale-and-return terms, Borders “owns” that inventory, even if the invoices for it haven’t been paid. Lots of unpaid-for inventory is now being sold at fire-sale prices, making it more difficult for publishers to sell replenishment inventory of those titles to stores which are in sound financial health and paying their bills.

From the store’s point of view, consignment terms are all about cash flow. Publisher, however, particularly those whose results are reported in a public company, also think about the balance sheet. When publishers print a book (as I understand it; I’m not an accountant) and put it in their warehouse, it is on their books valued at the unit cost of manufacture. When they ship it to a store and invoice it, the value of the book as an asset grows to the price they invoiced. If they consigned it to the store, its value would remain the manufacturing cost until it was sold.

What that adds up to is that any publisher switching to consignment terms would take an apparent “hit” to their financials. It would be a one-time hit because once the new system took hold, books would steadily be moving from inventory-value to sales-value. And there would be a longer-run balance sheet benefit that large returns wouldn’t suddenly erase value. (This would happen because the returned inventory had been valued at the publisher’s sale price; now it will be valued at cost of manufacture if the returned stock is returned to inventory. If it isn’t, and it often isn’t, it’s a write-off.) It might be a lot to explain to shareholders or senior management that very large slugs of sales were substantially delayed in being recognized.

The store, on the other hand, would suffer no comparable impact. Under sale-and-return, they had the books at their cost on their balance sheet, but they were also debited for the cash they paid or owed. With consignment, they recognize neither the value of the books nor the payment for them until they’re sold, when they book the sale and also recognize the obligation to pay.

Consignment would definitely give the stores an apparently infinite return on inventory investment; there would be no inventory investment. The only limitation on how much stock the store would want is the available space to display it. The incentive to be rigorous about monitoring inventory really shifts from the retailer to the publisher or distributor.

Retailers have been striving for consignment terms, also called “pay on scan”, for years because, overall, inventory investment is one of the major working capital requirements for most of them. When we set up the distributor mentioned above in the late 1990s, we used consignment as a way to “guarantee” a store’s margin and their ROI. The retailer gets a fixed margin based on the retail price. The distributor makes all the inventory management decisions — shipments and returns — and pays the freight to ship the books in and out.

One other wrinkle of consignment is that “shrink” — inventory disappearing without going through the cash register — becomes a shared problem because it delays payment until inventory is ultimately reconciled. That is only really forced to happen when the publisher or distributor takes a complete inventory (rare) or calls for the return of a book that hasn’t been reported as sold but the store finds it isn’t there.

Under sale-and-return, the store pays for what is shipped to it. Shrink is entirely the store’s problem. This is an important concern to any publisher contemplating moving to consignment.

Another reason — and a good one — that publishers resist consignment is that they have a much-less-certain accounting of what they are owed. They are depending on the store’s POS system capturing every sale, with the differences being made up on a very delayed basis when inventory is taken or returns are requested and not found. Orders by a retailer of the same books from another source — if the consignment relationship isn’t a sole-source relationship — can seriously complicate the record-keeping.

If it is true that a number of publishers are contemplating a consignment model, that’s a good thing because it would demonstrate creative thinking is occurring where it is required. As we have said over and over again, shelf space at retail is going to be an increasingly vexed issue in our business in the months and years to come. Anything publishers can do to make it easier and more attractive for owners of brick locations to put books on their shelves is going to be needed and appreciated. Consignment, properly done and properly positioned, can be helpful, but it isn’t a panacea and it requires a lot of consideration of the details of implementation.

Consignment terms for retailers, I must admit, is one of the few important topics not being discussed at either our “eBooks Go Global”  conference at BEA on May 25 or our “Global Perspective on Digital Change” conference in London on June 21. If you’ll be in the vicinity on those dates, click the links and check out the programs. We’re very excited about what we’ve been able to put together.