VMI

Seven key insights about VMI for books and why it is becoming a current concern


Vendor-managed inventory (VMI) is a supply paradigm for retailers by which the distributor makes the individual stocking decisions rather than having them determined by “orders” from an account. The most significant application of it for books was in the mass-market paperback business in its early days, when most of the books went through the magazine wholesalers to newsstands, drug stores, and other merchants that sold magazines. The way it worked, originally, was that mass-market publishers “allocated” copies to each of several hundred “independent distributors” (also known as I.D. wholesalers), who in turn allocated them to the accounts.

Nobody thought of this as “vendor-managed inventory”. It was actually described as “forced distribution”. And since there was no ongoing restocking component built into the thinking, that was the right way to frame it.

The net result was that copies of a title could appear in tens of thousands of individual locations without a publisher needing to show up at, or even ship to, each and every one.

To make this system functional at the beginning, the books, like magazines, had a predictable monthly cycle through the system. The copies that didn’t sell in their allotted time were destroyed, with covers returned to the publisher for credit.

Over time, the system became inefficient (the details of which are a story for another day, but the long story short is that publishers couldn’t resist the temptation to overload the system with more titles and copies than it could handle) and mass-market publishing evolved into something quite different which today, aside from mostly sticking to standard rack-sized books, works nothing like it did at the beginning.

My father, Leonard Shatzkin, introduced a much more sophisticated version of VMI for bookstores at Doubleday in 1957 called the Doubleday Merchandising Plan. In the Doubleday version, reps left the store with a count of the books on-hand rather than a purchase order. The store had agreed in advance to let Doubleday use that inventory count to calculate sales and determine what should then be shipped in. In 18 months, there were 800 stores on the Plan, Doubleday’s backlist sales had quadrupled and the cost of sales had quartered. VMI was much more efficient and productive — for Doubleday and for the stores — than the “normal” way of stocking was. That “normal” way — the store issues orders and the publisher then ships them — was described as “distribution by negotiation” by my father in his seminal book, “In Cold Type”, and it is still the way most books find their way to most retail shelves.

After my Dad left Doubleday in 1960, successor sales executives — who, frankly, didn’t really understand the power and value of what Dad had left them — allowed the system to atrophy. This started in a time-honored way, with reps appealing that some stores in their territory would rather just write their own backlist orders. Management conferred undue cred on the rep who managed the account and allowed exceptions. The exceptions, over time, became more prevalent than the real VMI and within a decade or so the enormous advantage of having hundreds of stores so efficiently stocked with backlist was gone.

And so, for the most part, VMI was gone from the book business by the mid-1970s. And, since then, there have been substantial improvements in the supply chain. PCs in stores that can manage vast amounts of data; powerful service offerings from the wholesalers (primarily Ingram and Baker & Taylor, but others too); information through services like Above the Treeline; and consolidation of the trade business at both ends so that the lion’s share of a store’s supply comes from a handful of major publishers and distributors (compared to my Dad’s day) and lots of the books go to a relatively smaller number of accounts have all combined to make the challenge of efficient inventory management for books at retail at least appear not to need the advantages of VMI the way it did 60 years ago.

And since so many bookstores not only really like to make the book-by-book stocking decisions, or at least to control them through the systems they have invested in and applying the title-specific knowledge they work hard to develop, there has been little motivation for publishers or wholesalers to invest in developing the capability to execute VMI.

Until recently. Now two factors are changing that.

One is that non-bookstore distribution of books is growing. And non-bookstores don’t have the same investments in book-specific inventory management and knowledge, let alone the emotional investments that make them want to decide what the books are, that bookstores do. Sometimes they just simply can’t do it: they don’t have the bandwidth or expertise to buy books.

And the other is that both of the two largest book chains, Barnes & Noble and Books-a-Million, are seeing virtue in transferring some of the stocking decisions to suppliers. B&N, at least, has been actively encouraging publishers to think about VMI for several years. These discussions have reportedly revolved around a concept similar to one the late Borders chain was trying a decade or more ago, finding “category captains” that know a subject well enough to relieve the chain of the need for broad knowledge of all the books that fall under that rubric.

This is compelling. Finding that you are managing business that could be made more efficient with a system to help you while at the same time some of your biggest accounts are asking for services that could benefit from the same automation are far more persuasive goads to pursue an idea than the more abstract notion that you could create a beneficial paradigm shift.

As a result, many publishing sales departments today are beginning to grapple with defining VMI, thinking about how to apply it, and confronting the questions around how it affects staffing, sales call patterns, and commercial terms. This interest is likely to grow. A well-designed VMI system for books (and buying one off-the-shelf that was not specifically designed for books is not a viable solution) will have applications and create opportunities all over the world. Since delivering books globally is an increasingly prevalent framework for business thinking, the case to invest in this capability gets easier to make in many places with each passing day.

VMI is a big subject and there’s a lot to know and think through about it. I’ve had the unusual — probably unique — opportunity to contemplate it with all its nuances for 50 years, thanks to my Dad’s visionary insight into the topic and a father-son relationship that included a lot of shop talk from my very early years. So here’s my starter list of conceptual points that I hope would be helpful to any publisher or retailer thinking about an approach to VMI.

1. Efficient and commercially viable VMI requires managing with rules, not with cases. Some of the current candidates to develop a VMI system have been drawn into it servicing planograms or spinner racks in non-book retailers. These restocking challenges are simpler than stocking a store because the title range is usually predetermined and confined and the restocking quantity is usually just one-for-one replenishment. We have found that even in those simple cases, the temptation to make individual decisions — swapping out titles or increasing or decreasing quantities in certain stores based on rates of movement — is hard to resist and rapidly adds complications that can rapidly overwhelm manual efforts to manage it.

2. VMI is based on data-informed shipments and returns. It must include returns, markdowns, or disposals to clear inventory. Putting books in quickly and efficiently to replace sold books is, indeed, the crux of VMI. But that alone is “necessary but not sufficient”. Most titles do not sell a single copy in most stores to which they are introduced. (This fact will surprise many people, but it is mathematically unavoidable and confirmed through data I have gotten from friends with retail data to query.) And many books will sell for a while and then stop, leaving copies behind. Any inventory management depending on VMI still requires periodic purging of excess inventory. That is, the publisher or distributor determining replenishment must also, from time to time, identify and deal with excess stock.

3. VMI sensibly combines with consignment and vendor-paid freight. The convention that books are invoiced to the account when they are shipped and that the store pays the shipping cost of returns (and frequently on incoming shipments as well) makes sense when the store holds the order book and decides what titles and quantities are coming in. But if the store isn’t deciding the titles and quantities, it obviously shouldn’t be held accountable for freight costs on returns; that would be license for the publisher or distributor to take unwise risks. The same is really true for the carrying cost of the inventory between receipt and sale. If the store’s deciding, it isn’t crazy for that to be their lookout. But if the publisher or distributor is deciding, then the inventory risk should be transferred to them. The simplest way to do that is for the commercial arrangement to shift so that the publisher offers consignment and freight paid both ways. The store should pay promptly — probably weekly — when the books are sold. (Publishers: before you get antsy about what all this means to your margins, read the post to the end.)

Aside from being fairer, commercially more logical, and an attractive proposition that should entice the store rather than a risky one that will discourage participation, this arrangement sets up a much more sensible framework for other discussions that need to take place. With publisher prices marked on all the books, it makes it clear to the retailer that s/he has a clear margin on every sale for the store to capture (or to offer as discounts to customers). And because the publisher is clearly taking all the inventory risk, it also makes it clear that the account must take responsibility for inventory “shrink” (books that disappear from the shelves without going through the cash register.)

Obviously, shrink is entirely the retailer’s problem in a sale-and-return arrangement; whatever they can’t return they will have paid for. But it is also obvious that retailers in consignment arrangements try to elide that responsibility. Publishers can’t allow a situation where the retailer has no incentive to make sure every book leaving the store goes through the sales scan first.

4. Frequent replenishment is a critical component of successful VMI. No system can avoid the reality that predicting book sales on a per-title-per-outlet basis is impossible to do with a high degree of accuracy. The best antidote to this challenge is to ship frequently, which allows lower quantities without lost sales because new copies replace sold copies with little delay. The vendor-paid freight is a real restraint because freight costs go down as shipments rise, but it should be the only limitation on shipment frequency, assuming the sales information is reported electronically on a daily basis as it should be. The publisher or distributor should always be itching to ship as frequently as an order large enough to provide tolerable picking and freight costs can be assembled. The retailer needs to be encouraged, or helped, to enable restocking quickly and as frequently as cost-efficient shipments will allow.

5. If a store has no costs of inventory — either investment or freight — its only cost is the real estate the goods require. GMROII — gross margin return on inventory investment — is the best measurement of profitability for a retailer. With VMI, vendor-paid freight, and consignment, it is infinity. Therefore, profitable margins can be achieved with considerably less than the 40 to 50 percent discounts that have prevailed historically. How that will play out in negotiations is a case-by-case problem, but publishers should really understand GMROII and its implications for retail profitability so they fully comprehend what enormous financial advantages this new way of framing the commercial relationship give the retailer.

(The shift is not without its challenges for publishers to manage but what at first appears to be the biggest one — the delay in “recognizing” sales for the balance sheet — is actually much smaller than it might first appear. And that’s also a subject for another day.)

6. Actually, the store also saves the cost of buying, which is very expensive for books. The most important advantage VMI gives a publisher is removing the need for a buyer to get their books onto somebody’s shelves. The publisher with VMI overcomes what has been the insuperable barrier blocking them from many retail establishments: the store can’t bear the expense of the expertise and knowledge required to do the buying. It is harder to sell that advantage to existing book retailers who have invested in systems to enable buyers, even if some buyer time can be saved through the publisher’s or distributor’s efforts and expertise. But a non-book retailer looking for complementary merchandise that might also be a traffic builder will appreciate largely cost-free inventory that adds margin and will see profitability at margins considerably lower than the discounts publishers must provide today.

7. Within reasonable limits, the publisher or distributor should be happy to honor input from the retailer about books they want to carry. It is important to remember that most titles shipped to most stores don’t actually sell one single unit. Giving a store a title they’re requesting should have odds good enough to be worth the risk (although that will be proven true or not for each outlet by data over time). Taking the huge number of necessary decisions off a store’s hands is useful for everybody; it shouldn’t suggest their input is not relevant. Indeed, getting information from stores about price or topical promotions they are running, on books or other merchandise, and incorporating that into the rules around stocking books, will help any book supplier provide a better and more profitable service to its accounts. After all, having a store say “I’d like to sell this title for 20 percent off next week in a major promotion, would you mind sending me more copies?” opens up a conversation every publisher is happy to have.

Of course, in a variety of consulting assignments, we are working on this, including system design. It is staggering to contemplate how much more sophistication it is possible to build into the systems today than it was a decade-and-a-half ago when we last immersed ourselves in this. In the short run, a VMI-management system will provide a competitive edge, primarily because it will open up the opportunity to deliver to retail shelves that will simply not be accessible without it. That will lead to it becoming a requirement. As I’ve said here before, a prediction like that is not worth much without being attached to a time scale. I think we’ll see this cycle play out over the next ten years. That is: by 2025, just about all book distribution to retailers will be through a VMI system.

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What I was thinking when I said that wild stuff


At our Publishers Launch Conference on the Wednesday of BEA, Michael Cader and I introduced a new feature we think will become regular at our events: a candid 1-on-1 conversation between us. It went well.

In fact, it went so well that what reads like a pretty damn accurate verbatim account of much of it constituted a story for Ed Nawotka at Publishing Perspectives. So, now, thanks to Ed, much of the world knows that I made a number of pretty bold forecasts, probably the boldest of which is that we’ll see the US market boil down to one dominant trade publisher over the next 10 years.

There are a lot of unexpressed assumptions in that calculation. And, in the “predicting the future” part of my business, when I say 10 years I don’t count myself “wrong” if it takes 15. So, with thanks to Ed for reporting me accurately, it seems worthwhile to elaborate a bit more on what I said last week.

Operating with absolutely no “inside” knowledge, I outlined two expectations I have for initiatives we’ll see from Penguin Random House, about which I’ve written before. One is that they’ll create an ebook subscription offering which operates exclusively for their own books. The other is that they’ll apply the knowledge they’ve already gained about vendor-managed inventory (VMI) to create book departments within stores of all kinds, taking advantage of the reduction of shelf space in dedicated bookstores and the related challenges facing all other retailers to maintain top line revenues for whatever is their line of business as sales of all things, not just books, migrate online. Both of these capabilities could also be extended to include their distribution clients; it might require some renegotiation of terms to do it, but it would almost certainly be seen as a beneficial add-on by the distributees.

If PRH did that, and if they hit my made-up-from-thin-air target of 1000 proprietary sales locations over a couple of years, the new trade behemoth would have a bigger distribution base than all the other trade houses to go along with their already-bigger checkbook. So the consolidation of the general trade business under them could occur author-by-author as contracts expire, not requiring them to buy or merge with other companies.

I think the ebook subscription service is a relative no-brainer, assuming Random House can come up with the deal structure to get big authors to agree to it and, without a third party taking out some of the revenue, that should be doable. They don’t need 100% participation; I’d guess that if half the big-brand authors go ahead, the others will follow and the rest should be delighted with the opportunity.

I also think that every major publisher should be offering an ebook subscription service for their kids’ books, because they all have extensive lists and major brand names for that market and subscriptions will prove a very convenient way for parents to give kids lots of reading material at a predictable cost as the book world goes increasingly digital. There are aggregators in the field doing that now across many publishers’ titles, but there might be room for a lot of offers here and the publishers would be wise to consider whether they do best by creating their own subscription offers, licensing their big brand content to aggregators, or doing both.

But the build-up of proprietary offerings at retail and the prediction that trade publishing will consolidate as radically as I forecast, depend on the future of consumer behavior which nobody, and certainly not I, can predict with any certainty.

What most industry observers track is how the percentage of a publisher’s revenue that comes from digital books is rising. That’s commonly considered to be in the 25-30 percent range at the moment, going up by perhaps 30-40% a year (so next year it might e 33-38 percent) after having been rising much faster in recent years. A more nuanced view of this recognizes that it is particular books that (so far) really sell in digital form — generally books you read from beginning to end rather than those you skip around or dip into or which require illustrations — while others do not. For fiction, we are likely at 50% or more digital for a high percentage of the titles published.

In fact, PriceWaterhouseCoopers, tracking ebook sales against print sales, believes that digital will exceed print in a pretty short time.

But an even more important index if you’re charting the future of publishing is what’s bought in stores versus what’s bought online. Obviously, all ebooks are bought online. But there’s pretty strong evidence that the percentage of print books sold online is still steadily rising. In our discussion on stage, Michael Cader (the most reliable source for industry facts there is) remarked on the fact that Amazon print sales are still rising; more slowly than before, but still rising. Juxtapose that fact against the reality that total sales of print books through retailers are not rising, and sales through bookstores are certainly shrinking and it is clear that the online share of print sales is still going up.

I’m assuming that trend will continue. When bookstores close, the people who shopped in them often switch to buying online. When a bookstore reduces the selection of titles it offers, as Barnes & Noble certainly seems to have done, some of the people who browsed it are going to switch to browsing online. This leads to more stores closing and to more stores reducing their book inventory. It’s called a vicious cycle. It’s not a new concept.

Every publisher is trying to put print books into more retail places with great urgency. Some have better lists for it than others; some have better sales policies and other tools for it than others. But the barrier, most of the time, is that buying books is really hard for retailers. Each book is a unique product that has to be tracked uniquely and thought about uniquely and a store has to have at least hundreds, and preferably thousands or tens of thousands of them to be a decent place to shop for books.

That’s why vendor-managed inventory is so important; it can eliminate the need for the store to have book-buying expertise as a pre-condition for them to carry a decent range of books, even in a defined niche market.

So if PRH does what I think they will do and the shelf space for bookstores keeps shrinking and the share of book sales that take place in stores shrinks along with it, the position of other general trade publishers becomes increasingly difficult to navigate. PRH has additional distribution that nobody else has and the biggest checkbook among publishers. Amazon will have an increasing share of the potential market, so authors signing with them will be missing less and less eschewing what most publishers could give them beyond Amazon and the biggest checkbook of all.

Almost two decades ago, when the Internet first posed a threat to the business model for scholarly journals, I asked my friend, Mark Bide (now head of business development for Publishers Licensing Society in the UK), what would be the early warning sign that the traditional journals model is headed for trouble. He said “when the scholars stop submitting to the journals. As long as the scholars submit, their business will work.” In other words, the danger wasn’t so much losing their sources of sales as it was losing their sources of intellectual property.

It looks to me like that wisdom will apply to general trade publishers over the next decade or so.

In the discussion with Cader, we talked about how the other publishers might respond to this. It would take all four of them merging to present an equivalent title offering to PRH, and that would, at the very least, take some time. Another possibility is that a third party aggregator could create a competitive set of titles, or even do the job for the whole industry including PRH. But the challenge there would be terms; publishers need to give up margin to make this workable for a 3rd party, a problem PRH wouldn’t have on their own. And it is also true that PRH could probably complete its set of bestsellers if it had to by buying in those that it didn’t publish for this offering. One CEO I talked to about this nearly a year ago conceded that, if PRH went this way, that CEO’s company would almost certainly have to sell them whatever books they wanted.

And while this post is still extremely speculative, it has what might be the virtue of being fairly consistent with the thinking reflected in the speech I did at BEA six years ago predicting “the end of general trade publishing houses”. 

Final point on this one. I am not saying that nobody but one publisher will publish books that people will want. There will be publishers in many niches, including fiction niches. What I’m predicting is that the “general trade” model of a publisher that issues books on subjects across the board, trusting the book retailing system to sort out the books for the customers by subject and genre, will consolidate to a single player in the next couple of decades.

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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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