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Strategies to cut overheads in a shrinking book business make a lot of sense

July 31, 2017 by Mike Shatzkin 16 Comments

An inexorable reality of today’s commercial book publishing world is that it is shrinking. Although there have been no obvious signs yet that actual long-form book reading itself has declined (even though that would seem a likely consequence over time of the changed ways we get our reading inputs), the self-publishing and indie segment of the market keeps growing at the expense of the legacy commercial business.

Although it would take data I don’t have to prove this, it certainly appears anecdotally that the big houses are cutting back their investment in midlist titles, perhaps actually cutting future title count (which, over the years, has been an often-espoused but seldom-pursued strategy) but also offering smaller advances for all but the very top books.

Sales seem to be drifting away from the established publishers as their title outputs shrink or remain static and are shifting to Amazon’s own titles and indies, which is where the title base is expanding.

When businesses are shrinking, or even just not growing, it is a normal reaction to find ways to cut costs to maintain margins and profits. And, in fact, the big publishers have generally been managing their costs pretty effectively during a period of flat or declining top line sales.

In that context, it was no real surprise when it was publicly announced last week that F+W Publishing, which recently changed ownership, will cut overheads by moving from doing their own sales and distribution to working instead through Perseus, an Ingram company.

Meanwhile, the whole legacy industry worries about the future for Barnes & Noble.

Last week a significant Barnes & Noble shareholder called publicly for the chain to offer itself for sale, apparently calculating that new (and perhaps “private”) ownership would see paths to profits that aren’t being followed right now. This follows continuing evidence that B&N’s overall sales track the legacy business, and are therefore declining. Amazon, of course, is not just the principal creator and beneficiary of the new competitors, primarily independent authors. They are also moving from being an online-only retailer to competing in B&N’s milieu: physical locations offering books.

So now we face a paradox of competing best practices. Barnes & Noble outlasted its erstwhile big bookstore competitor, Borders, in large part because B&N built an efficient supply chain operation that could resupply its stores quickly and efficiently. This meant both that their inventory investments were best employed and that sales lost in stores because moving books weren’t put back on the shelves as they sold were minimized. (There were certainly other factors. When I was working with B&N about 15 years ago, it was widely believed internally at B&N that Borders had an inferior real estate department. What they thought they saw happen repeatedly was that Borders would open near where they had put a new location, but on a specific corner B&N had already rejected. To them, it was pathetic: a running joke.)

Amazon is now beating B&N at that same game. Amazon’s supply chain, built on a scale that the book business alone could never support, is now the gold standard. It will enable them to continue rolling out smaller stores, which is the kind of outlet that can succeed in today’s book marketplace. The stark fact today is that more than half the sales are online (and despite BN.com and the increased frequency of online book peddling from authors and various vertical organizations enabled by Ingram’s Aer.io and its competitors, almost all of those go to Amazon).

Big in-store inventories have become a pointless anachronism.

It is cheap sport to ridicule Barnes & Noble’s performance in the Internet age. They’ve made many of the standard incumbent mistakes in the face of upstart competition. They dealt themselves out of the online business by not pursuing either of the two most likely paths to success. They should either have made their dot com a stand-alone business, with pricing and growth aspirations beyond books that competed with Amazon, or they should have tightly integrated the online and store offerings to produce a hybrid that had its own appeal. They did neither.

(But, then, neither did most other brick-and-mortar retailers who have been disrupted by Amazon. In any vertical. And Borders didn’t even try; they basically turned their online business over to Amazon!)

The shrinkage of the commercial business has other visible impacts. There is anecdotal evidence that the agents are suffering from these cutbacks. One much-younger-than-I-am publishing veteran recalled for me that when he started agenting (he no longer is active in that aspect of the business) a dozen years ago, he could live on his salary as a fledgling agent and he could really “build a list”. Neither of these things seem to be possible anymore, or at the least they are much more difficult. Meanwhile, even the older agents — those who have a list of productive authors — are finding it get harder and harder to make sales. And like publishers of a certain age, these agents don’t find their own progeny or their younger staff as willing to commit money or time to the future of the business as they would have expected them to 10 or 20 years ago.

Present trends clearly suggest that we will continue to have fewer commercial publishers signing up fewer books for smaller advances outside the handful of authors that are virtual guarantees to deliver big unit sales. And for those books that do have an assured big unit sale, publishers will tend to be willing to overpay because they need throughput to feed their fixed-overhead machines.

In a environment where top-line revenue is declining, it is just logical to figure out how to cut costs. That’s what F+W has done with this move. It is likely that the declining number of publishers with their own operations will increasingly find it sensible to get rid of those overheads.

The shareholder that wants B&N to sell inherently makes the point that Barnes & Noble should really be thinking along the same lines. Getting smaller demands close examination of fixed overheads. And, in a different way than it does for publishers, once again Ingram offers a solution.

Barnes & Noble could take a big step in the right direction by switching from its own network of warehouses for resupply to using Ingram. They would trade large fixed costs for what might be a slight increase in costs per unit, but they’d almost certainly have greater inventory efficiency, as measured by a higher “fill rate” for books they want to bring into the stores. The recovery of sales they would otherwise have lost might well make up for the margin they’d sacrifice by using Ingram inventory for supply rather than having purchased that stock directly from publishers..

Consider that the two networks of warehouses are really redundant. They mostly carry the same books and they have to cover the same country with 1- or 2-day delivery service. And the recognition that the two could be productively combined is not new. Nearly 20 years ago, a much more dominant Barnes & Noble tried to buy Ingram, in a deal that terrified the industry and that regulators threatened to make so difficult that it was abandoned before it was consummated.

If B&N were to shift its strategy for resupply from owning its own warehouses to a tighter integration with Ingram, they would unlock a slew of benefits.

They’d shed significant fixed costs that could be redeployed to invest in their evolving retailing strategy, which today consists of filling their big spaces with things other than books but which tomorrow should almost certainly include occupying smaller spaces. (Really competing with Amazon for the physical store customer will require doing that.)

They’d free up management bandwidth now engaged in a commoditized task (that Ingram does better than they do). They need their management’s attention to invent new retailing opportunities (new products, new store configurations, new pricing and merchandising strategies, new integration between online and store selling) and running a logistically-demanding distribution operation is a major distraction from those new existential objectives.

It is abundantly clear that the formula for book retailing success of the 1980s and 1990s no longer applies. A large selection at retail is not the traffic magnet it was before the entire world’s selection was a click away. It is not a productive use of Barnes & Noble’s capital or management bandwidth to maintain an infrastructure built to support a model which has outlived its usefulness.

Although I have been consulting with Ingram for years, the inputs pretty much flow one way: from me to them. This piece is not informed by any inside knowledge of Ingram strategy. Barnes & Noble was a client for a few years in the early part of this century, and the investor who tried to save Borders in the final stages of their existence was also a client at that time.

Ingram is extraordinarily well-positioned to take advantage of the book business’s consolidation but that is because they had the foresight to take key steps — perhaps most notable among them being the creation of Lightning to provide print-on-demand and developing the ability to drop-ship for their customers — to deliver scale to a fragmented industry that needs it. That vision, and the ability the company has to execute on complex logistics, have nothing to do with any help from me!

Filed Under: General Trade Publishing, New Models, Scale, Supply-Chain Tagged With: Amazon, Barnes & Noble, Borders, F+W Publishing, Ingram, Perseus

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Mike Shatzkin

Mike Shatzkin is the Founder & CEO of The Idea Logical Company and a widely-acknowledged thought leader about digital change in the book publishing industry. Read more.

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