Strategically Speaking: Surviving Volatility
Anyone paying even the slightest bit of attention to book publishing industry news (and also living through it) knows that these are indeed remarkable days. Having more years in and around the book business than I care to count, I can tell you with absolute certainty that the pace of change is unlike any time I can recall, and few signs can be seen of any slow-down in an environment that can only be described as volatile—if not downright unpredictable.
One basic tenet of Wall Street thinking is the value of predictability. The investment community rewards the stocks of companies and industries that exhibit steady (not necessarily spectacular) growth in revenues and earnings with appreciated share prices—and punishes those with wide swings in either direction with lower stock prices. More than anything else, the Street hates surprises. If predictability is a qualification for success, I suggest to you that we are, as an industry, in for a bit of a roller coaster ride for the next several years—as the business environment that has been, for the most part, fairly stable for the past several years undergoes transformational times.
On Aug. 9, the Association of American Publishers (AAP) and the Book Industry Study Group (BISG) gave the book publishing community an early glimpse of the BookStats project—the joint effort of these two industry stalwarts. For those of you new to the BookStats project, the program was created to provide publishers with a comprehensive view of industry sales—across product lines, formats and distribution channels. The project was based on information provided by almost 2,000 publishers using this baseline information to project statistics for the industry as a whole. A glimpse at the BookStats study revealed much interesting and important information, particularly in its reporting of industry growth in sales, from 2008 to 2010, of 5.6 percent—a remarkable achievement in the soft economy of recent years. It also showed a dramatic increase in e-book sales, in both dollars and units, and continued erosion of the market share of brick-and-mortar retailers to the benefit of online booksellers and mass merchants. Here are some of the highlights from the preliminary report:
● Industry revenues across all product segments grew more than 5 percent from a 2008 base of $26.5 billion to $27.9 billion, an extraordinary achievement in the face of an otherwise challenged economy.
● During the same period, unit sales rose about 4 percent from a 2008 base of 2.47 billion units to end calendar year 2010 at 2.57 billion units.
● Net sales for trade hardcover books closed 2010 at $5.26 billion—growing a modest 0.9 percent over the study's three-year time span.
● Total net trade unit sales for 2010 were 603 million, representing a 5.8-percent increase from 2008. Despite these encouraging signs, hardcover books' share of the total trade market fell from a 2008 share of 39.6 percent to 37.7 percent in 2010.
● Net revenues for trade paperbacks closed 2010 at $5.27 billion, a 1.2-percent increase over 2008.
● Net units (in trade paperbacks) sold increased 2 percent during the three years reported, totaling 1.1 billion units in 2010.
● Like hardcovers, soft covers' share of the total trade market over the study period dropped in 2010 to 37.8 percent from 39.5 percent in 2008. ● Mass-market paperbacks were savaged by both the recession and e-books over the study period. Net sales for mass-market closed 2010 at $1.28 billion, plummeting 13.8 percent since 2008.
● Mass-market unit sales fell even more precipitously, nose diving to a 2010 close of 319 million units—down an unprecedented 16.8 percent from their 2008 base.
● As one might reasonably expect, mass-market paperbacks' market share fell from a 2008 base of 11.3 percent to 9.2 percent.
● E-books proved to be one of the industry's two shining stars. E-books grew from a paltry share of 0.6 percent of the trade market in 2008 to 6.4 percent by the close of 2010. While e-books represent a modest share of the total book market, the spectacular growth equates to 1,274.1 percent surge in net sales with total net sales closing 2010 at $878 million.
● Looking at perhaps the most striking statistic of all—that unit e-book sales closed calendar year 2010 at a staggering 114 million units—can anyone still think that e-books are a passing fad?
Educational and Professional Markets
The study findings for the less glamorous, but usually more profitable education and professional sectors are, for the most part, considerably rosier than they are for trade:
● Higher-education delivered a 23.1-percent increase in net sales over the three year study period—closing 2010 at $4.55 billion. This is extraordinary growth by any yardstick and confirms the industry maxim that higher-education publishing is counter cyclical—with sales rising the tougher the economy gets.
● Professional publishing net revenues grew by 6.3 percent during the study period. Revenue for 2010 closed at a respectable $3.75 billion.
● Perhaps more encouraging was the corresponding increase in unit sales of 6.3 percent between 2008 and 2010 to 171 million units.
● On the downside, the study paints a more depressing picture for the elementary-high school (el-hi) marketplace with sales declining 6.2 percent during the three-year period, although dropping to a still-respectable $5.5 billion.
Several interesting developments have been shown on the distribution-channel front, and a few findings will come as a surprise:
● Net revenue generated by sales to retail chains closed 2010 at just over $3 billion.
● Publishers' net sales revenue to brick-and-mortar retail chains saw a decline of 2.7 percent over the study period.
● Net sales by publishers to online channels closed 2010 at $2.8 billion—a three-year increase of 55.2 percent.
● The unit sales gains to the online channel have been even more significant, soaring 68.6 percent over the course of the study to 276 million units in 2010.
● Publishers are increasingly selling directly to mass-merchants (e.g., Wal-Mart, Costco, etc.), with net sales dollars up 553 percent and unit sales up 294.7 percent over the past three years.
● As mass-merchants have experienced this increase, there has been a corresponding decline in sales to wholesalers, where revenue has declined 6.7 percent and net units fell 9.6 percent.
Clouding the Optimism: 2011 Figures
While the BookStats study does indeed offer many reasons for optimism, as an industry, we should take this information with the proverbial grain of salt, as the year-to-date May 2011 information provided by the Association of American Publishers suggests that the good times may indeed be on hiatus. Consider that:
● Year-to-date net revenues for higher-education, the shining star of the BookStats study, closed May 2011 at $561 million—decreasing $57 million or 9.1 percent from the comparable period in 2010.
● Year-to-date net sales for professional products closed January through May at $237 million, declining $19 million or 7.4 percent from the comparable period last year.
● Mass-market books continue their precipitous decline with net sales falling almost $80 million or 30 percent from this period last year.
● Children's books (including both hardcover and paperbacks) are down $42 million for the year-to-date through May, a decline of almost 11 percent.
● Adult trade sales (including both hardcover and paperbacks) are down $221 million or 20 percent over last year.
Why the Decline?
Invariably much of this is explainable. E-book technology has matured considerably over the past three years, and e-reader prices have dropped dramatically, accelerating the transition to e-books—and certainly a contributor to the declining fortunes of trade and mass-market's print books. And, of course, the Border's bankruptcy added fuel to the fire, with the implications of the store shutdowns not yet fully clear.
As for higher-education, a former colleague suggested that the year-to-date decline may be the first clear evidence that textbook rental is taking hold, and with digital textbook options growing exponentially, who knows what the fall rush will bring.
What does all this mean in practical terms? It certainly doesn't mean that you should be selling off what's left of your 401K, but this is perhaps the time to start looking at your business—the fundamental processes, the organizational structure, and the bricks-and-mortar infrastructure—and evaluating all of those elements against a future that's likely to be very different three to five years from now. Start evaluating the possible outcomes, and your personal and organizational options for responding to an industry landscape that's unlikely to have any of the predictability we have come to expect.
Some might see this volatile environment as anxiety-provoking and the end of the world as we know it. However, this new era we are entering has the potential to be an extraordinarily exciting time for the book publishing industry, and more is to be gained by embracing the changes than fighting them.
The publishing industry has many traditions that have long outlived their usefulness, and if we keep an open mind and are willing to ask the tough questions about the status quo, the industry will be the better for it. BB
David Hetherington is director of major account sales for Baker & Taylor's Digital Service Group and an adjunct professor at the Pace University Graduate School of Book and Magazine Publishing. He was previously managing director for strategic business development for Integrated Book Technology, and has held senior positions in finance, operations and manufacturing with some of the industry's largest firms, including Simon & Schuster, Reader's Digest Association, BearingPoint Consulting, Wolters Kluwer Health and Columbia University Press.