The Point of No Returns
On his “Publishing 2020” blog, Joe Wikert, general manager of O’Reilly Media’s Technology Exchange Division, mused recently about the long-term viability of the closely watched deal between Borders and HarperStudio, whereby the bookstore chain will purchase HarperStudio titles at a 10-percent to 15-percent discount in exchange for accepting a no-returns agreement. As a result, Wikert wrote, Borders will probably be less aggressive with initial buys and could find itself out of stock in the face of a hit—not a good situation for either party. On the other hand, having to sell all of the books it purchases most likely means Borders will more aggressively market HarperStudio titles—just the sort of incentive lacking in the current system.
“Just like any other part of a business transaction, there’s an equilibrium point that will be reached by both parties,” Wikert wrote. “If HarperStudio decides non-returnability isn’t worth this deep of a discount, they’ll eventually push back. Right now, though, both parties have decided the elimination of returns is worth 10 percent to 15 percent of additional points. I’m anxious to see if everyone is truly happy with that range in the long run.”
HarperStudio President Robert Miller sounds a cautious tone when discussing the potential for expansion of the model. “The slowdown in the economy has made retailers a little more hesitant about inventory risk, and we’ve realized that we need to offer a choice between returnable and non-returnable,” he says. “I’m still hoping that more booksellers will come on board; so far we have a commitment to go non-returnable from Borders.”
According to Miller, HarperStudio was set up as an experimental division, one of its goals being to find ways to reduce returns. The current economy “has made this a harder time to ask booksellers to take on additional risk,” he notes.
“That said, we’re offering aggressive, non-returnable discounts that I believe will make more money for those booksellers willing to try going this way. And I think that once booksellers realize they are more profitable going non-returnable, the practice will increase,” he says.
“If we’re lucky enough to find solutions to some industry problems, perhaps others will follow. But first we have to solve the problems,” Miller continues.
Everything on the Table
“Everybody is watching HarperStudio to see if they have any success,” says Lorraine Shanley, a book industry consultant with Market Partners International.
Shanley notes that other publishers have already benefited from lower-profile innovations, such as Workman Publishing and Running Press, which maintain a number of nontraditional accounts at gift shops, and cookware and specialty stores (Restoration Hardware being one example) that do not follow the book industry returns model.
“Most other retailers do not do things the way publishers and book retailers do in that they may not do 100-percent returnables, but they might have some kind of credit system going on,” she says. “It is a better system than the system we have with book retailers.
“The best thing is to have a more fluid relationship with book retailers in how returns are accounted for,” Shanley says, such as being open to tailoring policies based on the type of book or offering varying terms that work for the publisher and retailers. “Increasingly, with a much greater reliance on just-in-time printing and short-run printing, publishers will be able to cut the numbers significantly.”
One area of debate has to do with the notion of discounting, which seems, on the surface, a good way to monetize excess stock without incurring added expenses for the publisher.
“There is a certain amount of discounting in place, and maybe that will become a bigger option,” Shanley says. “There are a lot of ways business has been done traditionally; … you can look at the fashion industry and the increasing amount of discounting they do as an obvious example. This may not be a viable option long-term, [however], because now nobody pays retail for anything.
“The problem is that everything has to be very standardized, so it’s not as though you can deal with one store with your left hand and the other with your right hand,” she adds.
Rich Freese, president of Bookmasters Distribution Services in Ashland, Ohio, says publishers are beginning to try the markdown route—but echoes Shanley’s misgivings about its long-term viability as an alternative to returns.
“Shared in-store markdowns are a way publishers are working with retailers to increase sales and reduce returns on overstocked items,” he says. “The problem with markdowns is that too often the book is perceived to have failed to meet expectations, and as a result is considered a failure. [It is then] harder to establish a long life, and almost impossible in the same format.”
Freese says some publishers are beginning to provide additional discount terms to retailers who place larger orders and for greater control over returns, but he adds, he’s “not sure how effective this is [yet]. Few true incentives are under way.”
The reason for this lackluster response to the problem may be systemic, and the prescription may be tough to swallow, especially for larger publishers, believes Eric Kampmann, president of Midpoint Trade Books Inc. and Beaufort Books. A high returns rate is, he believes, the consequence of spending too much on the development end (including on author advances and royalties), necessitating pressure to produce “extravagant” sales numbers upon a book’s release.
“No one seemed to say ‘stop,’” he says of the traditional environment of escalating royalty costs, which assumes perpetual growth in a healthy economy, “and so the high cost of acquisitions has led to escalating costs right down the line, leading, of course, to higher returns. It is all very predictable. Wouldn’t the better operating philosophy be: ‘Buy cheap, sell dear’? It seems that the book business has reversed the order and is proud of buying for very dear and selling (ultimately) very cheap.”
Discounting, in this viewpoint, would not solve the problem of the imbalance between what it costs to produce a book and what publishers are ultimately able to earn from it. And releasing many books a year on a limited promotional timeline compounds the problem.
“Certain pressures have forced the larger publishers to do their version of Charlie Chaplin’s accelerating assembly line in the movie ‘Modern Times,’” Kampmann says. “Publishing more titles increases the possibility of more best-sellers. So more titles are pushed into the marketplace and within a few weeks the next bunch must be attended to. The marketing people have only so much manpower to deal with the glut, so they move on to the next big thing and then the next big thing.”
An Imperative for Change
“It’s referred to as a consignment system, and that’s really what it is,” Shanley says of the returns structure. “[It’s the result of] of evolution over time—which might have seemed like a good idea back in the day (though it’s hard to imagine when that day was), but which [is] now coming back to haunt us.
“If you [were] paying shipping, you would be that much more eager to come up with an alternative,” she says of retailers. She notes that retailers do have some incentive to change due to the significant cost of unpacking, packing and managing shipments. For this reason, booksellers are, at least to some degree, on board with the reform efforts.
Without going into details, Borders has commented publicly on its own interest in streamlining the supply chain system as it now stands, and has held itself open to ideas of fundamental reform, notes Anne Roman of Borders corporate affairs.
“We have talked about our own initiative to improve inventory productivity, and this remains one of our key priorities,” Roman says. “Further, we have commented publicly that we believe returns are not productive for the industry as a whole, and looking at a wide range of alternatives to returns is something we support.”
Steve Mettee of Fresno, Calif.-based Quill Driver Books looks forward to a “hybrid” model, where risk (and expense) is shared between bookstores and publishers.
“We have to come to a hybrid: … If you are a store and you order two or three books, they [should not be] returnable; if you … order a lot, then 50 percent of those ought to be either returnable or … you ought to be able to give some kind of credit. Because we, as publishers, do not have any retail outlet, and when I get books back, I don’t have any way to sell them except for back through the distribution channel.”
The other significant factor going forward, he says, will be digital printing and/or delivery, with print-on-demand (POD) options reducing the need for large initial print runs and shipments, and book-at-a-time machines holding the potential to make the whole question of managing returns irrelevant.
“The higher book cost [of POD] is actually coming down,” notes Shanley. “Particularly if you look at university presses, where they are likely to sell small runs, it’s really becoming a way of life for them.”
As with everything else, the extent to which POD will alleviate the returns problem is an open question, mainly because its effect on front-list titles, where offset runs still dominate, is unclear.
A Digital Strategy With ‘Welcome Consequences’
If the strategy pursued by Hoboken, N.J.-based Wiley-Blackwell is any guide, the returns issue may be easier to manage in the scientific, technical, medical and scholarly (STMS) publishing world than in the trade sector (which is not to say trade companies could not learn a thing or two from STMS publishers’ recent experiences).
“Our digital strategy is a driver behind lowering returns,” says Wiley spokesperson Susan Spilka, who points to WileyPlus and CourseSmart as examples. WileyPLUS is a course management tool offering interactive online materials, including complete textbooks, while CourseSmart—a cooperative venture with Pearson, Cengage Learning, McGraw-Hill Education, Bedford, Freeman & Worth, and Jones and Bartlett—lets students shop for textbooks in e-book format from a number of publishing companies at discounted prices (compared to printed versions).
“The success of WileyPlus has made a difference by selling students something they need and use each semester,” Spilka says. “CourseSmart is helping to reduce … copies going into the used book market, which ultimately affects returns.”
This is important in the textbook trade, as the unpredictability of the used book market skews what would otherwise be a fairly straightforward ordering process based on class enrollment.
“If more used books are available, the bookstores sell fewer new editions, and then they return them,” Spilka explains.
Returns are no longer a core concern for Wiley, though Spilka says this was a “welcome consequence” of increased digital adoption. “Wiley-Blackwell’s migration to online for STMS products is driven more by our anticipation that customers are increasingly turning exclusively to the Web as their primary resource for information,” she says.
For much of the industry, however, such heavy focus on digital content is not an option, with print sales still comprising the vast majority of revenue—though the inefficient and costly returns model adds to the incentive for publishers to give their digital efforts a greater push.
The only certainty is that the status quo can no longer be maintained. “[The returns system] is wildly inefficient [and] ecologically unsound,” Shanley says. “Publishers and retailers are increasingly aware of the costs. We need to find a middle ground.”