Deconstructing Distribution

The recent collapse of San Diego-based wholesaler Advanced Marketing Services (AMS), and its distribution subsidiary that it took down with it—the much esteemed Publishers Group West (PGW) that it acquired only five years ago—reminded me of the remarkable way in which our industry sorts through 180,000 new titles a year and the millions more in print.

Somehow, in a timely manner, the industry moves books into stores, superstores, specialty stores and gift shops, big-box discounters, grocery and drug store chains, and libraries of all kinds—aggregating more than 100,000 accounts that someone has to bill and collect on.

Dramatic though the PGW collapse is, drilling down into the system reveals that the key master distributors such as PGW, as a group, may account for less than 3 percent of bookstore sales, and just over 1 percent of total sales. So, what about the remaining 99 percent?

Quantifying the various distribution channels
In its 2006 “Book Industry Trends” report, the Book Industry Study Group (BISG) forecasted that publishers would have moved 3.2 billion books into the marketplace in 2006, netting $35.8 billion in sales. (These numbers represent printed books in units, although e-book revenue, especially in professional and reference, is included.) Of that, 1.9 billion units netted $18 billion in sales to retail and college bookstores.

In other words, retail sales make up slightly more than 50 percent of all book sales. (Libraries and institutional sales, incidentally, account for 149 million units, netting $3.5 billion, or 10 percent, of all book sales.) So, how economically significant are each of the various distribution channels to the industry? Insights from a number of experts indicate that a lot of guesswork may be involved.

For example, it is now widely cited that some 85,000 publishers have ISBNs, but how many of these publish only one or a few evergreen books? And how many have sufficient sales volume to create a marketplace for distribution service providers—wholesalers, large publishers representing other publishers, master distributors, warehouse and fulfillment services, shipping companies, manufacturers providing shipping and fulfillment services, and various e-commerce aggregators and service providers?

In its ground-breaking 2005 study “Under the Radar,” BISG mailed a survey to the 85,000 publishers in Bowker’s November 2004 database and reported that there were 62,815 active publishers (which excluded publishers reporting no revenues). Of this number, there were 46,860 publishers with less than $50,000 in annual revenues.

Based on percentages in the report, I calculated that, of the 15,955 publishers (including non-conventional association, institutional and corporate programs) with revenues of more than $50,000:

● 744 had revenues of $50 million+

● 3,580 had revenues of $1 million–$49 million

● 1,570 had revenues of $500,000–$999,000

● 6,041 had revenues of $100,000–$499,000

● 4,020 had revenues of $50,000–$99,000

Out of this universe, how many publishers could realistically be targets of opportunity for distribution providers? Overall, the 10,000 or so publishers with revenues of $50,000–$500,000 are the farm team, and the 5,150 publishers doing $500,000–$50 million are the major leagues. Publishers with revenues of $50 million or more are usually running their own show and providing services to others (with exceptions, of course, to every rule).

It is useful to establish under what circumstances a publisher should take on its own sales and distribution operation. Probably the best discussion I have seen of the matter appears in a report by Cross River Publishing Consultants (PubConsultants.com)—specifically Ani Chamichian and Thomas Woll—for the Association for the Export of Canadian Books in Ottawa. Carla Ruff, a sales and marketing consultant working with new and established publishers, also assisted in the report and helped me work through some of the highlights of this article.

Based on their analysis, if a benchmark 7 percent of sales expense is applied to an average $70,000 cost of salary, benefits and expenses, a publisher would need a minimum of $1 million in net sales per sales rep. With one rep for national accounts, anywhere from an additional one to 10 reps would be needed to cover the country, depending on how wide a reach is desired.

When the strategy of using commission reps or an in-house sales force is adopted, the publisher will need to have a warehousing and fulfillment operation to support them. For the publisher undertaking its own distribution, the cost of warehousing and fulfillment is typically expected to run 8 percent to 10 percent of sales.

To keep costs down to this percentage, the publisher needs to be doing enough business to afford the basic overhead of leasing or owning the warehouse space even when there is no activity. The alternative is to engage a warehousing and fulfillment service, of which there are a number serving the publishing industry (for a starter list see www.BookPublishingSoftware.com/book-fulfillment.htm).

Consultant and publisher Howard Fisher (www.TheFisherCompany.com) suggests that a publisher needs to be doing at least $10 million to $12 million in sales before it should consider operating its own warehouse.

Outsourced distribution
Eric Miller, president, and Paul Williams, executive director, the National Association of Independent Publishers Representatives (NAIPR.com), suggest that publishers must clear several important hurdles before they can work effectively with independent reps, primarily:

1. Sufficient scale so that national and independent booksellers will carry their accounts. This generally means at least $100,000 a year of business with wholesalers and chains.

2. Sufficient sales volume potential and financial credibility, so that sales reps and booksellers can count on continuing sales, cash flow and returns handling.

Fisher cautions that publishers undertaking their own selling operations need to ask themselves:

1. Do I have enough presence with the chain stores to be a direct account?

2. Am I willing to spend time and money on an electronic ordering system?

3. Can I set up and maintain the accounting and reporting systems required?

4. Do I have a satisfactory relationship with a fulfillment house?

The results: Sales revenue by sales/distribution source

Thomas Woll and I estimated the probable sales volume by the top tier of each outsourced sales/distribution source, based on published, verbally reported and estimated sales volumes:

● 10 key master distributors: $400 million–$500 million

● 10 key major publisher distribution services: $750 million–$1 billion, and

● 350 commission reps: $250 million–$500 million.

This totals about $1.4 billion–$2 billion, or 8 percent to 11 percent of book sales to booksellers. My guess is that more than 90 percent of these sales dollars are coming from among the 5,300 publishers in the $500,000–$49 million bracket mentioned earlier.

Wholesalers’ role
Any discussion of distribution seems incomplete without mentioning the role of the wholesaler. The classic distinction is that the wholesaler essentially “works” for the bookseller, while the distributor really “works” for the publisher. But when it comes to assuring timely distribution and backlist sell-through, the economic benefit of wholesaler efficiencies in combining orders from diverse imprints is enormous to both publishers and their outsource distribution partners.

In its 2006 “Book Industry Trends” report, BISG forecasts that wholesalers’ 2006 sales to retailers would account for $3.6 billion—or 20 percent of publisher sales to booksellers. (To libraries and institutions: $2 billion.) Since wholesalers also handle books of the “big 10” (who themselves may account for 50 percent to 60 percent of bookstore sales), the health and vitality of these distribution channels are critical to the entire industry—top tier as well as small and independent publishers.

For the love of books
One might ask what motivates people to keep this complex system going. After all, although a lot of cash may flow through, it usually takes its time and leaves behind relatively modest portions, if any.

As to why we’re in this business and why we persist, Miller explains, “To have a bookstore is part of the American Dream. It is a form of self-expression.”

In the next issue, I will discuss how to choose and work with master distributors and wholesalers, and about the merits and demerits of bypassing bookstores entirely with a target-marketing list. BB

Eugene G. Schwartz is a regular contributor to Book Business. He is a publishing industry analyst, writer and editor-at-large for Foreword Magazine. A former PMA board member, he is president of Consortium House, a management and business consultancy to publishers. He was previously a manufacturing, production and operations executive.