Superstores, Megabooks And Humongous Headaches
In late February, 300 fans packed into the Borders Books & Music superstore in Manhattan's World Trade Center where author John Grisham was signing copies of his latest thriller, The Partner. A lucky 200 emerged from the lunchtime gathering with autographed copies purchased at 30% off the $26.95 list price.
But eager devotees willing to skip the brush with celebrity could do even better: That same day, as noted in a full-page New York Times advertisement, they could drop by Barnes & Noble as early as 7 a.m. and pick up a copy of The Partner at 50% off. Shrugs Barnes & Noble Inc. Chief Operating Officer Stephen Riggio: "It was just a special promotion that our buyers wanted to do." The lesson: Don't spit into the wind, and don't presume to upstage Barnes & Noble in New York City.
MAALOX MOMENT. With superstores clashing over customers and big-name speakers, the retail book trade is not for the faint of heart. Many independent stores are being pushed over the edge, but that is only the most visible of the factors roiling the book industry. Sales have failed to keep pace with the rapid growth of retail space. Retailers, who can return unsold books at purchase price, sent a flood of them back to publishers last year, depressing many publishers' 1996 earnings. Pricey book contracts based on fleeting celebrity and frantic bidding have proved hugely problematic. The promising but murky electronic future has many in book publishing reaching for the Maalox.
Consider the following:
-- Some 800 superstores have opened since 1990, with the top four chains--Crown Book Corp. and Books-A-Million Inc., along with B&N and Borders Group Inc.--opening some 190 stores during 1996 alone. Even though the chains closed mall stores, the net gain in retail space during 1996 was 20%, according to trade bible Publishers Weekly. Yet, according to the Association of American Publishers, total book sales in 1996 rose by only 4%, down from 1995's 5.8% gain.
-- Publishers say returns of new hardcover books last year ran between 35% and 50%, compared with 15% to 25% ten years ago.
-- Earnings at several big publishers ranged from poor to flat in 1996. At HarperCollins, the book-publishing wing of Rupert Murdoch's News Corp., operating profits fell 66%, to $18 million, for the first six months of fiscal 1997, ended Dec. 31, 1996. Penguin Books USA--whose parent, British-based Pearson PLC, in late 1996 bought Putnam Berkley Publishing Group from MCA Inc. and joined the two houses--anticipated a strong 1996. But recently, it discovered that unauthorized discounts had been given to some retailers, which will force the company to take a $163 million pretax charge against earnings.
At Simon & Schuster, a subsidiary of Viacom Inc., earnings in the trade-book division rose only slightly. A 16.6% rise in overall operating profits, to $217.2 million, was largely a result of professional and computer book sales. At Random House, company representatives say profits were thin, largely due to returns. (No figures are available because it is a division of privately held Advance Publications Inc.) "It was a case of winning the publishing war" with numerous best-sellers and notable books "and losing the business battle," says Chief Executive Alberto Vitale.
-- Meanwhile, competition among publishers for big hits remains intense, prompting astronomical advances. Random House paid $20 million to $25 million for a five-book deal with thriller writer Jonathan Kellerman. Viking Penguin spent $4.2 million for O.J. Simpson prosecutor Marcia Clark's account of the trial, and Time Warner Inc.'s Little, Brown spent $2.75 million for a memoir by Clinton aide George Stephanopoulos.
Bookstores aren't happy. "Nowadays, nobody makes money on the bestsellers, certainly no independent store does," says Avin Mark Domnitz, chairman of Milwaukee's Harry W. Schwartz Bookshops and interim executive director of the American Booksellers Assn. Big-money deals don't help publishers, because sales must be huge to earn back advances. "We used to say that a best-seller would fund the rest of the publishing we do," says Simon & Schuster Consumer Group President Jack Romanos. "You could argue that today, it's the other way around."
-- As the superstores grab an ever larger share of the retail market, independent stores are losing sales and going out of business. According to the Consumer Research Study on Book Purchasing, in 1995--the most recent year for which data are available--the chains sold 26.2% of all consumer adult books, up from 24.6% in 1994. Non-bookstore outlets, from mail order to book clubs to warehouse stores, accounted for 54.3% of 1995 sales. And only 19.5% of '95 sales were through independent stores, down from 21.4% in 1994.
Publishing's seemingly intractable problems constitute "a Gordian knot," in the words of S&S Trade Div. Publisher Carolyn Reidy. "In every single part of the business, there are problems," she says. "We were hit by a three-part whammy on returns." Superstores refined their computer models and reduced stock, many independent stores closed, and consolidation continued among wholesalers. "It's increasingly difficult to break a book out," says Romanos. Individual volumes get lost amid the 180,000 titles carried by many of the big stores. Books that don't get found by consumers get returned. Moreover, with roughly 50,000 new titles produced last year, each book has an ever shorter shelf life.
"WALLPAPER." Some blame the returns on the superstores. "The big stores treat books like wallpaper," states Peter Osnos, former publisher at Random House imprint Times Books. "What you have really is an overabundance of floor space," adds Random House's Vitale, pointing to the doubling, then tripling of retail space over the past several years. "And clearly the superstores haven't expanded the overall retail business because book sales have been flat for three years."
Big retailers deny they are responsible for the surge of returns. Rick Vanzura, vice-president for planning and finance for Borders Group Inc., says his company's returns were not higher last year. "The main reason we have so many titles is that public interests have become more diverse," says Vanzura. Adds B&N's Riggio: "Returns cost the booksellers as much as the publishers. Most retailers traditionally mark down things that don't sell--and that's a model we're willing to move toward." For the fiscal year ended January 31, 1997, the largest chains did well, with B&N reporting net income of $51.2 million on sales of $2.45 billion and Borders net income of $57.9 million on sales of $1.96 billion.
Can this industry turn things around? Various solutions are being proposed. Some publishers say they will narrow their focus to genres where they do best. "We were publishing in a lot of categories in which we weren't doing a good job," says HarperCollins CEO Anthea Disney. HarperCollins executives also are trying to stimulate entrepreneurial thinking and swifter action--and there have been some recent staff cuts.
To lower returns, almost all publishers are reducing the total number of titles, often by 25%, and cutting initial print runs. They are also moving, albeit nervously, toward just-in-time inventory management. S&S's Reidy points to company experience with a mid-list book, Samuel P. Huntington's The Clash of Civilizations & the Remaking of World Order, as a paradigm of the new approach. Only 12,500 copies of that book were printed in the first run, but positive reviews and publicity built demand for the volume, prompting 10 more printings in increments of a few thousand each time. In the end, 50,000 copies were produced. Similar caution was applied to the printings of such hit books as S&S's Angela's Ashes by Frank McCourt and Random House imprint Alfred A. Knopf's Personal History by Katherine Graham.
The danger is that publishers won't have the inventory to resupply promptly when booksellers reorder. Writers, too, have doubts about this approach. Po Bronson, author of Bombardiers and The First $20 Million Is Always the Hardest, who also has a background in book publishing, tells of a catch-22. "Bookstores have software that lets them look at wholesaler Ingram's inventory. If they learn Ingram has no copies of a title in stock, they won't order it. But then Ingram, having no back orders, doesn't request more from the publisher. It's an `infinite loop."'
And what of the fat paydays for certain authors? "It's a problem with no immediate solution," sighs HarperCollins' Disney. "Any house that needs and wants a best-seller will pay for one. And there are several new houses with lots of money to spend that are just beginning to build lists."
Increased profits would solve all ills. And while it's not exactly book publishing, several companies see potential gains from organizational synergies. HarperCollins often pitches projects based on successful books to its cousin, Fox Television, which is now producing a fall series based on the successful Dilbert books. S&S, which has capitalized on Viacom brands, such as MTV books and Nickelodeon books for children, also has had success with interactive games linked to so-called brand-name authors. One game, conceived by Tom Clancy and marketed under his name, became so successful that the author wrote it up as a novel, Ssn, which became a best-seller. That, in turn, became an S&S audio book.
WATERPROOF? Random House's Vitale disputes the worth of such synergies, but he is enthusiastic about electronic books. "Within the next few years, there will be an electronic device the size of a paperback that will permit you to download one or more books and carry them with you to the beach," he says. In anticipation of such developments, most publishers have become insistent on winning electronic-reproduction rights from authors. "Way back, the book industry gave away a valuable right--movie rights--out of ignorance," says S&S's Romanos, explaining that publishers don't intend to repeat such a mistake.
The future of electronic books is uncertain, but no one doubts the worth of another electronic phenomenon: Internet bookselling. S&S's Reidy points out that the I-way has "the capability of building communities of interest, such as that of Civil War buffs"--and of targeting such groups for book sales. Web book retailing currently is dominated by such purely electronic "stores" as Amazon.com, with its searchable 2.5 million-title catalog, and Britain's Internet Book Shop. But many independent stores, such as the San Francisco area's A Clean, Well-Lighted Place for Books and Atlanta's Oxford Books, currently have large, searchable online databases and online ordering. Both B&N, which currently sells books through America Online, and Borders say they soon will be selling on the Internet. Finally, both Random House and S&S are selling some titles directly through their Web pages.
And maybe, just maybe, the book-reading public will expand. Since late last year, publishers have been looking to an unlikely angel--television, home of Oprah's Book Club. Oprah Winfrey, it turns out, has an appetite for recent fiction and has made several books the subject of televised discussions. Novels getting a surprise Winfrey nod include Jacquelyn Mitchard's The Deep End of the Ocean, which in November surged to the top of the New York Times Best-Seller List, and, more recently, Wally Lamb's She's Come Undone and Ursula Hegi's Stones from the River, which took turns occupying the No.1 spot on Publishers Weekly's list. Problem is, Winfrey likes to keep her picks a surprise. It's enough to give publishers an ulcer--but if all their troubles were like this one, they'd be happy to guzzle the Maalox.