Virtual Bookstores Start To Get Real
Amazon.com, the leading Internet bookseller, bills itself as "Earth's Biggest Bookstore" because it offers a selection of 2.5 million books. But behind the marketing hype lies this reality: Amazon.com stocks just a couple thousand titles in its Seattle warehouse--far fewer than the inventory maintained by the average superstore--and fills only an estimated 5% of its orders itself.
The secret of Amazon's success in building a business on this "sell all, carry few" strategy is a company that few of its customers even know exists: Ingram Book Group, the largest U.S. book wholesaler, with revenues of $1.5 billion. Amazon works with a dozen wholesalers but obtains a staggering 60% of all the books it sells through Ingram, which runs seven warehouses strategically situated around the country. There are dozens of other Internet booksellers now, and Ingram does business with all of them. The Nashville-based wholesaler, in short, is the most pervasive force in Internet bookselling today.
But to maintain that position, Ingram is having to adapt. Competition among the retailers escalated earlier this year when Barnes & Noble Inc. opened its own online bookshop, sparking a fierce price war in an industry in which profits have been scarce. B&N, for example, announced on Oct. 14 that it expects to lose nearly $7 million on its online venture this year. That kind of pressure has led many Internet booksellers to search with born-again urgency for cheaper ways to get books into their customers' hands.
By all accounts, Ingram is a paragon of operational efficiency. It stocks nearly 500,000 titles--the largest inventory of books in the trade. The company ships virtually all orders the day they are received. About 85% of shipments arrive at retailers' loading docks within 24 hours and 95% within 48 hours. But Ingram's prowess does not come cheap. Its customers--be they online booksellers or old-fashioned stores--have to pay the wholesale mark-up, which amounts to a couple of percentage points above the price of a book purchased directly from a publisher. Online vendors also incur considerable costs in repackaging and shipping books to their own customers.
DEEPER SHELVES. These added expenses weigh heavily in a low-margin business, negating the one major cost advantage intrinsic to the virtual bookshop: minimal investment in bricks and mortar. "The logistics of distribution are the iceberg below the waterline of online bookselling," says Jeff Bezos, founder and chief executive of Amazon.com, which lost $9.7 million on revenues of $43.9 million in the first half of 1997 alone.
To lessen its dependence on Ingram, Amazon plans to do more of its own distribution. In early September, it announced it would enlarge its Seattle warehouse by 70% and lease a new one under construction in New Castle, Del. The result will be a sixfold increase in Amazon's warehouse capacity. According to Bezos, this expansion will enable the company to stock 200,000 to 300,000 titles and to buy the bulk of its books direct from publishers. To help implement its new distribution system, Amazon recently hired Richard Dalzell, a logistics whiz, from Wal-Mart Stores Inc.
Bezos says that 80% of the company's investment in software development since its founding in 1994 has been not in its famously user-friendly screens but on back-office logistics. Even so, Amazon's warehouse plan is a quantum leap into the real world. The company's sales now are running at a rate of more than $100 million a year and are still rising rapidly. But the company will have to triple its volume at a minimum, by Bezos' own estimate, to support the cost of its vastly expanded book inventories.
"DROP-SHIPPING." Lee Synnott, vice-chairman of Ingram Book, seems unperturbed by Amazon's plans to self-distribute. He expects any loss of volume to be more than offset by Ingram's increasing business with other online vendors. Although online sales will probably account for no more than $250 million of the $20 billion in total U.S. book sales in 1997, they have been rising at a double-digit clip month after month. "This market is growing very rapidly, and I see no reason why that won't continue for a long time," Synnott says. "Books are being sold over the Internet to people who don't even go into bookstores."
Although Bezos doesn't like to admit it, Amazon is emulating its new archrival, Barnes & Noble. Like Amazon, the superstore colossus is an important customer of Ingram Book. However, over the last few years B&N has been gradually scaling back its purchases from wholesalers and increasingly buying direct from publishers. "The cost advantages of self-distribution are tremendous," says Stephen Riggio, chief operating officer of Barnes & Noble. According to Riggio, 40% of the books B&N sells are supplied by the company's mammoth distribution complex in New Jersey. "The plan is to get to 50% in 12 months," he says.
As Ingram's largest customers infringe on its turf with plans to build their own distribution, it is moving in the opposite direction by edging closer to retailing. Synnott is readying a new "drop-shipping" service designed both to slash online booksellers' operating costs and to make them even more dependent on Ingram Book. Beginning early next year, Ingram's customers will be given a choice: Either continue receiving bulk shipments of books themselves or authorize the wholesaler to ship orders directly to consumers. Online retailers will pay more per book to drop-ship, but not nearly as much as they now spend to repack and reship. Drop-shipping also will speed delivery to consumers by a day or two at a minimum.
Among the online retailers that already have signed on is Amazon, which plans to work both with Ingram and the No.2 distributor, Baker & Taylor Books, to drop-ship books it doesn't stock itself. Bezos predicts that by augmenting its expanded warehouse capability with the artful use of drop-shipping Amazon will be able to fill 95% of orders for in-print books on the day they're received.
Shipping vast numbers of books one by one is not nearly as simple as it sounds and Amazon won't even begin drop-shipping until its new warehouse is fully functioning. "There are huge efficiencies to be gained through drop-shipping, but they are paid for by increased complexity in sorting," Bezos says. "Your partner [the distributor] has to be very adept, because if it is done wrong you can really mess up your customer service." Ingram has long been the most innovative force in book wholesaling, but in this instance it is likely to be beaten to market by Baker & Taylor, which is planning to introduce its own drop-shipping service by the end of October.
One reason for Ingram's lag was a rare stumble earlier this year, when it began testing a service to create new online book retailers. All the would-be retailer had do was lure the shoppers. Ingram handled everything else, from maintaining the Web site to taking orders, processing credit-card billings, and shipping the books. In effect, the virtual bookshop became little more than a retail facade of Ingram. However, after six months of test-marketing, Ingram quietly pulled the plug in early October. The company's Web-hosting experiment foundered in part because many of the new vendors were simply unable to attract customers to their Web sites. But the venture also stirred a backlash among Ingram's existing clientele, who did not welcome the prospect of having to compete with a swarm of no-cost clones.
STAYING ADAPTABLE. So Ingram now intends to concentrate on providing even better service to its existing customers. It plans to continue adding to its inventories and fine-tuning the book-moving machinery that has made it indispensible to retailers for more than two decades. "As long as Ingram remains the most efficient supplier of the largest number of titles, they win," says Mike Shatzkin, an industry consultant. "It's like a funnel running to a drain: One way or another, the business will flow to them."
Ingram's adaptability is no less an ingredient of its success. By striving, above all, to make itself useful to its customers, it has continuously managed to come out ahead--even as the book industry has undergone one upheaval after another. The evolution of online bookselling is likely to be another case in point.