The subtext of REDGroup's collapse

Twenty years ago, commentators were predicting the rise of the electronic book. The questions weren’t what and how, but who and when. I’m willing to bet on the integration of digital rights, bookstores and online retail. But only the who and when are up for grabs. Who’ll take the bet, and who’ll decide its outcome? The REDGroup collapse may bring a healthier outcome one step closer.

As a former publisher at Allen & Unwin, I'm well aware of the popularity of book reading. Indeed, it is still the most popular single pastime we know. Because we impressionable humans love a good story, it will likely remain so.

But how we buy and read books will continue to change, and those with a stake in it might have to move that stake to safeguard it. There must be a much tighter alignment of interest between author, reader, publisher, bookstore and online outlet, with a new balance between time and money.

Publishing is neither printing nor distribution. It is neither paper nor e-ink. It is the creation and support of content, and the delivery of content in whatever ways are both appreciated by readers and profitable. At the moment, the industry is being buffeted by the simultaneous rise of e-books, online retailing and retail chain discounting, as well as changes to copyright policy. It must get its internal dynamics right to remain attractive against more and more home, computer and mobile entertainment.

It is worth noting that no company has ever made an investor-attractive return by publishing printed books in Australia. All the big names have used another business to subsidise their publishing. Some were printers, some were disguised real estate operations (Angus & Robertson). Most, even those with a strong local list, have been and remain distributors of overseas titles (Penguin, Random House, Allen & Unwin, etc). How they make money from that distribution matters. If they don’t make enough, say good-bye to local publishing, and much else besides.

Further, book retail is not like other retail. With few exceptions, each ‘product’ sells in the low thousands nationally, with a shelf life of just a few months. Retailers get about a 50 per cent discount on the RRP, but almost all books are sale or return: that’s right, if it doesn’t sell, it goes back to the publisher. That’s a big leg-up for retailers, but one that can be abused. If they order way over what’s needed for impressive in-store promotions and don’t back it up with sales, then the publisher takes the hit, and cuts back next time.

The publisher/distributor takes that risk and more. For local books, it pays the author, editors and designers. It then shells out for the printers, sales teams, author tours, publicity and point-of-sale marketing to support the book’s potential. If all goes well, the author might get a royalty of 10 per cent or more, production costs might be 15 to 20 per cent, distribution costs five to 10 per cent, retail margins 45 to 55 per cent and the publisher’s margin 10 to 15 per cent. These all vary tremendously with volume, except the retailer’s sale-or-return margin.

To earn a margin for distributing overseas titles, as with local titles, the publisher employs an army of public relations and marketing people to arrange interviews, reviews, author tours, literary lunches and social media snippets – anything to get the book talked about. Because books only ever sell in quantity through word-of-mouth. And if you take away territorial copyright, anyone can import and sell that book. There’s then no point in the publisher investing in that marketing and publicity, because there would be no return on it. That’s one among many reasons for maintaining territorial protection, so long as its price to the consumer is not too great.

For the moment, e-Books and overseas online retailers have only just started to gnaw away at local distribution. Their convenience and price advantages make sense, so the trend will continue. But to fly books in small parcels around the world is surely crazy, not least for their carbon footprint. There must be a way for books to be bought online and sent from local warehouses, through the same distributor who has spent money to secure the local rights for the book, and invested more in its local marketing and publicity.

As with the music industry, the book industry needs a greater alignment between where the money is spent creating and distributing books, and where the income is drawn.

Well-managed bookstores can make money in good times. A strong backlist and good staff who know their books are essential to keep readers enthusiastic about buying books. But times aren’t so good. Money for discretionary spend is tight. We see prices falling for almost everything except rent, food and power, and almost expect it. But bookstore prices have kept going up. So we borrow books, and when we do buy, we’ll look for the cheaper price. Online is one option, e-books another option. We can buy them from our couch at home. Though bookshop browsing is a rare genteel pleasure, getting to the bookshop can be as difficult as finding the time to do it. The bookstore share of the publishing pie, low-risk as it is, is shrinking. It certainly won’t pay off too much debt.

Brick and mortar bookshops will only survive if they form part of a vertically integrated enterprise that includes the distributor, and an online and e-book retailer. Bookshops need close and effective relationships with their publisher/distributors. They need to work together to make a larger pie, rather than squabble over their share of the current one.

To imagine how this might work, consider how we buy wine. To keep a supply at home (or dream about it), I’ll buy wine by the case or on rare moments, more. I can get it cheaper that way, with free delivery. More to the point, it doesn’t matter when I drink it, and it may not be for quite some time. If I need a bottle now, for a dinner or gift, then I’ll waddle off to the grog shop and pay the penalty for convenience.

People will always want to buy printed books for today. They’ll want to read them or gift them immediately. The problem is, those immediate-use sales are a decreasing share of the market. If there are to be bookstores to serve that market, they’ll need other ways of making money. The good thing is that both we readers and the publishers want there to be bricks and mortar bookstores, because most of us still like to see and feel before we buy.

The money will have to come from electronic orders or electronic delivery, or both. You can browse a bookstore and, as well as buying a book on the spot, put in an order through a store device or your smart phone app for home delivery or store collect, or just download the electronic copy. Not the crazy in-store orders that happen today: "Oh yes, we should be getting that in again in a fortnight, please come back then.” But a firm payment and commitment, just like online, only more local and immediate.

For this to happen, though, the same enterprise must have a stake in the bookstore, the online store, and the distribution. The distributor won’t care how the buyer buys, because they will benefit either way. If the distributor sells to the bookstore at 50 per cent of the RRP, then there’s no disincentive to sell to the online buyer at 50 per cent plus postage. If the buyer gets more than a few books at a time, that postage will be negligible. Although sales through the bookstore will be cannibalised, who would care? Sales overall will increase with lower pricing, and almost all sales will flow through local distributors, rather than through the US or UK.

The bookstore would basically have ‘display copies’ of as many titles as possible, and carry one or two more of certain titles for immediate sales. Daily resupply, as the better bookstores practice today, would keep that stock fluid. It would be a place where people would be happy to spend whatever time they had. People who like selling books are not hard to find, and they’ll be all the happier to know that their enthusiasm isn’t leading to lost online sales.

At some point, a financial controller or management consultant might observe the obvious: that the bookstores don’t make enough money of themselves, and conclude that therefore they should be scrapped. But their owners would recognise the bookstore’s indispensable role in a healthier system. And, as everyone in the book trade likes to think, correctly, that they’re selling something more complex than soap, the system itself needs these internal subsidies for the whole to remain healthy.

The REDGroup collapse is a signal event in our publishing history. It should provide the impetus for the industry to secure a sustainable response to the forces which continue to assault it.

Josh Dowse is a consultant on sustainable business.

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Some good insight, Josh (See The subtext of REDGroup's collapse, February 23).
As we speak, a large offshore publisher is setting up shop in Australia to provide support to the local distribution market – but this is to also complement their offshore drop ship supply. Given our population, it stands to reason that offshore locations are going to produce a more cost effective product.
The cost of shipping is insignificant in comparison to domestic delivery, footprint or no footprint.
What happened to the concept of in-store printing? (See The subtext of REDGroup's collapse, February 23.) By that, I mean printing on dead tree, the book which the customer selects from a physical in-store display.
I have this week ordered two paperbacks. On-line. From an Australian bricks-and-mortar distributor. These books are available overseas and I probably could have purchased them through one of the foreign majors, but I choose not to do. I like bricks and mortar, physical shops, and so on.
So, why not save the costs of distribution, sale-or-return, the dramas involved with distant suppliers and so on, and print most books on demand in-store? Of course, coffee-table colour laden, large format books cannot be supplied this way, but why not the other 90 per cent of books – and especially textbooks, and books which originate overseas but which appeal to a wide market, such as scholarly works on climate change?
At today's print speeds and with basic bookbinding capabilities, books should take about the same time to download and print as it takes for a pharmacist to package and dispense medicines.
Josh, your article is quite interesting (See The subtext of REDGroup's collapse, February 23).
However, you state that for bookshops, the "retail margins [are] 45 to 55 per cent". I have managed retail bookshops, and the best discount was typically 33 per cent with returns or 45 per cent without returns. Also, your statement that "all the big names have used another business to subsidise their publishing" is interesting, but I think it needs a bit more evidence to back it up.
Hi Josh,
You mention only in passing the major contributor to REDGroup's demise, when you say in your article: "The bookstore share of the publishing pie, low-risk as it is, is shrinking. It certainly won't pay off too much debt" (See The subtext of REDGroup's collapse, February 23).
Following the classic private equity model, PEP loaded up REDGroup with debt, significantly increasing its risk profile. This high gearing magnified the impact of reduced revenues and gross margins (the reasons for which are well described in your article) to the point where the company could not service the debt, equity value was wiped out and administrators were called in.
It's only a shame that PEP's inappropriate and overly-optimistic exercise in financial engineering has led to the demise of these long-standing businesses, the unemployment of many experienced and knowledgeable staff, and even fewer opportunities for bibliophiles to experience the physical pleasures of a bookstore.
Regards,
Hi Josh,
Your article got my wife and I thinking and talking, yet again, about the future of books and bookstores (See The subtext of REDGroup's collapse, February 23).
As writers (and regular advisers on the impact of digital tech to arts companies), we have often been perplexed as to why publishers can't see that the future of e-book publishing is actually, potentially quite rosy, compared to their current arrangements with retailers, which you describe in your article.
We have put together a response to your article on my wife's blog if you are interested, about the future of books and bookstores – it's at http://thosecreativetypes.com.
We don't really think that bookstores becoming shopfronts for online sales is the answer – there are too many ways that online stores can fulfil the role of shopfronts to make this sort of outlay unnecessary. But there are other functions which physical bookstores can still retain, either physically or online. These are, to our mind anyway, most importantly: taste setting, selling books as objects, and bookstores being simply cool places to hang out.
I have been involved in retail bookselling in an independent book store for over five years (See The subtext of REDGroup's collapse, February 22).
My previous background had nothing to do with the industry so I was a newbie. Over the last five years I have been on a steep learning curve but I am constantly amazed that the publishers and distributors within Australia are so dysfunctional and inefficient. I think the biggest reason that REDgroup is in administration is because of the mismanagement of their debt. The industry in Australia did play a small part, because they greedily maintain their RRP's high and haven't adjusted their prices quickly enough to adjust to the strong Australian dollar.
This puts massive pressure on booksellers who in turn find it hard to compete with overseas sellers shipping to Australia. When your wholesale price for a title is $12 and you are trying to sell it for RRP$19.95 and an overseas retailer can ship the thing for about $9.50 freight free direct to your home, you know there is something very wrong with the wholesale pricing in Australia.
I feel that lots of what is said in this article is industry spin. It seems that Josh is too influenced by the rhetoric of the big publishers and distributors. He doesn't seem to really get what the real problems are.