Almost every publisher today
is either a distributor for others or a distributee of another. More than a
handful are both. And right this minute is a pretty active time in the world of
distribution. Competition has heated up; distribution deals are where a lot of
the consolidation of the trade-book publishing industry in the United States is
taking place.

Distribution functions comprise:

·      warehousing (and related services)

·      receiving orders

·      picking, packing, and shipping the
orders

·      managing data associated with
maintaining inventory and filling orders

·      collecting accounts receivable

·      sales representation to the trade
channel (usually exclusive)

·      sales representation to special
markets (usually nonexclusive)

·      international sales representation
and fulfillment

·      sales of subsidiary rights

·      basic publicity

·      additional title-specific
marketing

Distribution arrangements usually
cover most, but not all, of these functions.

Publishers as Distributors

Why do publishers collaborate for
distribution? What’s in it for the distributing publisher? And what’s in it for
the distributee?

Publishers take on other
publishers for distribution to reduce their own costs. Scale is an advantage
for virtually all aspects of distribution. If you’ve got a warehouse, you want
to fill it, because you pay the same for empty space as you do for utilized
space. More volume gives you more leverage to collect money and makes it easier
to support a sales force. And we live in times in which systems costs keep
rising; several of the largest publishers have spent double- or even
triple-digit millions in the past few years putting in new “enterprise” systems
to manage their business. That’s one of the factors driving the growth in
distribution activity now. It is helpful to amortize those costs over more
books than publishers care to invest to create.

Another factor driving
distributing publishers to seek clients is that launching new titles
successfully and maintaining sales on backlist are both getting harder and
harder in the current marketplace. So volume increases are most easily achieved
by getting more books to sell from somebody else’s investment. That means
getting distribution clients.

Distributees also seek a value of
scale that may be beyond their means. For example, selling today requires
expensive systems (like the SAP enterprise system) along with knowledge of
standards for data transmission that all big publishers and distributors have
and that would be expensive and draining for small or new publishers to gain.

Going to a larger entity for
distribution also has the effect of making large costs variable rather than
fixed. You pay for the warehouse space you use, not the whole warehouse. You
pay for the pick-and-pack activity associated with your actual sales; you don’t
have a payroll to meet regardless of whether anything is selling this week.
Ideally, when distribution costs are set as a percentage of net sales, you get
a high degree of predictability of expenses in relation to sales.

The pace of collecting also
becomes more predictable. On their own, smaller publishers may find themselves
stretched out well past 90 days waiting for payments. Bigger publishers and
distributors usually have more reliable collection times, so that they can
guarantee payment of receivables on a contractual schedule timed to the sales.
This certainty as to when cash will arrive can have life-or-death value to a
small publisher.

Distribution relationships are
complicated and cover a lot of ground, facts reflected in the great variety of
deals that govern them.

Of course, the first question is:
what is covered? When I got involved in distribution more than 30 years ago,
just about the time current industry leader PGW began in business, most deals
between publishers and distributors covered virtually all the services listed
above, and the charges were usually a fixed percentage of net sales. Some
publishers, like Harper at that time, offered a sliding scale of charges that
decreased as volume increased. One publisher back then charged based on gross
sales—what it shipped out rather than what was sold net of returns
received. Its percentage charges were lower, but it transferred some of the
risk of returns to its client publishers.

Today’s Deals with
Distributors

The two biggest dedicated
distribution companies—PGW (for Publishers Group West) and NBN (for
National Book Network)—have standard arrangements that illustrate this
distinction. PGW’s contracts usually call for it to collect a fixed percentage
of the net sales, which means “value of shipments minus the value of returns.”
NBN’s standard contracts enumerate two different percentages. It charges a
percentage of gross sales, which means “value of shipments,” for the
fulfillment portion of its responsibility and a percentage of net sales for its
sales efforts.

Sales-only distribution
relationships are rare, but there have long been fulfillment-only
relationships.

Other charges by distributors to
distributees include fees for ancillary warehouse services, such as stickering
inventory or putting books into promotional display cartons. But sometimes
extras are for core services. Distribution contracts might provide for “in and
out” charges for receiving inventory or for shipping books when the distributor
doesn’t share in the revenue (as with sales to a foreign distributor, for
example). Some contracts charge for warehousing based on the volume of books
being stored. More and more contracts call for “returns processing” fees.

Another variable in distribution
contracts is how the distributee is paid. It is normal to specify a payout
based on when billings are posted, and to pass money along to a distributee
only after collection from the accounts. Most contracts call for all money to
be paid within 120 days of billing, but beyond that, there is wide variation in
the speed of payment.

Can You See Me Now?

Many publishers worry about losing
their identity when they arrange to be distributed, partly because they know
they may lose control of metadata—the information about each book that
the supply chain demands. This basic information includes the name of the
distributor as well as the name of the publisher, and it is not uncommon for
booksellers to list the distributor as the publisher in many of their internal
systems.

This confusion of identities is
almost inevitable. The distributee’s books are often presented from the
distributor’s catalog. The review copies may go out in the distributor’s box.
Bookstores and wholesalers order the distributee’s books from the distributor.
As a result, the distributee publisher faces an ongoing conflict between
pushing its own identity forward out of pride and pushing its distributor’s
identity forward out of practicality.

But lack of direct contact with
major accounts may be an even more serious cause for worry. Majors offer
opportunities—and new ones arise daily—to promote titles in
exchange for payments from publishers. Whether these opportunities are
cost-effective can be questionable. But distributors’ reps may turn them down without
even submitting them to distributees. Sometimes the distributor thinks that a
customer’s deal for a promotion is not good value, but the smaller distributed
publisher would have jumped at the opportunity to buy into it.

Competition Is Keen

The market for distribution
services in the United States right now is in greater flux than ever before.
The number of players among publishers and the size and number of dedicated
distributors have been growing for at least two decades. But two recent
reentrants into the market—Random House and Ingram Book Company—are
accelerating the movement of lines from one distributor to another.

Ingram tried for years to set up
distribution services for publishers and shut that effort down a few years ago.
But then it saw its primary business—book wholesaling—under assault
as independent bookstores died off and big booksellers (like Barnes &
Noble, Amazon, and now Borders) created their own distribution centers to
supply backup stock. Random House disposed of its distribution business when
Bertelsmann bought it from Advance in 1999. At the time, Bertelsmann saw its
state-of-the-art distribution capabilities as a competitive advantage they did
not want to share. But then Random House spent an enormous amount of money
improving those capabilities. The allure of being able to use existing
facilities to serve distribution business became too compelling for both firms
to resist.

At the same time, the biggest
dedicated distributor, PGW, lost several key clients, which made it aggressively
pursue more distributees while redoubling its efforts to keep the ones it had.

Both Random House and Ingram have
great operations, and they brought them to the market at rock-bottom prices.
PGW’s principal competitors among dedicated distributors (NBN, IPG, Consortium,
and Midpoint Trade) plus other major players among the publishers (Simon &
Schuster, Holtzbrinck, TimeWarner, Norton, and Chronicle) all have responded by
actively pursuing additional lines while scrambling to hold onto what they’ve
got.

Two consequences are especially
important for distributees:

·      Prices for distribution services
appear to be falling.

·      Unbundling—buying specific
distribution services rather than an all-inclusive deal—has become
common. One publisher recently made a distribution deal that involves using
Ingram for fulfillment and Midpoint Trade for sales.

Who’s Best at Handling
Sales

When a publisher shops for
distribution services—which all but the largest publishers will do every
few years in the current environment—the biggest decision is how to
handle sales. Comparing the quality of fulfillment services is relatively
straightforward. You can learn how efficient each distributor is from its
customers, retailers, and wholesalers. But how effective the sales effort will
be depends not just on the skill of the selling organization, but also on the
effectiveness of the communication between the distributor and distributee.

My observations indicate that the
experienced dedicated distributors tend to have better procedures to absorb
product information and project it through the sales organization than
publishers who distribute. And the dedicated distributors also tend to have
established mechanisms to manage co-op offers and marketing opportunities for
many publishers at one time. Although every client relationship is different,
of course, distribution clients are, inevitably, more important to the top
management of dedicated distributors than they are to big publishing houses.

But, while bookstore consolidation
on the customer side has made it almost essential for the smaller publisher to
have a larger operation with critical mass to warehouse, bill, collect, and
make bookstores and wholesalers feel comfortable buying the books, the paradox
is that a small company can still handle its own sales.

Most large accounts will make some
time for a small company to see a buyer if its books come in a box from a
company they already do business with. Commissioned rep groups all across the
country are still looking for lines to pitch to the smaller bookstore and
specialty accounts in their territories. And if a small company has enough
titles in a niche, it can establish relationships with major bookstore accounts
as well as with accounts in its special-sales markets. In fact, publishers with
a critical mass of titles in a niche often have relationships with
special-sales accounts before they arrive at a distributor, and the special
markets may be carved out and treated separately or not included at all in
their distribution deals.

The challenge for distributees
here is that increased control comes only with increased management
responsibility and expense. Yes, you can cover major accounts yourself and
handle the rest with commissioned reps, but you have to manage the big
relationships and support the reps with costly selling materials and management
attention. None of these is a trivial task.

Key Considerations

Because the choices and
combinations of choices for distribution are, if not limitless, so plentiful
that very few publishers have the time, energy, or resources to explore and
consider them all, the best strategy for any distributee is to make contracts
and commitments as short as possible; competitive pressure is likely to keep
prices falling for some time to come.

When looking for a distributor,
try to shop the market as broadly as possible and keep in touch with the ones
you liked but didn’t pick, because they’ll still be there when the next
contract is up. When you make a deal with a distributor, do your best to own as
many buyer relationships as possible even if the distributor is actually
covering the account. And no matter what the duration or provisions of your
distribution deal, always remember that the primary responsibility for
marketing to end users is yours. No matter how many books a distributor gets
onto the shelves, it’s your job to create the demand that will get them off.

Mike Shatzkin, founder and
CEO of The Idea Logical Company, Inc., has been a consultant in the
book-publishing industry for three decades. An observer and forecaster of
digital change, he is the author of five published books; his professional
activities have included agenting, editorial direction, all aspects of sales
and marketing and production, and strategic planning.

This article is adapted
from a speech he delivered at this year’s Stanford Professional Publishing
Program.