No More Returns

by Doug Shidell

Imagine this: The head of one
of the major chains or wholesalers utters three words—“No more
returns”—and changes the business model for the entire book industry.
With two more words—“Net 30”—the industry would be on the path
toward a sustainable future. Pay-to-play, consignment sales, return and
reorder, six-month payment delays, low retail margins, and other strange
characteristics would melt away.

Good riddance to them all. They
are complicated attempts to deal with a bad business model. If we scrap that
model and adapt the proven model of other industries, we could free up cash and
creativity for better purchasing software, better trained buyers, better
editing, higher-quality books, better marketing, and maybe even better pay for
book industry employees.

Why would any bookseller make such
a bold move? Margins, relevancy, and the black eye.

Retail margins provide the
strongest motive for changing the business model. As discussed last month in
“Reducing Returns,” simply moving from net 90 to net 30 terms would let
booksellers negotiate for up to 2 percent more margin.

Along with more intelligent
purchasing—which would mean spending less money on packing and shipping
returns—better margins are reason enough to change the business model,
but booksellers also have to look at the bigger picture and see whether
bookstores will still be an important outlet for book publishers in the future.
This isn’t about reading versus downloading, or the Internet versus paper
books, or chains versus independents. This is about the fact that savvy
publishers aim to make at least 50 percent of their sales through
nontraditional outlets. Some have reached goals of 60 percent or more for sales
outside the book industry. And a small but apparently growing number have
chosen not to sell through bookstores at all.

The most common reason for
avoiding sales to the trade is obvious: no profits largely because of returns
(see part one of this series, “Controlling Returns to Preserve Profits,” June
2006). While tenaciously defending their unsustainable business practices,
booksellers have missed an important point. You can’t dictate the terms of a
business deal if the other guy doesn’t show up. Retail bookstores and the
distribution chain that supports them do not have a monopoly on book sales.
What will happen if they continue to lose market share to sales channels that
buy nonreturnable? If publishers of high-quality books rely less and less on
the book trade, won’t serious readers do the same?

50,000 Sales
Means Suffering

Recently a Minnesota boy died of
lead poisoning from eating a trinket that came with a pair of Reeboks. Nike ran
into a buzz saw when the media discovered that its clothing was manufactured in
sweatshops. Arthur Andersen went from a major accounting firm to oblivion after
its actions at Enron. CBS ran afoul of the blogosphere when it reported a false
story about President Bush. Is a black eye waiting out there for the book
trade? Allow me a little fiction writing.

Annette Novel writes and publishes
her first book. It’s headed for the big time with an appearance on <span
class=95StoneSerifIt>Oprah.
Annette’s local paper runs a piece about the book and about how Annette and her
husband have taken out a second mortgage to cover advance orders from the major
wholesalers for more than 100,000 copies. Six months later, the reporter comes
back for a follow-up story and finds Annette living in a rundown apartment,
facing divorce and a huge debt. The book sold well—50,000 copies. But
instead of a tidy income from the sales, the couple still hasn’t received dime
one. Their marriage collapsed under the stress of payments on the printing bill
and huge shipping costs on the return freight. When Annette moved out of her
house, she tossed the returned copies into a dumpster because she didn’t have
room for them in her small apartment. Furthermore, the local paper reports, the
wholesalers’ spokespeople explain that they are waiting to see if more books
come back. Annette won’t see a check for another six months.

The story goes out the next
morning. AP picks it up. The blogosphere picks it up. CNN, CBS, and Fox News
pick it up. A pundit wonders whether Oprah should be blamed for creating
blockbusters overnight. In response Oprah does a study that shows—<span
class=95StoneSerifIt>gasp!–this
is Common Practice in the industry! Oprah makes an on-air vow that she will
never buy a book in a bookstore again.

Meanwhile, the publicity has
created new demand for the book, and wholesalers order 50,000 more while a
local TV station films copies rotting in a local landfill.

Ready or Not . .
.

But enough of fiction. Here’s a
prediction: For the reasons outlined above and in my two previous articles,
either unlimited returns will disappear from the book business, or the book
business as we know it will disappear. If the change happens slowly, most
publishers will have time to adjust. If the change comes quickly, there will be
carnage. Will you survive?

The answer depends on how deeply
your business is tied to the current business model, how well you’ve prepared
for change, and how quick you are on your feet.

Are all your sales based on the
net 90, unlimited-returns model? If so, and if the book industry changes
quickly, you will be faced with a painful paradigm shift. Frontlist titles won’t
create the traditional buying frenzy because book buyers will know they’ll have
to own up to their mistakes. Initial orders will be smaller, and marginal books
will not get to retail shelves as buyers learn how to make intelligent
purchases. At least initially, you will have to work with shorter press runs.

At the same time, you will be
squeezed for better margins. You’ll still have to pay for the warehouse space
you needed for returns, and you’ll probably have to lay off that 20-year
employee with kids in college who did a great job handling them.

Furthermore, if you have been
spreading the returns virus to other industries, you will have to tell
retailers there that you can no longer accept their returns. Then you will have
to offer them incentives to continue carrying your books.

But this grim scenario won’t apply
to publishers who have prepared for change slowly and methodically. Pending the
time when one price schedule will fit all, the prepared publisher has a
schedule for the book trade, with its higher costs of doing business, and a
different schedule for booksellers in other industries, which builds in
keystone pricing for retailers and a profitable margin for distributors, and
still allows for reasonable margins because of the reduced cost of doing
business.

Even with preparation, a rapid
change in the book-business model will require quick thinking and fast action.
If a major chain declared “Net 30, No Returns,” major distributors and
wholesalers would try to buy time by claiming they couldn’t extend the terms
down the distribution chain because the rest of the industry hadn’t adopted the
policy. Pressed by the chain for keystone pricing and by panicky publishers for
immediate payment, they would stonewall, try to broker unusual deals, and sweat
profusely. Some distributors, including some of the biggest, would not survive.

There is no recipe for dealing
with a seismic shift in the business model. The best strategy involves having
nonbook-trade outlets for your product and reducing your risk when selling to
the trade. Watch for and cultivate business with booksellers who are moving
toward practices standard in other industries. Minimize the amount of unpaid
inventory that you store in your distributor’s warehouse. Prod your distributor
to work with you on returns. Offer incentives—both stick and
carrot—to encourage trading partners to develop intelligent purchasing
models. Make sure you have enough cash to ride out the impending storm, and
fire the publishing consultant who has spent the last 10 years telling you how
to survive in a world where returns at the 30 percent level are considered
acceptable.

Doug Shidell, who runs
Little Transport Press, is a past president of MIPA (Midwest Independent
Publishers Association). He has been a publisher for more than 20 years and the
author of books and columns on bicycling for more than 30. If you’d like to
determine your own costs for accepting returns, email him at <a
href=”mailto:info@littletransport.com”>info@littletransport.com
and ask for the spreadsheet with cost variables.