Book Publishing Bubble
In case you haven’t heard Canadian book sales are doing well. I am happy and worried at the same time. What has me worried is the amount of inventory I am seeing in some stores. There are a lot of books in Chapters/Indigo. That might be good for sales and good for the consumer but it could turn out to be bad for the industry.
Normally just after Christmas, two things happen in retail. First, stores start purging titles and quantity that didn’t sell over the holiday. Second, stores also purge work-hours and employees so their labour costs realign with their mid-winter revenue. These two things are naturally at odds — lots of manual labour, not enough people — but that inefficiency lets a store breath instead of being expertly filleted to the point it is empty by March break.
This year, something seems off. I was in the flagship Barnes and Noble store in mid-February and it looked lean compared to the Indigo at the Toronto Eaton Centre that I visited this past weekend.
One possibility is Indigo hasn’t pulled the trigger on returns because they are distracted by other things. I am skeptical, but it’s possible. Another option is they are rebalancing their inventory. That is possible too but if they were tweaking the title count in stores than they would still be returning the massive quantities I am seeing stacked under tables. The quantity and the breadth makes me speculate that some other force is at work here.
A really simple definition of a bubble is when everybody does the same thing. In this, the late age of book retail, I fear every Canadian publisher has made entreaties to Indigo not to return their books. I am worried publishers have paid Indigo off — not just one of them either but the majority of them. I am worried the inflated inventories are a bubble that is insulating publishers from reality (if sales dropped drastically after Christmas, then publishers won’t feel it until fall) and I am also worried the extra fat is going to make the industry supply chain unstable.
Publisher incentives for retailers aren’t new. Richard Curtis was complaining about them 15 years ago. But look at co-op. Retailers have come to rely on revenue from co-op. It is built into their budgets for subsequent years. Now imagine a publisher giving a retailer a performance incentive for their entire account. If a store sells x number of a publisher’s titles, then the publisher rewards the retailer with y number of dollars at the end of the year. That makes sense doesn’t? Well yeah so did collateralized debt obligations but I digress.
Now imagine a publisher rewarding a retailer on what they purchased from the publisher and not on what they in turn sold to the customer. Publishers think in these terms all the time. Sell-through is such a novel curiosity. Are you following me? The retailer doesn’t have to do anything new for free money. It doesn’t have to hustle or double down on its commitments. It doesn’t have to sell any more than last year. All it has to do is hold returns into the new year and the publisher will give it money. A smart retailer could conceivably get an incentive from the same publisher every other year. With a little luck they may be able to get one a few years in a row.
The thing is when you give a publicly traded company free money, they tend to expect it the following year. There is this whole wall street stigma with growth. I can’t blame a manager for demanding growth but there is a real danger — as we have seen — in demanding growth from a false economy. If a bunch of publishers are giving a retailer free money, you could see how it could get out of hand and you could see why a retailer would ignore its own inventory practices.
If, and this has been all speculation so far, publishers are offering Indigo performance incentives to sell their books I hope they have had the good sense to tie the incentive to sell-through not to sell-in. And if Indigo or any other retailer has agreed to play the performance incentive game, I hope they have the good sense to get off the crack before they drive their inventory system off the road.
I also hope the 8 percent comp is here to stay.
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