Thursday, August 26, 2010

Why This is a Returnable Business

As I've mentioned before, back during The Great Depression (as opposed to today's Great Recession), a lot of things (surprise!) weren't selling, including (surprise again!) books. In order to get book stores to carry their stock, publishers allowed them to return any unsold merchandise for credit. Not surprisingly, this worked pretty well. Very surprisingly, the industry has continued this practice for the past eighty years, boom or bust, recessions, depressions, and rapidly expanding bubbles be damned.

As Jeffrey Trachtenberg points out (albeit in a Wall Street Journal article from five years ago), returns are "crippling inefficiencies of an antiquated business" and "The book industry... has been saddled with this system since the Depression." Around forty percent of books are returned (my estimate would be slightly higher in today's economic climate), comprising hundreds of millions (if not a billion or more) dollars per year in lost revenue. Many of these books are remaindered; the rest are pulped. Sad but true, mes auteurs.

So: why does the industry maintain this astoundingly inefficient business practice?

First, there's a sort of institutional singlemindedness I've discovered in which publishers seem to believe that because something has worked in the past, it will 1.) work just as effectivley now, and 2.) continue to do so indefinitely. As you can see: not the case (although, somewhat ironically, the returnable stock structure probably saved more than one book store when the recession hit in 2008). How things are done is how things are done, and this is more or less the end of it.

Second (and this sort of ties into the above), publishers are expected to demonstrate healthy growth year-on-year in terms of their sales numbers. Any year in which a publisher converts from a returnable to a non-returnable model will immediately see a 40% (or more) reduction in gross sales, and even though they'll recoup a lot of this by not having to print, package, ship, and warehouse books that will never pass through the register to the consumer, it would cause enough of an accounting and financial nightmare that most publishers will (and do) balk at the prospect, myopic as that practice may be.

Third, as mentioned in Trachtenberg's article, publishers have been steadily increasing the prices of books for years in an attempt to (among other things) compensate for the revenue lost to returned, remaindered, and pulped books. A conversion to a returnable model would almost certainly require a reduction in price point, which is great for consumers but bad for the publisher's bottom line (at least in the short term). I think there's something to be said about e-book pricing here, but that's another post for another day.

Finally, as I've mentioned in some of my co-op posts, brick-and-mortar retailers order more copies of would-be bestsellers than they really need, since they need to make those elaborate hardcover towers at the front of the store to attract consumers' attention. In a non-returnable model, they would be stuck with these books until they could either sell them at a sufficient discount or destroy them; this would in turn disrupt the co-op system as retailers and publishers scramble to reset the bar for promotional quantities.

This is all assuming a perfect world with a perfect supply chain, and as we all know, neither of these exists. Even if a publisher were to reach maximum efficiency in terms of getting books to retailers' warehouses, they would still need the cooperation of the retailers' supply chains and sales forecasting in order to make a non-returnable model work. It was easy back in the '30s to convert from a non-returnable to a returnable model when there were no superstores or Amazon; these days, converting back would be a Herculean task (though I think it would be enormously beneficial in the long-term).

What say you, meine Autoren?

23 comments:

  1. Forty percent is quite a LARGE number. Insane really. I can see how a return policy can be beneficial on both sides of the track, but 40% returns? If it happened occasionally because of missed forecasts, it'd be one thing. But to consistently overprint by 40% on a regular basis deliberately is so wasteful and doesn't sound economically sound in the long run.

    If it's about display and presence, I'd hope the marketing department could come up with a fresher way to entice readers to buy books rather than the idea of printing more than the publishing company can sell. Attractive displays with S.W.A.G. on the tables instead of piles of books? Perhaps the bookstores will sell window real estate (posters or window displays)?

    I just think there is some other way than printing 40% more books than a publisher can sell. Look at the marketing done for Mockingjay. A large quantity of people pre-ordered copies because of the hype. There's no need to print to the extreme to get people interested.

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  3. How do other industries do it? What does a grocery store with milk that hasn't sold and is going bad? Does the retailer take the hit or does the supplier buy it back? What does a car dealer do with a purple Impala that sits on the lot well past its model year? Does GM buy it back?

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  4. Keith, I think some other businesses take returns from sellers just because the seller over-estimated demand. But mostly we're talking about things that are a lot more expensive and for which there's steady demand and continuing production, so that they can just sit in the warehouse for a while until the next order comes in. Washing machines, for instance.

    As for the eye-catching hardcover towers, maybe publishers need to ship those books with a bunch of extra slipcovers that can be put over blank or surplus books of the same size to build that tower. This would also give the bookstore a way to salvage a copy whose slipcover gets damaged.

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  5. That's actually a great idea, Tyler Tork. You have to wonder why no one in the business seems to be coming up with these ideas.

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  6. Heck, you could put covers on empty boxes of the same size as the books. We all those Christmas displays in store windows don't have real presents in them. Same principle.

    The real problem seems to be that publishers print far more books than they expect to sell. I can imagine it's a tricky calculation. After all, you want to have ENOUGH books in a large variety of places. As a consumer, I wouldn't want to be told I can't buy a book because the store doesn't have any more. So I understand.

    Maybe this is an argument for POD, or even an order against brick-and-mortar bookstores. I hesitate to say that. I do love bookstores. But in the interest of reducing waste and saving money, maybe it's time to grow past the old way of doing business.

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  7. Adding on to Mardott:

    I'm not sure why publishers can't just print more books if they find out the demand outpaces the supply. Other companies do it. When new electronic gadgets come out, it seems they almost always run out of stock. I understand the profit margin is bigger with electronics. Put if a publisher thinks they'll sell 50k books, but later realizes the demand is 60k, I'd think it'd still be more profitable printing the other 10k on demand than starting off with 100k and having 40k in returns.

    Sure it'll put a lot of readers into culture shock not getting the book exactly when they want. However, I've gone to bookstores for a book out of stock and had to put in a special order. It's nothing new. And for those who can't wait for an out of stock book, there's usually an eBook.

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  8. Reena, I think publishers are afraid (probably with good reason) that if the book isn't immediately available, they'll lose the sale in most cases. There are plenty of other books in the store, and most people come to browse, not with a particular book in mind.

    I, too, love the ambiance of a real bookstore, and to get recommendations from the knowledgeable staff at my local independent (is it okay to plug Uncle Hugo's here?). But I think most bookstores would do better to have a couple of paper copies of most books (more for the big sellers), and a POD machine in the store to print replacements for the ones people buy (or, if you prefer the fresh copy, you could relax in their cafe while you wait -- with a good book, naturally. Snack sales!).

    Big print runs give a much lower unit cost and higher quality than POD, but when you subtract wasted materials, shipping returned books (twice), cost of maintaining inventory and pulping, and one or two other things I haven't thought of, POD in the store might seem very competitive. And I think the quality will improve further, though I don't know when we'd get the embossed covers, glitter and so on that publishers gussy-up their stuff with.

    Or, for a one-two punch that maximizes profitability, the publisher says no returns, the bookstores order as many copies as they're pretty sure they can sell (for that big-print-run savings) and if they start to run out, use POD-in-store to restock (or reorder, as Reena suggests, if the publisher is willing).

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  9. Agreed: terrifyingly difficult in the short term, much much better for everyone in the long term.

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  10. I'd love to see this wasteful system eliminated. And I'd love to see the return of small indie bookstores to main streets. They would be less likely to be harmed by eliminating the returns system as they tend to make more realistic buying decisions. See http://heydeadguy.typepad.com/heydeadguy/2010/08/i-love-my-indie.html

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  11. If the advantages of the current system outweigh the disadvantages, then it should continue. It the disadvantages outweigh the advantages, then it should stop.

    Or am I being too simplistic?

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  12. Returns need to exist unless you want to shovel more dirt on the waiting grave of retail brick and mortar bookstores.
    When I worked for Tower Records each store had their own buyers. I bought for books, magazines, toys, and candy. How returnables worked affected how I bought.
    Every month each store did a return. We would return nearly all products we sold (the exceptions were accessories, toys, and candy). Music labels and video suppliers accepted returns as did books and magazines. Magazines were the easiest to return, so easy we were expected to stock two copies for every one sold. Books were more demanding and were a constant source of financial problems for Tower. The slightest mark on a book made it non-returnable. This, and customer preference, was a reason for Tower to stock mainly TR. For books I ordered more carefully usually in twos and fives (twos to keep stock available after one sale, five so I could face it out on the shelf). We were the biggest Tower Records west of the Mississippi so we did promotions. We would bring in a hundred or more copies for the event, then reduce stock to twenty or more a month later (so not to kill the publisher with too big of a return right away).
    Toys (we carried collectibles that appealed to geek culture) were non-returnables so I bought low, preferring the problem of sell outs (ohhh, the lost possible sales) to dead stock (ohhh, the lost profits).

    The question with returns is who should be stuck with the losses. Should the retailer who took the risk in buying the title or the publisher who took the risk printing the title. Returns is the best current way to keep the retailer alive so he will risk supporting the publisher.

    Of course this is one of the reason all publishers and retailers should look forward to an e-world.

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  13. How about setting up a sliding scale of returns? Bookstores could get free return of, say, 10 percent for proven best-selling authors and up to 60 or 70 percent for new authors. Publishers and bookstores would share the risk.

    This would allow publishers to phase it in gradually. They could start by limiting returns to, say, 25 percent for big-name authors and tighten things as the market and Wall Street allow.

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  14. This is a good conversation. It's a crazy system of returns, but then, so many books get bought--and new authors found-- by 'accident.'


    Readers go into bookstores all the time and see books they did not go in intending to purchase. The unknown, unexpected book happened to be next to/above/below the book they *did* come in for, or was otherwise eye-catching enough to grab their attention. The pull it out, open it up, like what they see, and buy.

    Books are not like milk or cars. People generally do not come in with lists. They come in for one or two certain books, written by the authors they love, or the ones getting the hype, and they find others by accident.

    And then there are the readers who *do* come in to browse, with an expectation they will find the unexpected book.

    But if that unexpected book is not on the shelves, it will not get found. Or bought. Or loved.

    And yes, people can special order a book. But I don't see this as a matter of people needing to exercise more patience (which is odd, b/c in most cases, I think that's exactly what people need to do). But if the book's not even there on the shelves to sample and enjoy, then there's no 'special order' to be made. They won't even know about it.

    And anyhow, we're talking an impulse buy, finding something that struck someone's fancy in a moment. In sales, you have to seize that moment. People generally don't special order--then hand over the money later--on an impulse.


    I think over time, posters or cardboard cut-outs of mock books (to catch the visual attention via cover), or excerpts available via some online reader device, may catch on. But for now, I think books on the shelves is the way most authors get found.

    I was going to suggest something like Annie Madison said. Bestsellers have a track record of sales, making accurate orders easier, and people *will* special order them if they're not on the shelves.

    No answers, just thoughts.

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  15. I work in one of the large chain bookstores. We used to have a big problem with people who would order books and then not buy them. We would get stuck with non-returnable copies of expensive textbooks, and, worse, self-published books. Now those types of books have to be paid for in advance, which has greatly reduced the problem.

    From a bookseller's viewpoint, there's never enough room on the shelves, and limited space in the receiving area. If we couldn't return books, we would not have room for anything new. And books that don't sell would end up in the dumpster (or recycling bin).

    The thing is, we never know for certain how a book will sell. Some fly off the shelves and we end up scrambling to get more copies. And some, despite marketing and publicity efforts, just sit on the shelves.

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  16. Tyler wrote:

    "As for the eye-catching hardcover towers, maybe publishers need to ship those books with a bunch of extra slipcovers that can be put over blank or surplus books of the same size to build that tower. This would also give the bookstore a way to salvage a copy whose slipcover gets damaged."

    Working in a bookstore, I can tell you that we would have customers complaining that the wrong book is in the slipcover. People actually do pick up books and browse through them. Even if they didn't, employees at the cash registers would have to check to make certain the slipcover contained the correct book, or customers would discover the mistake at home. Then they would call and complain.

    Booksellers have enough to do without this headache.

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  17. Reena wrote:

    "I'm not sure why publishers can't just print more books if they find out the demand outpaces the supply. Other companies do it."

    They do, Reena. It happens all the time with hot-selling books. But it can take time, and it is expensive to do another printing run. Many times it's not justifiable.

    If only booksellers and publishers had working crystal balls that would tell us which books are going to be big sellers....

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  18. It is all about maintaining a monopoly. The return policy effectivley locks out POD books and all small publishers. This of course gives the large NY publishers a monopoly.

    The good news is the increasing number of Kindle eReader book buyers, who shop nowhere esle other than the Kindle catelogue.

    My Sci/Fi series "American Galactic Foreign Legion" is published by a small press, so will never be on bookshelves. However, in july my sales were 100. In August sales were over 500. All but 5 sales were Kindle sales.

    So, even though I am locked out of Barnes and Nobble, I can compete as never before at Amazon's Kindle book. Kindle is the savior of small presses and new authors.

    Wally
    .

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  19. Speaking as a former indie book buyer (as in I ordered for the store)... Returns are crucial. They are what allows the midlist to continue.

    With no returns, we can only afford the sure thing. Welcome to Patterson-Meyers-Roberts-ville.

    With returns, we can bring in a couple copies, giving us the opportunity to read the book, and if we love, order more and sell the hell out of it. This is where we find the obsession of next year.

    And I can say that our returns were a HELL of a lot lower than 40%... yet another reason the publishers ought to love the indies and do whatever they can to support them.

    Kat

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  20. The manufacturing process (printing, lithography), is outdated, causing book printers to have to print XXXXX copies in order to make money, and there is no way to economically print small runs quickly. If the book printing industry would think outside of the box - or rather, press manufacturers would be more innovative, we wouldn't be seeing this return issue.

    This is only an "industry standard" because no one has bothered to come up with a better method.

    Lithography, like Nietzsche's God, is dead.

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  21. Hmmm sounding like another tick for e-books

    http://damselinadirtydress.blogspot.com

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  22. After reading michael's post about the necessities of returns, it seems part of the problem is with the retailers. If majority of the retailers are purposely ordering 2 to 5 times the number of books they can sell, that's not really a publishing problem in my mind. That's publishers trying to meet the demand of the customers (retailers). Yet retailers are taking advantage of the system. Kind of pulling the "aha fooled you; we knew we couldn't sell that many books" and returning the excess.

    As michael mentioned, if the items were nonreturnable, he'd ordered fewer merchandise because the risk was his.

    Someone mentioned retailers should share in the risks also. I like that idea. It'd discourage retailers from buying 100 copies when they know they'll only sale 50. Perhaps refunding a percentage (10-50% maybe?) of the wholesale price would encourage retailers to order according to anticipated needs rather than splurging just because they can get away with returning the excess.

    I just don't see why publishers have to take full responsibilities for the miscalculations (intentional or not) of retailers.

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