February 23, 2011
From Andy Laties:
We were knee-deep in planning our own independent bookstore. It would be a community gathering-place, a center of literary life, a crazy dream we’d make real. But in a Boston hotel conference room, after the first day of the 1984 American Booksellers Association’s school—a day spent sharing plans and fantasies with 60 other prospective booksellers, guided by four accomplished bookstore owners—my partner had a question for the association’s Education Director. “Why don’t you open a bookstore yourself?”
“Because there’s no return on investment,” the Education Director replied.
It was a straightforward, depressing response, and I have learned over the years that thousands of experienced independent bookstore owners will concur with that former ABA staffer. Indeed, there’s no question that if you operate a socially responsible community bookstore focused on passionately selling marvelous new trade print books, you’ll probably get a poor return on capital and your chance of ultimately selling your business for a profit is minimal. A more likely outcome is that after years of dedicated bookselling you will lose your original investment when you close your store down. Your only return on investment will be the pride you take in the work you have done and the gratitude of your former customers. (The exception is when bookstore owners buy their buildings and the value of this real estate grows.) If you’re not prepared to accept the reality that there’s no return on investment in the bookstore business, it’s unwise to launch your own bookstore. Every year, more than a billion dollars worth of books are sold by bookstore owners who know they are sacrificing return on investment in order to benefit society.
And yet, if there’s truly little possibility for return on investment for owners in the trade bookselling business, how could Tom and Louis Borders have sold the Ann Arbor, Michigan bookstore company they founded in 1973 for $126 million to K-Mart Corporation in 1991? How could Len Riggio, creator of the modern Barnes & Noble company, have gone from a single college bookstore in 1965 to a personal net worth of more than a billion dollars today? How could Amazon.com founder Jeff Bezos have made so much money in the past fifteen years that he can afford to dabble in the space tourism business?
The U.S. new-book market has been stuck at about $24 billion for many years, so what’s been the business secret of these highly profitable booksellers? (It obviously wasn’t selling more books to more readers; instead according to Nielsen Bookscan readers’ choices are getting less diverse.)
The big booksellers have specialized in leveraging the customer traffic that promoting low-margin new books attracts to then sell products and services that in some manner do provide decent return on investment. Then when their popular companies’ perceived value has been high, these owners have sold part or all of their ownership stakes to outsiders.
It’s the loss-leader approach: hyping low prices on some products to sell different products and services—and then company shares—high.
For instance, both Borders and Barnes & Noble have made lots of profit on high-margin publishers overstock discount books (authors earn no royalties on these; that’s partly why they’re cheap). B&N has supplemented that with proprietary books they publish themselves (similarly: few author royalties paid).
B&N and Amazon have earned great profits from publishers’ promotional payments (this payola is a secret; readers believe these companies’ featured books are selected for quality and popularity).
For years Borders sold inventory management services to other bookstores; the company could then use data they collected to open bookstores that competed with stores they’d once serviced.
Amazon has done well with brokerage fees and commissions charged to used-book sellers (somehow these fees just go up and up and up), while keeping costs low by evading sales taxes (too bad for communities that utilize sales taxes to fund local services).
All three companies have sold lots of high-margin non-book items—in fact Amazon sells more non-book items than books, though they retain their customers by hyping their high-status image as a bookselling company.
Big-league booksellers are today plunging into digital bookselling because in the constricted marketplace of the no-growth book industry they preside over, they must innovate to compete with one another to continue generating the consumer traffic that will ultimately be converted to some other form of profit-making enterprise.
At Borders, amid management turmoil over the past decade, business innovation slowed. The company was created in 1973 by book-lovers, and the Borders brothers’ original commitment to books attracted scads of customers from whom the company could earn profit in creative ways. But the thrill is long gone for former Borders customers. Its 90s-era business plan served for a decade (music sales were key)—and in particular the company succeeded in destroying many independent bookseller competitors, keeping the marketplace constrained to its own advantage—but Borders then failed to invent new profit-making techniques once music CD sales slowed with the arrival of digital downloading.
Still the Borders brothers themselves did earn a great return on their initial investment, and this year’s Borders bankruptcy should serve as a reminder that money-minded owners can indeed generate personal wealth in the bookstore business, if that is their objective. They can take a lesson from Tom and Louis Borders: get out while the getting’s good. Don’t just sell low; sell out high.
After ten years as an American Booksellers Association School instructor, Andy wrote Rebel Bookseller: How To Improvise Your Own Indie Store And Beat Back The Chains, published by Vox Pop, which won the 2006 Independent Publisher Award for best book about writing and publishing; a revised and expanded edition entitled Rebel Bookseller: Why Indie Businesses Stand For Everything You Want To Fight For, From Free Speech To Buying Local To Building Community is due out in July 2011 from Seven Stories Press.