Borders Alternate Model Makes Sense

The WSJ Reports

Borders Group Inc. has agreed to accept books from HarperStudio on a nonreturnable basis, departing from a decades-old publishing tradition. Under the terms of the deal, the nation's second-largest bookstore chain by revenue will get a deeper discount on initial orders of books published by the new imprint of News Corp.'s HarperCollins Publishers -- 58% to 63% off the cover price, instead of the usual 48%. In exchange, Borders won't return any unsold books to HarperStudio, instead probably discounting them in the store. (News Corp. owns The Wall Street Journal.)

"The idea of taking inventory and then shipping it back isn't a good idea for anybody. We're open to all publishers to discuss alternatives to the traditional return model," said Robert Gruen, executive vice president of merchandising and marketing at Borders, of Ann Arbor, Mich. Under standard industry practice dating to the 1930s, retailers can send back whatever new titles don't sell for full credit, with publishers paying for shipping. This has created a mass of titles that are trucked from one warehouse to another until they eventually are sent back to the bookstore chains, where they are sold for a significant discount to the list price.

People in the industry estimate that between 30% and 40% of all consumer adult titles are eventually returned to their publishers. "Returns have never made sense in our business, and with the recent economic downturn, publishers and booksellers are more open than before to experimenting with models that might decrease waste and increase profit," said Robert Miller, president and publisher of HarperStudio. When he started the imprint earlier this year, Mr. Miller said he intended to shake up traditional book-publishing economics.

Pros are that the new arrangement instantly increases margins or, should Borders elect not to go that route, the company is now able to become more competitive on prices to the consumer without pressuring current ones. The key to making it work is inventory. It now becomes more important than ever to maintain proper levels to maximize sales of new titles at higher prices.

This year Borders has shown that it is able to do that and having control of the website from Amazon (AMZN) does give it a far more profitable clearing house for unsold titles.

Disclosure: Long BGP

Comments

[Michael57:]

5 titles out of 120,000 are going to be purchased non-returnable. What a non-story. Reuters, WSJ, everyone else, piling onto this trivial snippet in the hopes that it means something.

2008 Dec 17 11:53 AM

[bookseller ...:]

This story by journalist (?) Todd Sullivan illustrates the growing problem with internet news and journalism in general. Get a press release or wire story and don't bother to research the project--just spew forth based on your years of experience.

Buying books on a non-returnable basis has been offered for years as an option by some publishers. As a system it has been tried off and on since the 1970s--remember "Remainder in Place?"

Borders said it wanted to try print-on-demand in their stores. That would be truly revolutionary--one at a time printing. But, of course, they overwhelmed any strategies thay had to go coupon for coupon with B&N.

The problem with non-returnable books is that it mostly affects the very top projected sellers. Say Borders buys 100 copies per store of the latest mega seller by one of the tree-burning authors--and the books bombs--Borders gets credit and the publisher sell it to a remainder house. Borders uses that money to pay its bill.

Publishers have been notoriously slow to reprint books because of returns, so this new plan is going to make buying a lot more difficult and could ultimately raise the price of remainders.

It will also have a profound affect on midlist books where publishers and booksellers take a chance and depend on word of mouth for publicity.

Borders has reduced their stock so much they resemble the defunct Crown Books.

It would be really nice for Mr. Sullivan to actually do some homework so he could honestly analyze a situation. People wonder how they get suckered by bad investments and all you have to look at what passes for financial journalism now. How many writers even know now what credit default swaps are? Here we have a story written by someone owning Borders stock that has absolutely no value.

It is not an honest analysis, but a reaction to an unchecked press release. As the first commnter suggests, this si a So What story.

2008 Dec 18 10:24 AM

[Michael57:]

Exactly. It kind of makes you wonder how wrong-headed a lot of financial reporting is. People in the book business know that the Harper Studio story is utterly trivial and has no implications at all for Borders' basic business model. But most investors reading this article will think that Borders is reinventing the wheel.

How many other stocks rise and fall on uninformed reporting?

2008 Dec 18 02:13 PM

[burningprop...:]

Sullivan's myopic take on Borders discredits this entire website for me. When I first ran across one of his articles, I was astounded at his naivete with regard to the book business; but I was even more astounded by his blatantly apologist tone. He's a high profile penny stock pumper. And it doesn't look like anyone else is paying attention to his drivel either: BGP closed at .51 today.

2008 Dec 19 02:31 AM

[wassercom:]

I can't comment on Borders' long-term financial outlook, but I have seen a dramatic improvement inside their stores. The employees are much more professional (in appearance, demeanor, and resourcefulness), and the merchandise is more effectively presented. And I think booting Amazon from their Web site is a move that was long overdue.

2008 Dec 20 09:32 AM

[Michael57:]

wassercom, how many stores have you visited?

2008 Dec 22 10:42 AM