The Need to Revisit The Supply Chain

Logistics always taught us that supply chains are only as strong as their weakest link. This is particularly relevant in a finely balanced chain such as the book trade, which is made complex by the many to many relationships and single source of product.

Publisher, former politician and founder of Biteback Publishing Iain Dale, made a strong speech at the Independent Publishers Guild conference last week claiming that the large retailers have publishers ‘over a barrel’. So what is the ‘barrel’ he was claiming and how does it impact today’s supply chain.

His points are nothing new:

Sale or return

This works well within a stable and predictable market, but becomes somewhat of a mare when the market becomes volatile and unpredictable. What started off as a good idea to ensure new stock was promoted and visible, can become a wasted journey when stock is not moving fast enough to support it. What was celebrated as a good sale one month, becomes a nightmare when it comes back two months later and still be in its packs opened. Sale or return has to be mixed with firm sales otherwise it can become a very weak link in that supply chain. An early logistics truth is that ‘every time stock moves or stands still it costs money and any cost is a cost to all.’  

High Discounts

Again these are fine if the volume is there to fuel them and generate the margin return. But high discounts, applied across the board are very questionable as many titles may not wash their face if they don’t sell. What tends to happen in markets with little price points is that the supplier just ups the RRP to compensate for the discount they have to give which in turn just creates an unsustainable cost spiral. Its easy to give stuff away it’s a lot harder to sell it.

Payola

Promotional marketing, or ‘pay to play’ and make a title visible is often a standard practice but again it has to be successful to recoup the investment made and when coupled with high discounts and sale or return begs the question of who is taking the risk. Some would suggest that being paid to fill shelves, merchandise and send it back if it doesn’t sell is a franchise and far from independent. Do book become like cards, where the stock is based on filling genre, or card type slots, more than true selection based on shared risk?

There are many challenges facing the trade supply chain today. As it shrinks and becomes less predictable, it must also learn to adapt and hone its practice. Merely continuing with the practices that were right yesterday is not the answer and will further provoke stone throwing from either side.

Sam Walton, who foundered Walmart, once described the dialogue between suppliers and Walmart as being like them being in two separate rooms and communicating ‘ by slipping notes under the door to each other.’ He realised the need to open the door sit down and work together and lets hope that Ian Dale’s comments now open doors.

How will shrinking shelf space impact publishing?

This week Barnes and Noble boldly stated that they envisaged a store reduction of around a third over the next decade. Some however might raise the question of whether they will be in the market at the end of that period. We also expect Waterstones in the UK to cut their cloth and shrink in the near future.

What would you predict for the sales of your next best seller that you will publish in say 12 to 18 months? What will be the initial print run and costs to get it to first base? How reactive can you be to ramp up or shut down? Will merely cutting back the list resolve the issue? If the likes of Barnes and Noble close a third of shelf space, can you be confident that the internet will take up that slack on your title, or will the internet find its own best sellers through the myriad of new ‘discovery’ facilities that spring up each month?

We read about shrinking bookshelf space on the High Street, library closure and the constant re-examination of both channels. The traditional physical market space is reducing, as are the sales from it. The internet has taken up much of the slack, but the vast majority of that has gone into one channel – Amazon. The ebook market has also converted and increasing number of pbook sales to ebook ones and again the vast majority of these have gone into one channel – Amazon.

The reality is that we have declining physical book sales in the traditional physical channels and the increasing dominance one player in the replacement channels and new ebook market. There are, as in any sweeping prognosis, many exceptions to the rule, with some industrious and innovative booksellers bucking the trends, but we have to balance these against the increasing market share of others such as supermarkets that carry a limited range.

However, the shelf space is shrinking.

It is hard to see these lost shelves being replaced by others and therefore the volume of print itself may have to shrink further. Some believe that a direct marketing  approach will replace the High Street and to a degree it is true, but unfortunately the biggest direct marketer today is Amazon. The one that knows more about your book buying habits, tastes, dislikes and your disposable income is only one click away. Many direct marketers merely only handle the marketing and throw the fulfilment over to – yes, Amazon.

So what is the potential impact of shrinking and highly consolidated trade market? Do we honestly think it is a case of substitution sales and that the underlying commercials and value chain will remain unscathed?

We have already seen the obvious, revaluation of books. Today we expect heavy discounting and have seen it move from a selective model to everyday low pricing and the control move to the consumer end. It will not move back up the value chain in the foreseeable future.

We have seen the emergence of the aggregator controlled marketplace which feeds off the need of many to associate with the main player in town. Amazon have been very clever in how they have developed this potential, created a lock in and have even enabled the players to fight amongst themselves to be cheapest in town and sometimes even cheaper than Amazon.

The average volume of sales needed to top the charts has dropped. The market has widened and deepened and despite the consolidation, or because of it, the internet aggregator now offers a greater range than those physical shelves could ever stock. This results in sales are now being shared against a wider range of titles – sales are spread wider and deeper.

The traditional marketplace is still dominated by the ‘sale or return’ model, which works well in a front list dominated market with a constant queue of ‘guaranteed’ best sellers every thirteen weeks. Being able to pay; to be at front of store, in the seasonal catalogue, at a gondola-end, were all the things we took for granted and fed the High Street and chain model. You spend your marketing dollar, get the visibility and be rewarded with sales. But does that same discovery model work in shrinking shelf environment?

What will the unpredictability of some titles mean to print runs, marketing budgets, inventory placement, sales and returns? Can we predict, or forecast the winners and does this change the ‘bets’ we may well place across the value chain. Like music, we may well see fewer but bigger hits but also see an overall a drop in the ‘also rans’ who simple don’t get that same exposure the old model afforded. Can you spread bet in a highly volatile market?

We have seen the erosion of the market differential between traditional and bargain markets, between full price and value pricing. The lack of price points, which appeared logical before, could now be viewed as having acted against the market and enabled the free fall off prices we have today. When consumers don’t know the price it’s relatively easy to maintain them, once consumers expect a 99p book, that becomes the norm and itself vulnerable. It’s like death by a thousand cuts or price cuts. This has now even dangerously knocked on the door of the one market that it should have not impacted – digital.

The challenge is that the physical channel does not have the deep pockets to survive and operate at such low margins and so it shrinks further.

How do you manage the inventory disposal of that failure when you have taken out the bargain value statement?

What happens when consolidation goes sub optimal and the cost of shipping inventory back and forward starts to creates it own friction? What happens when the likes of Amazon demand their own inventory print buy in, logistics costing and refuse to cross subsidise others? What happens when you see more erratic sales with some titles selling very well in limited and smaller locations?