Bookselling and Book Publishing in Canada, an emergency report

By Gordon Lockheed | October 26, 2001

My first item is that a sizable portion of Canada’s book publishers are in dire financial difficulty. The second item is that all publishers in Canada are facing an editorial catastrophe. The third item is that in the vast majority of cases, the main causes are the emergence of Chapters as a de facto bookselling monopoly, along with the Chapters/Indigo merger that has yet to reveal its ultimate effects.

Particularly among the smaller independent publishers, fall publishing lists are being cut back and/or delayed. Publishers who use General Distribution Services are in a double bind, because General is in some distress and so can’t pay the publishers it distributes for their books it has sold. They may go first, but they won’t be the only ones.

General’s problems come from two sources. The first is that it lost its line of credit last year when its US banker filed for Chapter 11 protection and cut loose its Canadian loan portfolio. There were no takers for General’s business, in large part due to the queasy-making properties of the company’s receivables, more than half of which represent money owed by Indigo Books&Returns, AKA Chapters, Coles, and a few other brands. Exacerbating this are persistent rumours that Chapters is still not able to keep current with its suppliers — that is to say, it has not been able to meet the generous 110-day payment terms it demanded, and received, from the bigger publishers last summer. A third factor is the threat of what will happen when Chapters/Indigo reduces its fleet of superstores from 90 to the 60 it’s corporate planners believe are viable.

If Chapters is still falling into arrears, that would explain some General’s problems, although none of the other bigger distributors in Canada seem to be in the same kind of trouble, possibly because they haven’t yet lost their line of credit. Jack Stoddart, who operates both a major publishing house and a distribution company, has from the get-go been one of the strongest supporters of the Chapters-Indigo merger, and of the terms of trade negotiated between the Canadian publishers and Heather Reisman over the spring and summer. His company is one of the companies that seems to have benefited, at least in terms of raw unit sales, from Chapters’ concentration of book retailing and the concomitant centralization of buying in Toronto. Chapters accounts for the largest share by far of his company’s sales (Stoddart himself has mentioned figures as high as 70 percent; the best estimates put Chapters/Indigo’s combined market share in Canada at around 60 percent), and the efforts he has expended on rescuing Chapters, and smoothing the way for the takeover—and consolidation—by Indigo, have to be seen in that light.

General distributes many of the smaller Canadian presses, the majority of whom simply don’t have the same stake in the success of the Chapters experiment or its successor, Chapters/Indigo. Chapters/Indigo might account for two thirds of a large, Toronto-based publisher’s sales, but for most other smaller presses, the percentage is much lower. Generally it is a third or less.

Yet these smaller stakeholders are paying the price to keep Chapters afloat—along with, eventually, Canadian taxpayers. Publishers currently underwrite Chapters through high discounts, what are easily the most generous payment terms anywhere in the retail sector, and extremely high penalty-free returns privileges, another feature peculiar to the book trade, and a practice that has only ever served the market interests of the large publishers. The federal government, meanwhile, has cheerfully indicated its willingness to increase funding to publishers, and neither it nor Heather Reisman make any effort to obscure the connection between this new publishing money and Indigo’s need to become and remain solvent while it absorbs the market-flooding WalMart-style retail octopus that Larry Stevenson constructed at Chapters in order to knock off the independents. The increased federal grants are meant to bail out Chapters/Indigo, and if it helps a few publishers along the way, so be it. This is outrageous, and ought to be a scandal, given that the alternatives to having Indigo/Chapters selling 50-70 percent of books in Canada mainly involve not having the luxury of being able to recognize your book-buying opportunity while heavily tranquilized, and being able to purchase franchise-outlet coffee and cake on the premises. The Chapters/Indigo amalgamation, meanwhile, is capable of sinking half the publishers in the country, with or without federal help.

What nobody has considered, in the general rush to declare Heather Reisman a culture hero and save Chapters/Indigo, is the possibility that as a machine for selling books and making money, Chapters and its successor doesn’t seem to work. It is becoming painfully obvious that the only real economy of scale Chapters/Indigo enjoys is the muscle it wields in dictating terms to suppliers. From the beginning, Chapters bled red, and there isn’t much evidence to suggest that Chapters/Indigo can make money today, whether its chain of big-box stores numbers 90 or the 60 Reisman wants to keep after downsizing is complete. There seem to be few economies of scale to be had once a bookseller get past a handful of stores.

Even with the advantage of having terms of trade that are the object of bitter envy from Canada’s surviving independent booksellers, only a few individual Chapters stores actually make a profit on their operations—about a third of the 90-odd superstores operating in Canada last year eked out a small operating profit. This piece of corporate optimism ignores the fact that the company has a massive capital debt that must be serviced, and eventually paid down. Chapters crowed last year about a 1 percent operating profit on the bookstore end of things, but properly considered, that was like you or me pretending that our paycheque doesn’t have to cover the mortgage on your house or pay the rent.

The problem may run even deeper than the bottom line. Last winter, the Association of Canadian Publishers commissioned a study of Chapters’ impact on the marketplace designed provide evidence for the federal Competition Bureau that the merger should be allowed to go forward. The study was quietly obliterated when it came back with the finding that the overall market for books had barely grown over the second half of the 1990s. Even Canada’s department store sector, practically a by-word for “moribund”, grew faster.

Now, we all remember the buzz that Chapters created when it opened for business–how, thanks to Larry Stevenson, books were suddenly sexy and necessary, how Chapters was drawing consumers who had never seen the inside of a bookstore, etc. Here, the rant went, was the future of bookselling, and while a few eggs have to be broken—and hundreds of independent bookstores driven out of the marketplace—my, my, what a delicious commercial omelet results!

But Chapters, the study results implied, did not “grow” the market at all. It merely shifted it away from competitors, and towards itself. It also s steered the market away from smaller presses and towards bigger mainstream publishers, which is, in a long term sense, the cultural equivalent of shutting down the farm and selling it off for condos because this year’s harvest has provided a storehouse full of food. And even in the near term, publishers, writers, and others whose work results in books, got less of the money those readers spent buying books. Mall landlords, Chapters execs, and corporate coupon clippers burrowed in for their (fair) share.

Larry Stevenson and Heather Reisman have used their corporate leverage to bankrupt hundreds of independent bookstores across Canada. (It’s worth remembering here that for all the vilification Stevenson’s received and the contrasting kid-glove treatment accorded to Reisman, by virtually everyone since, Stevenson merely beat Reisman to the punch.

In the mid-1990s, Heather Reisman and Larry Stevenson more or less simultaneously came up with the same brilliant idea for the future of book retailing in Canada. Presumably, this is because they read about it in the same issue of the Wall Street Journal, because like most brilliant ideas in business, it wasn’t a new idea at all, but was stolen from someone else. In this case it was Barnes & Noble, who had just finished steamrolling the US independent sector, overbuilding stores to kill the competition the way Walmart does, and picking up the pieces later.

Reisman wanted to do it with an equal US partner, Borders Inc., which would have required the government of the day to look the other way with respect to its foreign investment laws. Stevenson wanted to do it by buying Coles from Southam and merging it with Smithbooks/Classics, which required the government to look the other way with respect to its competition laws. Stevenson won regulatory approval for his scheme; Reisman did not. (This, incidentally, is no doubt one of the sources of bitterness between the two.) Now Reisman, whose name until recently was rarely mentioned in the business press without the modifier “turnaround artist” attached to it, basks in her new image as a cultured lady who just plain loves books. The truth is more gritty. Given the chance, she would have done exactly the same as Stevenson did to the independent booksellers of Canada.

Some of the independent stores that went down weren’t much of a loss, but many were—Duthies in Vancouver, Lichtman’s in Toronto—and collectively they represented a much more heterogeneous marketplace for books than the one we now have, and one that may prove more viable. The cultural price of having a single 30-something marketing dork at Chapters/Indigo dictating what books ought to be published in Canada hasn’t, meanwhile, been seriously calculated, even though it is, for all intents and purposes, already happening. And down at street level, even though the new Chapters in your neighbourhood may hold more charming retail ops than the late lamented independent across the street, you need to remember that most Chapters superstores were actually responsible for closing three to six independent bookstores.

Jack Stoddart and the other major publishers who are currently on the ropes deserve some sympathy, but only some, because they’ve authored much of their own misfortune. In deciding how to respond to Chapters’ woes (and the publishers have known about them since 1998), publishers as a group made a terrible mistake: they got confused about who actually buys books. The real “market” for books is the few million of Canadians—Flaubert’s Happy Few–who occasionally walk into stores of various kinds and buy books there. The publishers, under a lot of stress, got confused, and thought that Chapters was buying their books and not the individual customers at Chapters. These Chapters customers were essentially the same people who used to wander into independent bookstores for their books before Chapters crushed the independents. Not recognizing who really does the buying and reading might turn out to be a fatal mistake, because Stoddart and some others redesigned their companies around Chapters’ needs and practices.

During the last two annual meetings of the Association of Canadian Publishers (ACP), the looming bankruptcy of Chapters was described—over and over again—as the worst possible catastrophe. It wasn’t clear what this perception was grounded in, but it was clearly what the majority believed. The ACP’s membership were labouring—and one can only conclude that it was honest labour—under the delusion that, if Chapters disappears, 60 percent of Canadians will suddenly have no way of obtaining books. Many publishers were frank in acknowledging that Chapters’ failure would result in their own more or less immediate failure as well. Sadly, and ironically, quite a number of Canadian publishers are on the ropes today because last year, and the year before, they adopted a course that was seen by most of them as the only one that would forestall precisely the sort of major collapse of the industry that now seems imminent.

A tiny minority within the ACP has believed from the start that trying to appease Chapters was a mistake, arguing that it was Chapters that needed—and needs—the publishers, not the other way around. This minority believes it would be best for publishers, writers and the book-buying public if Chapters collapsed. If it did, they acknowledge, it’s unlikely that it would disappear completely. There is probably room in the Canadian market for maybe 20 to 30 profitable big-box stores, along with quite a few more re-emerging independents than there are now. If we were smart, everyone in the trade—publishers, writers, independent booksellers, book readers—would be working to bring about such a state of affairs.

2128 w. October 26, 2001


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