Fungibility and Bookselling

By Frank Davis | November 22, 2001

Fungibility is a term from economics that refers to the degree to which a given commodity can be substituted for. Gasoline, for example, is highly fungible; one gallon of it is pretty much the same as any other. Cigarettes are pretty fungible, unless they’re menthols. Land, on the other hand, is an example of something that is not fungible at all: two acres an hour and a half northeast of Hazelton is nothing like two acres on Coal Harbour in downtown Vancouver.

Books fall on the less fungible end of the scale. “Books” is a very heterogenous category, so there’s going to be varying degrees of fungibility from one book to the next. The Idiot’s Guide to Windows XP is pretty much interchangeable with Windows XP for Idiots. But Haruki Murakami or Banana Yamamoto will probably not do if Kazuo Ishiguro is what you’re looking for.

Understanding the degree of fungibility of a product is critically important if you’re trying to make a living from buying and selling it. Business, being essentially risk-averse, likes predictability and fungibility, which is why commodities (oil, land, food, drugs) have always been where the action is. The unfungibility of books is one of the features that makes it so damned hard to make a killing from them. Any smart businessman keen on a profit would do well to learn about fungibility. A stronger understanding of it might keep them and those know-it-all MBAs away from the unfungible, low-profit neck of the woods, where they wreak havoc every time they do come around.

The concept of fungibility helps explain some of the peculiar features of bookselling. The natural tendency of any retailer would be to observe what’s selling and try to narrow their inventory appropriately, the goal being to sell as many units as possible of as few items as possible. However competent booksellers understand the unfungible nature of books, even if they’re not familiar with the term itself. That’s why they try to strike a balance between current bestsellers, which might move in significant numbers, and so-called backlist or basic stock, which tends to sell much more slowly but over time, more reliably — and in the meantime, draws customers to the store. The best booksellers seem to understand that there is a strong connection between their sales, and the health of their store, and the number of titles — not volumes — they carry.

I’m not aware of any research that’s been done in this area; the evidence I have for this is anecdotal and circumstantial. It is consistent with the fact that growth in worldwide book reading, buying, and publishing has gone hand-in-hand with shrinking average print runs. This suggests that new bookstore customers are due less to additional copies of books than they are due to the proliferation of titles.

This is why Heather Reisman’s strategy for saving Indigo / Chapters is so worrying. Indigo’s problem is basically that they’re not generating nearly enough profit from the superstores to cover their startup costs. They’re paying rents that are top-of-the-market for prime store locations, but are unable to sell books at a fast enough clip to pay those rents and still generate the profits demanded by investors. Reisman’s solution (that is, the part that doesn’t focus on supplier terms) is to reduce dependency on books, and to narrow their selection and focus on bestsellers.

The strategy seems to be that by cutting back on in-store selection, shoppers can be steered into purchasing more copies of fewer titles. A smarter plan might be to move to less costly digs and bring in more, not less, stock; but given lease terms, pretensions, etc., that isn’t likely. Instead, Indigo has chosen to focusing on the revenue side: they’re trying to sell more books in a shorter period of time. A typical Chapters store which might have carried as many as 150,000 different titles in the late 1990s now handles about 50,000 titles.

This strategy is pretty obviously doomed. What drew customers to Chapters in the first place was a selection that no independent could match. (Those 20% discounts on bestsellers probably played some role too, but they’re a whole ‘nother affair.) Post-merger sales at Chapters/Indigo are certainly not up, and may be down. The news in the business press about Indigo is certainly bad. Indigo blames September 11, but deteriorating inventory probably has at least as much to do with it. Ultimately, idiots and dummies do not buy a lot of books, and Indigo seems to be losing customers who are neither to the independents. It’s interesting to note, by the way, that the surviving independents have reported healthy sales increases over the last couple of years. Could it be that they have a more interesting selection of books on offer?

900 words, November 22, 2001


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