Friday, June 3, 2005

An Industry 'Gone Mad': Quest for Best Seller Creates a Pileup Of Returned Books


There are two Time Warner Book Group warehouses on the outskirts of Indianapolis. Although separated by only an eighth of a mile, between them stretches a gulf of disappointment.

One building, dubbed the "happy warehouse" by one publishing executive, is filled with about 60 million hardcover books and paperbacks waiting to be distributed to stores across the U.S. The other is the "sad" warehouse. Piled high are some of the 20 million books returned every year by retailers. Many will be resold at cut-rate prices. Two million to four million will have their spines sliced off before being piled into a recycling machine the size of a Dumpster, chewed up and spat out as bales of paper.

Returns are the dark side of the book world, marking not only failed expectations, but the crippling inefficiencies of an antiquated business. It's a problem that's only getting worse. The industry's current economic model pushes publishers to generate a small number of blockbuster hits. But picking winners is a quixotic enterprise, and as publishers ship an ever-increasing number of books to stores, hoping to hit the jackpot every time, stores are sending an ever-increasing number back.

In 2003, 34% of adult hardcover books were returned to publishers, compared with 28% in 1993, says Albert N. Greco, a professor at the Fordham Graduate School of Business and a leading industry statistician. That's more than one in three adult hardcover books that publishers edit, print, distribute and market. According to the Association of American Publishers, those returns in 2004 had a wholesale value of $801 million, up from $743 million in the prior year. It is a system nobody likes, but no one knows how to change, even though the country's largest book retailer says it would like to try.

In most other industries, manufacturers don't have to take back products that don't sell. If a department store can't move a line of clothing, for example, the items are pitched at lower prices. The book industry, by contrast, has been saddled with this system since the Depression, when publishers told struggling bookstores they could return unwanted books as long as they kept ordering new titles. Returns also persist in the DVD and music businesses, and to a lesser extent in videogames.

The reverse tidal flood of books hurts every aspect of the business, one already struggling with weak sales. Authors don't get royalties on unsold books. Publishers sell returned copies at distressed prices after paying to truck them thousands of miles around the country. Books that can't be sold at any price are pulped for a total loss. "The most expensive thing we do in our warehouse is process returns," says John Sargent, chief executive officer of Germany's Holtzbrinck Publishers, which owns such imprints as Farrar, Straus & Giroux; Henry Holt and St. Martin's Press.

Worst of all, the increasing rate of returns has helped ignite a destructive cycle. So many books come back that publishers say they have raised prices to compensate for the anticipated lost revenue. That in turn makes many books harder to sell, creating more returns. Between 1985 and 2003, hardcover book prices rose 118%, far outpacing the 71% gain in the Consumer Price Index during that period, according to Fordham's Mr. Greco.

Last October, Time Warner Inc.'s Warner Books published Nicholas Perricone's "The Perricone Promise," a book about staying young. It sold 525,000 copies, hit the major best-seller lists and was one of the publisher's hot books of 2004. Retailers sold about 70% of the book's print run. That's a standard performance for such a title but it means that 225,000 copies remain unsold. Publishers and retailers will pay to truck these copies thousands of miles around the U.S. -- without once selling them to a consumer.

Time Warner initially shipped a number of copies 2,100 miles from its "happy" warehouse in Lebanon, Ind., to a Barnes & Noble Inc. bookstore in Marina Del Rey, Calif. Those that remained unsold were taken into a back room, packed in a box -- which was picked up by a trucking company -- and dispatched on a 2,800-mile journey to Barnes & Noble's national distribution center in Jamesburg, N.J.

Barnes & Noble processed the books and sent them a further 700 miles back to Lebanon, where this time they went to the "sad" Time Warner warehouse. There they remain. After 12 to 18 months, these copies will likely be sold to companies that specialize in bargain books.

Time Warner, for example, sells many returns to Strictly-By-The-Book Inc., which has a warehouse in Bridgewater, Mass., about 1,000 miles away. Barnes & Noble says it plans to buy bargain-priced copies of "The Perricone Promise," which it will eventually sell for as much as $7.98 instead of its original list price of $27.95. That means they will probably wend their way back to Marina Del Rey, via Bridgewater and Jamesburg, for an additional 3,000 miles on the road.

The escalation of the returns problem began when book chains became superstores and expanded the size of their orders. In one decade, between 1989 and 1999, Barnes & Noble went to 542 from 23 superstores and Borders Group Inc. to 300 from seven. At the same time, discounters such as Wal-Mart Stores Inc.'s Sam's Club and Costco Wholesale Corp. emerged as book powerhouses. These stores sell a few hundred titles in massive numbers and constantly replace slow-selling books with newer titles.

This kind of retailing has led to an ever-shortening shelf life for bestsellers. Most stores promote new books for only one or two weeks. Authors who might have remained on the best-seller list 10 to 12 weeks a decade ago now often stay only six to eight weeks. This phenomenon has been exacerbated by publishers themselves, who are publishing ever more books each year in search of hits. That pushes other titles off the shelves more quickly.

Because potential bestsellers have only a short time to get established, publishers say they need towering stacks at the front of stores to ensure their titles get noticed and to make sure they don't miss any sales. The principle is similar to movie studios wanting to get their films in as many theaters as possible on opening weekend. "You build authors by the weight of copies," says Laurence Kirshbaum, CEO of Time Warner's book group.

This means printing ever larger quantities. A publisher who wants to supply an average of 25 copies to the 690 superstores that Barnes & Noble is expected to operate by year end -- typical for a book with best-seller potential -- will have to ship 17,250 copies to that company alone. In 1985, Warner Books printed a total of 35,000 copies for "Word of Honor," the first Nelson DeMille novel it published. Today, Warner Books typically prints 800,000 copies of a new DeMille offering.

The ultimate fantasy: Finding a book like Dan Brown's "The Da Vinci Code," which now has more than 10 million hardcovers in print in the U.S.

Even midsize publishers sometimes reach for the brass ring. In April 2004, Avalon Publishing Group Inc. issued, "The Politics of Truth: Inside the Lies that Led to War and Betrayed My Wife's CIA Identity," by former U.S. Ambassador Joseph Wilson. At the time, books about politics were selling well, and Avalon, eager to deliver as many copies as quickly as possible, printed 100,000. Shortly before the publication date of April 30, it went back to the presses for an additional 25,000.

Just as the book was hitting the best-seller lists, public attention switched to allegations of abuse at Iraq's Abu Ghraib prison. Although "The Politics of Truth" enjoyed good sales, Charles Winton, Avalon's CEO, says he's now sitting on 60,000 copies, including many that have been returned. The second printing cost at least $60,000, he says, none of which he has yet recouped. Mr. Winton says he had to gamble: "You sell a lot of books, but there's also a lot of waste."

At the beginning of each month, Brian Wakeley, who heads up the returns department at Powell's Books in Portland, Ore., runs a computerized inventory review to determine which books haven't sold in the last six months. After deciding which titles need to be shipped back, Mr. Wakeley contacts all eight stores in Powell's chain and asks them to send their copies to the retailer's distribution center in Portland.

There, employees manually scrape off the Powell's barcode label on the back of each book. The staffers, who work in shifts, use a plastic scraper that looks like an inverted spoon. The work is so boring that "some people just can't stand it," says Mr. Wakeley, who listens to books on tape as he works.

Retailers, who pay millions in freight and handling for returns every year, have mixed feelings for the present system. "There is no doubt it gives us too much confidence," says Gregory P. Josefowicz, CEO of Borders Group, the nation's second-largest book retailer. "Without that umbrella, we might be more analytical" in what books are bought.

Steve Riggio, CEO of Barnes & Noble, the U.S.'s No. 1 bookstore chain, says he has a solution: He wants Barnes & Noble to start marking down books and selling them on the spot. Customers would relish the bargains, publishers would generate more sales and costs would be cut. He says eliminating returns would "revolutionize the book business and revitalize the book business."

But Mr. Riggio says he can't implement the change by himself, since it's ultimately a decision for publishers. "We'd like to see this practice discontinued," he says. "Any rational business person looking at this practice would think the industry has gone mad."

Though they stand to benefit, many publishers are leery of change. Cynthia Sherry, associate publisher of the Chicago Review Press, a small independent house, says that without the return option, bookstores won't take chances on the quirky, edgy books her company publishes.

Others worry that readers will learn to wait until books are cheaper. "You don't want to create a discount atmosphere," says Robert Miller, president of Walt Disney Co.'s Hyperion book-publishing unit.

Years ago, one leading publisher tried to change the system but nobody followed his lead. In 1980, the late William Jovanovich, chairman of what was then Harcourt Brace Jovanovich Inc., announced he was ending returns. Instead, he offered retailers larger discounts. Buyers responded by cutting their orders. Mr. Jovanovich reversed course a year later when retailers demanded even deeper discounts on the grounds that buying books on a nonreturnable basis was still too risky.

Thomas F. Burke, founder and president of Pomegranate Communications Inc., a small book and calendar publisher, says he's willing to try again. The Petaluma, Calif., company decided late last year it won't accept returns anymore. "The system doesn't work," he says. "I'm looking forward to having a clean warehouse."

Still, Mr. Burke is doubtful his decision will prompt changes in the business. "It won't create a ripple," he says.


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