Whither Chapters (or Wither Chapters?)

Indigo Books and Music Inc is the major corporation behind Canada’s big book chains - Chapters, Coles, Indigo and the World’s Biggest Bookstore.  And according to the November 7, 2013 copy of the Globe and Mail (“Indigo falls as dividend disappears”) it is in significant trouble.  Please note for American, British or other readers, that you can be pretty sure that whatever is happening to Canada’s Indigo/Chapters is also happening to Barnes and Noble, Waterstones, or whatever your national big book retailer happens to be called.

Here’s a selection of quotes from the Globe and Mail article about Indigo/Chapters:

·         "dying bricks and mortar bookstore model"

·         "falling margins in its core book business"

·         “remodelling… stores to step up its move away from books and into other products”

·          “investors are considering whether to wait for the results"

·         “The book part of the store will continue to decline in sales”

In terms of numbers, here’s what happened.  There was a net loss of $10.1 million dollars in quarter 2 (April to June) of 2013, based on lower sales and higher costs.  In fact, revenues fell 3.3%, to $179.4 million, while costs of operations went up slightly.  It should be noted that Q2, 2012 also saw a net loss, but a lower amount, about $4 million.   Another negative sign would seem to be the loss of 9 stores compared to the second quarter of 2012.

 Because of this, the company decided to suspend its usual dividend payout for Q2 2013, and the stock price plunged 18% in one day. The company has been paying dividends since 2009, when Indigo finished paying off debt incurred from its acquisition of Chapters.  So, it seems that investors are used to a dividend, and they don’t like to see it yanked.

The money that would have been paid out ($11 million) is to be redirected to its conversion into a “lifestyle company”, focussed less on books and more on toys, gifts, house wares and electronics.  This is due to falling margins in its core book business, related to pressure from online paper book and digital book sales.  The fact that this year hasn’t seen any mega best sellers, such as “Hunger Games” or “Fifty Shades of Grey” hasn’t helped matters.  Add to that more competition In the paper book mega best-seller domain;  other retailers such as Wal-Mart are also beginning to be significant competitors for sales of those books.

There is good evidence that this conversion from books to other products is in full swing.  I did an informal content analysis of the last 5 flyers that came to our house, roughly corresponding to October and first half of November 2013.  I scanned the flyers, and recorded how much advertising space was being devoted to books versus other items:

·         Indigo, Best of Fall Books Flyer - four large pages, 81% book ad content.

·         Indigo, Joy of the Table - four large pages, 25% book ad content.

·         Indigo/Chapters Christmas Flyer - 50 pages, 44% book ad content.

·         Indigo/Tech Christmas Flyer  - 12 pages, 13% book ad content.

·         Indigo/Kids Christmas Flyer - 44 pages, 34% book ad content.

 

Overall, this gives 114 pages of ads, with 38% of these ads being devoted to books.  So, the conversion is proceeding apace.

Certain types of books are taking longer to transition from print to ebook form, and therefore are still primarily purchased in bookstores (though also by mail order, primarily through Amazon).  Among these are picture books (kids books, coffee table books), cookbooks and technical non-fiction.  Basically these are books that aren’t mostly straight narrative, the type that has transitioned best to ebooks (especially genre books such as romance, science fiction, fantasy, mystery, thriller and so forth).  Looking at the books that are in the Indigo/Chapters flyers we find:

 

·         35% are picture books (mostly kid’s books).

·         5% are cookbooks.

·         5% are kobo ads, with book titles shown.

·         55% are miscellaneous books, with a significant narrative fiction component.

 

So, putting together the above results, we find that:

·         62% of ads were for non-book items.

·         13% were for picture books.

·         2% were cookbooks.

·         2% were kobo ads.

·         21% were narrative books.

Going by this analysis, Indigo/Chapters has only about one-fifth of its business promotion directed at what was, until recently, the bulk of the book buying market, which is to say narrative fiction and non-fiction.

So, what’s this mean for book publishing?  Basically, the big bookstore chains are either failing or converting to other products and business models.  That means the major “value proposition” for big publishers is withering away.  What is that value proposition?  Just this - they can put writer’s books into the bookstores.   Self/Independent/Small publishers really can’t do this, for the most part.

So what happens when that advantage goes away?  I would guess that, over time, writers will be less and less willing to take the substantial royalty losses that they do with the big publishing houses.  Once big publishing houses can’t offer entry into the big bookstores, it simply won’t make sense to give them a large cut of the money for formatting an ebook and putting it up on Amazon.  People can do that by themselves.  This is called disintermediation, and it is a dagger at the heart of any business whose model relies on being a “middleman”.

Furthermore, by necessity readers will move more and more to sites like Amazon, which don’t make a major distinction between books by the size of the publishing house.  Amazon makes money whether the book is published by on the Big Five or by a small independent.  And , for the most part, readers don’t care either.  There is ample survey evidence that says they shop by writer, genre, subject and word of mouth recommendation.  Amazon reader reviews and “Also Bought” lists are also major factors in buying decisions, and they don’t discriminate by publisher size either.

All that being said, the power law phenomenon in book sales will continue.  A relatively small number of books will dominate sales.  But that power law will probably flatten somewhat as the vectors of distribution open up (that just means that sales will spread out more evenly and the “long tail” will become more prominent).  So, writing and publishing books will still be a tough way to make a living.  As the value proposition of the middlemen withers away, it may become more and more a labour of love and art for the producers than a hard headed business.  But that’s another blog.