Friday, 7 March 2014

Whither Chapters 2 (and Whither Barnes and Noble too)

Whither Chapters 2 (and Whither Barnes and Noble too)

Indigo Books and Music Inc is the major corporation behind Canada’s big book chains - Chapters, Coles, Indigo and the World’s Biggest Bookstore.   I have written a couple of blogs about the fate of Chapters (or at least their recent results).  In this blog, I will update some data on them, and also add some data on the U.S. giant, Barnes and Noble.

The first graph below shows the sales trajectory for Chapters from 1999 onwards (this data is widely available from online stock market information sources such as the Globe and Mail).  I show sales in both current dollars, and in inflation-adjusted dollars (in this case using 1999 as the base year).  As we can see, sales grew fairly nicely until about 2008 in inflation-adjusted dollars, then plateaued for a few years, before turning downwards in 2011.  With nominal dollars (not inflation-adjusted) the growth continued until 2011, then also turned downwards.  In that case, the growth from 2008 to 2011 was just books keeping up with general inflation.

The fact that sales in inflation-adjusted dollars hit their peak in 2008, then stayed there for a few years is probably a reflection of the worldwide financial crisis that happened about that time.   But the downturn from 2011 onwards is more likely due to the disruption of the book market by the widespread adoption of ebooks, which would have cut sharply into print-book sales.    A significant increase in self-publishing and Indie publishing went along with that, and Chapters has probably not seen much of that revenue, though they might have benefitted from some Indie sales through Kobo, as they do  continue to have close business ties with Kobo.  For those who don’t know, Kobo originated with Chapters, who then sold them to Japanese retailer Rakuten in 2011.

I should note that Dodecahedron Books published our first books, Kati of Terra Book 1 – Escape from the Drowned World  and The Witches’ Stones Book 1 – Igniting the Blaze in 2012, the first year of the major drop in Chapters’ revenue.  Is it mere coincidence that Chapters’ troubles started then?  I wonder J.

We next look at operating expenses versus sales, and consequent operating income (operating profit or loss), in the graph below.  I have just included the inflation-adjusted graph lines, so as to simplify the picture.  As you can see, Chapters operating income dropped during the 2010 to 2012 period, eventually dipping below 0 in 2012, for an operating loss.  In 2013 they ground out a small profit, as their cost-cutting measures managed to overtake their revenue declines.  (Note - not sure if this graph will load properly into blogger).

The third graph shows operating income (profit or loss) at a more useful scale.  It is pretty clear that things took a nosedive after 2010, with a bounce back up in 2013.  Is this the infamous dead cat bounce?  (That’s a financial term that implies that one shouldn’t get too excited about a turnaround, because even a dead cat will bounce a bit after a big fall, but it doesn’t mean it’s getting back on its feet).

It’s hard to know that for sure.  Perhaps Chapters will be able to turn things around, though given the technological disruption that they are facing, it might not be a smart bet, if you are thinking of investing for the long term.  Companies can cut costs faster than they lose sales at the beginning by closing marginal stores, laying off inessential staff, selling unnecessary equipment (not sure if they have a corporate jet), and similar measures.  But most of those things can only be done once, so if sales don’t turn around, it just delays the inevitable.  As they say, you can’t shrink your way to greatness.

Barnes and Noble
Now, let’s look at the same set of graphs for the major bookseller chain in the U.S., Barnes and Noble.  The first graph shows sales (note that I could only find data from 2009 onwards for B&N).  It seems to be undergoing a similar trajectory to Chapters, with sales peaking in 2011, then dropping off.  The fact that their sales kept increasing for a year longer than Chapters’ sales did is probably due to the bankruptcy and closure of Borders, in 2011, which was their major U.S. competitor.   This may have only been a false bloom of health, though, given what happened in the next couple of years.  That is shown in the next graph, showing sales versus expenses and consequent operating profit or loss. (Note - not sure if the second graph will show - eating my graphs seems to be a law of the blogger software).

The third graph focuses in on the Operating Income figures (profit or loss).  It appears as if Barnes and Noble has not been quite as successful as Chapters at cutting costs faster than revenues fell.  There is no bounce, dead cat or otherwise in evidence.

So, what’s in store in the future for these major bookselling outlets?  Nobody can be sure, but below are some snips from recent European experiences (by the way, updated financials for Chapters Canada should be out in early April, 2014):

Chapitre (France)(Prensa Latina, Nove 28, 2013)
Paris, Nov 28 2013 (Prensa Latina) The French bookstore chain Chapitre announced today that it is filing for bankruptcy because it cannot maintain its book-buying and selling activities in the country.

The chain, which has 53 stores in France and some 1,200 employees, faces a difficult financial situation because of constantly falling sales, according to chairman Michel Resseguier.

Chapitre ranks second among businesses of its kind in France. It announced a restructuring program in April, including the sale of 12 facilities and staff cuts, but in late November it had only managed to sell four bookstores.

Its failure follows the liquidation of 26 stores of the Virgin Megastore chain in June, leaving 1,000 people jobless in several cities countrywide.

Weltbild (Germany) (Jan 14, 2014, Alex Shepard)

Weltbild, one of Germany’s largest publishers and booksellers, has begun insolvency proceedings, citing online competition—the Financial Times reports that it had initially warned investors in September “that high initial investments in its transition to online retail was resulting in temporary losses.” Last week, board member Peter Beer told the FAZ that the company’s struggles are a direct result of its failure to transition into the digital marketplace and compete with Amazon. Beer is also a priest—in fact, he’s vicar-general of Munich; Weltbild is owned by the Catholic Church.     
According to Weltbild’s website “every fifth book in Germany is sold through Weltbild.” The company currently employs 6,800 people and serves millions of Germans in its 300 shops. As of 2012 it had a yearly revenue of 1.59 billion Euros. Weltbild has previously claimed to be Germany’s second biggest online book retailer ( is first) and its best known publishing company.      

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