Saturday, July 28, 2007

‘Harry’ and the Strange Logic of Book Discounters


By JOE NOCERA
Talking Business
The New York Times
July 28, 2007

I had dinner with my daughter, Kate, near Union Square in Manhattan last Friday, and afterward, as we walked toward the subway, we saw a long line snaking around the corner. “Do you know what that is?” she asked. I didn’t. “Harry Potter.”

Of course! At midnight, the seventh and final installment of the best-selling book series of all time, “Harry Potter and the Deathly Hallows,” would go on sale. The sixth book, “Harry Potter and the Half-Blood Prince,” published in 2005, sold almost seven million copies in the United States within the first 24 hours; it was widely expected that “Deathly Hallows” would beat that record. (It did.) The line was filled with people of all ages, some wearing wizard robes, all eager to get into the 18th Street Barnes & Noble, and be among the first to find out how the author J. K. Rowling would wrap up the series.

It turns out that store on 18th Street was the original Barnes & Noble, which its chairman, Leonard Riggio, bought in the 1970s, and used as his launching pad as he transformed bookselling from a cottage industry into a real business. He created a chain of cavernous, comfortable stores, added cafes and advertised on television, something no bookseller had ever done before. And he discounted. Oh, how he discounted!

B.R. — Before Riggio — booksellers almost never strayed from the publisher’s suggested retail price. A.R. — After Riggio — rare was the best seller that wasn’t discounted. And not just by Barnes & Noble, but by Borders and Amazon and Wal-Mart and Costco. Indeed, the bigger the best seller, the larger the discount. Which meant that all those people standing in line on 18th Street were going to get one heckuva bargain.

And they did. Scholastic, Harry Potter’s American publisher, had a suggested retail price of $34.99. But the Barnes & Noble price was $20.99: a 40 percent discount. Barnes & Noble “members” got an additional 10 percent off. According to the chief executive Stephen Riggio — he’s Leonard’s younger brother — the company sold 1.8 million books in 48 hours.

Amazon? The online retailer sent out e-mail messages in early July, recommending that people preorder the book, offering it for $17.99, a saving of 49 percent, with a $5 gift certificate and free shipping thrown in. Some 2.2 million customers took that deal. Borders, meanwhile, was selling the book for $20.99. The Wal-Mart price was $17.87. Costco: $18.19. And across the pond, the Asda supermarket chain was selling “Deathly Hallows” for £4.99, basically, 10 bucks. Asda is owned by Wal-Mart.

Those are some serious savings. Harry Potter fans had to be happy about the great deal they were getting for a product they would have bought at just about any price. But didn’t those enormous discounts also mean that retailers were actually losing money on the greatest publishing event in history — especially as Scholastic was widely rumored to be selling to retailers at 46 percent below its suggested retail price? (Scholastic won’t comment.) And if that were indeed the case, what did that say about the state of the book business?

IT’S a funny business, the book business, and making little or no money on a brand as powerful as Harry Potter is only part of it. Name another industry, for instance, where the manufacturer agrees to take back — and reimburse the retailer! — for unsold merchandise. Yet that is how the book industry has operated since the Depression.

And what other business can you think of where sales are essentially flat, yet the manufacturers keep ramping up volume? In 1980, the book industry produced about 42,400 new titles, according to the R. R. Bowker Company, which monitors new books. By 2001, the number had jumped to 141,700, and 168,000 by 2005.

Each of these practices has a certain screwball logic. Because most books are written by unknowns, book publishers suspect that the returns policy makes stores more willing to take a chance on a new author. (Though it is also true that if the policy went away tomorrow, they would all breathe a collective sigh of relief; returns are both cumbersome and costly.)

And the reason for the rise in the number of published books is that the big publishers are owned by conglomerates that demand increased revenue and profits from their book divisions. Because publishers have no idea which books will succeed commercially (Harry Potter is an exception) they react by publishing ever more books, hoping to increase their odds of hitting the jackpot with a “Tipping Point” or “Da Vinci Code.” The vast majority of books, by the way, are commercial flops.

Discounting has its own logic. “It is a loss leader,” said Tony Schulte, a former executive vice president with Random House and Knopf (and a friend). “It’s not that different from a hamburger joint giving away the second hamburger free.” But it is a little different: you just don’t see other industries losing money on their hottest brand to get people to buy less desirable merchandise. But that’s what the book industry does.

Part of the problem is that books aren’t just sold in bookstores. Wal-Mart and Costco are both huge sellers of books, for instance. “Costco’s strategy is big best sellers and mass-market paperbacks,” said Albert N. Greco, a book industry expert at the Fordham Graduate School of Business Administration. “They want to price it so that it will be competitive with its competitors,” mainly Wal-Mart and Target.

Indeed, Costco’s chief executive, James Sinegal, conceded to me that profitability was low on the list of reasons his stores stock Harry Potter. “We think it is something our customers expect us to have,” he said. He wasn’t too concerned with the Barnes & Noble price, he told me, but he was very concerned with the Wal-Mart and Target prices. Still, he denied losing money on the book. “We’re making a little change,” he said. “We don’t sell things below cost.”

Despite the deep discount, Mr. Sinegal was not happy to learn that the Wal-Mart price was 32 cents lower than his. “We don’t like to be in that position,” he said with obvious distaste, adding that if the Wal-Mart price had been significantly lower than Costco’s, “we probably wouldn’t carry the item.”

Then there’s Amazon. By my calculation, Amazon, with its 49 percent discount, $5 gift certificate and free shipping, is losing more than $10 a book. A spokeswoman, Patricia Smith, would only say that the book was being sold “at slightly below break even.” But even without profits, she said, the company was “thrilled” with Harry Potter. “We love Harry Potter because it gives us a chance to showcase what we can do in terms of a good customer experience, including same-day delivery. There is a halo effect,” she said.

As an online retailer, Amazon’s motives for selling the book cheaply are different from Costco’s. Harry Potter generated tens of thousands of new customers for Amazon. The company now has their e-mail addresses and can market to them — something it does exceedingly well. Secondly, Amazon is trying to condition people to buy books online instead of shopping in bookstores. A heavily discounted Harry Potter furthers that goal. Third, Amazon says that people bought lots of other things when they preordered; indeed, in its second-quarter conference call this week, the company attributed about 1 percent of its revenue to Harry Potter customers’ buying other merchandise.

Which brings us back to the original discounter, Barnes & Noble, which, unlike its rivals, would very much like to make money on the book. So why is it discounting the book so heavily? Because it has no choice. Costco may not view it as a head-to-head competitor, but every book Costco sells is a book sale Barnes & Noble has missed. As for Amazon, the fact that it has a set of motives different from Barnes & Noble’s is meaningless. No one doubts that Amazon is a direct competitor.

“It’s almost biblical,” said Sara Nelson, the editor of Publishers Weekly. “What they did is now being done to them.”

When I spoke to Stephen Riggio, though, he seemed unruffled by all the discounting. “It is a competitive world out there,” he shrugged, “but not necessarily more than it used to be.” More than 50 percent of all books are now sold by nonbookstores; that’s just his reality.

As with the others, Mr. Riggio could count lots of ways a barely profitable Harry Potter helped his company. It developed a new generation of readers. It got people into stores where they bought other, higher-margin books. It was likely to be on the backlist forever, allowing Barnes & Noble to eventually sell it — probably to today’s young buyers as they become parents — for a good profit. “Many of our best-selling authors are dead,” he said. “Dickens or Shakespeare. Those are timeless works,” he added. “So is Harry Potter.”

Minnie Fry, the director for marketing at Bloomsbury, Potter’s British publisher, said, “We think the market share war is incredibly stupid.” But somewhat to my surprise, nobody in the trenches seemed to agree, including Stephen Riggio. Listening to him talk so matter-of-factly about his deep discounting competitors reminded me of the Don Corleone line: “This is the life we have chosen.” As we might phrase that today, it is what it is.

There is a final irony here. It turns out that there are retailers who will make money on “Harry Potter and the Deathly Hallows.” They’re the independent booksellers, the same group that originally suffered the brunt of Leonard Riggio’s discounting. Since then, though, independents have learned not to compete on price, but to give customers great service and other benefits. So how much did they charge for the most heavily discounted book of all time? Try $34.99.

Meaning that tiny Books & Books in Coral Gables, Fla., which has sold fewer than 2,000 copies of “Harry Potter and the Deathly Hallows” will make more money on it than might Amazon. Did I mention that the book business is a funny business?

Meet Joe Nocera at nytimes.com/nocera.

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